<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration No. 333-7569
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 19, 1997)
$300,096,000
[LOGO OF FIRST FRANKLIN FINANCIAL CORPORATION]
FIRST FRANKLIN MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1997-FF3
FIRST FRANKLIN FINANCIAL CORPORATION
MORTGAGE LOAN SELLER AND MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------
The Series 1997-FF3 Certificates will consist of the classes (each, a
'Class') of Certificates identified in the table below (collectively, the
'Offered Certificates') and the Class R Certificates (the 'Residual
Certificates'). Only the Offered Certificates are offered hereby.
Distributions on the Offered Certificates will be made on the 20th day of
each month or, if such day is not a business day, on the next succeeding
business day, beginning in December 1997 (each, a 'Distribution Date') to the
extent of funds available therefore as described herein. As described more fully
herein, interest payable with respect to each Distribution Date will accrue on
each Class of Offered Certificates during the period from the Distribution Date
in the month immediately preceding the month in which such Distribution Date
occurs (or, in the case of the first Distribution Date, from the Closing Date)
through the day before such Distribution Date. Interest will be calculated on
the basis of a 360-day year and the actual number of days in the applicable
accrual period, and will be based on the then-outstanding Class Certificate
Balance of the Offered Certificates and the then-applicable Pass-Through Rate
thereon, as reduced by certain interest shortfalls.
(cover continued on next page)
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR
INTEREST IN THE DEPOSITOR, THE MASTER SERVICER, THE SERVICER, THE
TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES
NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER 'RISK
FACTORS' BEGINNING ON PAGE 17 OF THIS PROSPECTUS SUPPLEMENT.
<TABLE>
<CAPTION>
INITIAL CLASS
CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
BALANCE RATE PUBLIC DISCOUNTS(1) DEPOSITOR(1)
------------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates............. $116,316,000 Variable 100.00% 0.20% 99.80%
Class A-2 Certificates............. $135,014,000 Variable 100.00% 0.20% 99.80%
Class M-1 Certificates............. $ 19,506,000 Variable 100.00% 0.50% 99.50%
Class M-2 Certificates............. $ 19,506,000 Variable 100.00% 0.60% 99.40%
Class B Certificates............... $ 9,754,000 Variable 100.00% 0.70% 99.30%
</TABLE>
(1) Before deducting expenses, estimated to be $250,000.
------------------------
The Offered Certificates are offered subject to prior sale, when, as and if
issued by the Trust Fund and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
Offered Certificates will be made in book-entry form only through the Same-Day
Funds Settlement System of The Depository Trust Company, CEDEL S.A. and the
Euroclear system against payment therefor in immediately available funds in New
York, New York, on or about December 3, 1997.
------------------------
MERRILL LYNCH & CO. PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 24, 1997.
<PAGE>
(Cover continued)
The Pass-Through Rate on each Class of Offered Certificates is
adjustable and will be calculated for each Distribution Date as described
herein. To the extent funds are available therefor as described herein,
distributions in respect of principal of each Class of Offered Certificates will
be made as described herein under "Description of the Certificates--Principal
Distributions on the Certificates."
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of a
segregated pool (the "Mortgage Pool") of conventional, one- to four-family,
first lien mortgage loans having original terms to maturity of 30 years (the
"Mortgage Loans"). The Mortgage Loans were originated or acquired by First
Franklin Financial Corporation (the "Mortgage Loan Seller") in the ordinary
course of its business. The Depositor will acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a Mortgage Loan Purchase Agreement. The Trust
Fund will be created pursuant to a Pooling and Servicing Agreement, dated as of
November 1, 1997 (the "Agreement"), among the Depositor, First Franklin
Financial Corporation, as Master Servicer, Option One Mortgage Corporation, as
Servicer, and Texas Commerce Bank National Association, as Trustee. Each
Mortgage Loan provides for semiannual adjustment to the Mortgage Rate thereon
(in the case of the majority of such Mortgage Loans, after an initial period of
two years from the origination thereof) based on six-month London interbank
offered rates for United States dollar deposits (the "Index") and for
corresponding adjustments to the monthly payment amount due thereon, in each
case subject to the limitations described herein.
The yield to investors on each Class of Offered Certificates will be
sensitive, in varying degrees, to the rate and timing of principal payments
(including prepayments, defaults and repurchases) on the Mortgage Loans and will
be sensitive to changes in the levels of the Index and One- Month LIBOR (as
defined herein). The Mortgage Loans generally may be prepaid in full or in part
at any time; however, with respect to a majority of the Mortgage Loans, a
prepayment may subject the related mortgagor to a prepayment charge. In
addition, the Mortgage Loans are assumable by persons meeting the then
applicable credit standards of the Mortgage Loan Seller. The yields to investors
in the Offered Certificates, and particularly the Class M-1, Class M-2 and Class
B Certificates, also will be adversely affected by Realized Losses and other
shortfalls in Available Funds. The rights of the Holders of the Class M-1, Class
M-2 and Class B Certificates to distributions from the Trust Fund are
subordinated to such rights of the Holders of the Class A Certificates to the
extent described herein. No representation is made as to the anticipated rate of
prepayments on the Mortgage Loans, the level of the Index or One-Month LIBOR,
the amount and timing of Realized Losses, or the resulting yield to maturity of
any Class of Offered Certificates.
An election will be made to treat certain assets of the Trust Fund as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. As described more fully herein, and in the Prospectus, the Offered
Certificates will be the "regular interests" in the REMIC and the Residual
Certificates will be the sole class of "residual interests" in the REMIC. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates. There is no assurance that a market for the Offered Certificates
will develop or, if it does develop, that it will provide the Certificateholders
with liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates. See "Risk Factors" herein.
The Offered Certificates offered by this Prospectus Supplement will
constitute a portion of a separate Series of Certificates issued by the
Depositor and are being offered pursuant to its Prospectus dated June 19, 1997,
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
Offered Certificates may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
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Until the expiration of 90 days after the date of this Prospectus
Supplement, all dealers effecting transactions in the Offered Certificates,
whether or not participating in this distribution, may be required to deliver a
Prospectus Supplement and the Prospectus to which it relates. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
Supplement and Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
To the extent that any statements in this Prospectus Supplement modify
statements contained in the Prospectus, the statements in this Prospectus
Supplement shall control.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriters 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
Underwriters will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
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<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere herein and in the Prospectus. Capitalized terms
used but not defined herein shall have the meanings assigned thereto in the
Prospectus. An Index of Principal Definitions is included at the end of the
Prospectus.
<TABLE>
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Title of Series............................................. First Franklin Mortgage Loan Asset Backed
Certificates, Series 1997-FF3 (the "Certificates").
The Certificates will be issued pursuant to a Pooling
and Servicing Agreement, to be dated as of November 1,
1997 (the "Agreement"), among the Depositor, the
Master Servicer, the Servicer and the Trustee. The
Certificates represent in the aggregate the entire
beneficial ownership interest in a trust fund (the
"Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional one- to
four-family, first lien mortgage loans (the "Mortgage
Loans").
Offered Certificates........................................ Class A-1 Certificates, Class A-2 Certificates
(collectively the Class A-1 Certificate and the Class
A-2 Certificates are referred to herein as, the "Class
A Certificates" or the "Senior Certificates"), Class
M-1 Certificates and Class M-2 Certificates
(collectively with the Class M-1 Certificates, the
"Mezzanine Certificates") and Class B Certificates
(collectively with the Mezzanine Certificates, the
"Subordinated Certificates"). Each Class of Offered
Certificates will have an initial Class Certificate
Balance as set forth on the cover page hereof. The
Pass-Through Rate on each Class of Offered
Certificates is adjustable and is calculated as
described under "--Pass-Through Rates" herein.
Cut-off Date................................................ The close of business on November 1, 1997 except that
the Cut-off Date of any Mortgage Loan with a Mortgage
Note dated after November 1, 1997 will be the date of
such Mortgage Note.
Closing Date................................................ On or about December 3, 1997.
Final Scheduled Distribution Dates.......................... The Final Scheduled Distribution Date for each Class
of Offered Certificates is set forth below:
Class A-1 November 2027
Class A-2 November 2027
Class M-1 January 2029
Class M-2 January 2029
Class B January 2029
Each such Expected Final Maturity Date has been
calculated as described under "Yield on the
Certificates--Expected Final Maturity Date" herein.
</TABLE>
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Residual Certificates....................................... The Residual Certificates do not have a Class
Certificate Balance and will not have a Pass-Through
Rate. Distributions on the Residual Certificates will
be subordinated to distributions on the Offered
Certificates. The Residual Certificates are not being
offered hereby.
Depositor of Mortgage Loans................................. Merrill Lynch Mortgage Investors, Inc., a Delaware
corporation and a wholly-owned, limited purpose
subsidiary of Merrill Lynch Mortgage Capital
Corporation, which is a wholly owned indirect
subsidiary of Merrill Lynch & Co., Inc. The Depositor
is an affiliate of Merrill Lynch, Pierce Fenner &
Smith Incorporated, one of the Underwriters. Neither
Merrill Lynch & Co., Inc. nor any of its affiliates,
including the Depositor, nor either of and the
Underwriters, has insured or guaranteed the
Certificates or the Mortgage Loans or is otherwise
obligated in respect thereof. See "The Depositor" in
the Prospectus.
Mortgage Loan Seller and Master
Servicer.................................................. First Franklin Financial Corporation, a Delaware
corporation. See "The Master Servicer and the Mortgage
Loan Seller" and "The Mortgage Pool--Underwriting
Standards; Representations" herein.
Servicer.................................................... Option One Mortgage Corporation will directly service
the Mortgage Loans on behalf of the Master Servicer
and the Trust Fund, and will be entitled to the
Servicing Fee (defined herein). See "Pooling and
Servicing Agreement--The Servicer" herein.
Trustee..................................................... Texas Commerce Bank National Association. See "Pooling
and Servicing Agreement--The Trustee" herein.
The Mortgage Pool........................................... The Mortgage Pool will consist of conventional, one-
to four-family, adjustable-rate Mortgage Loans secured
by first liens on residential real properties (the
"Mortgaged Properties").
The Mortgage Loans have original terms to maturity of
30 years. The Mortgage Loans will have an aggregate
principal balance as of the Cut-off Date, after
application of payments of principal due on or before
the Cut-off Date (whether or not received) of
approximately $300,096,194. Each Mortgage Loan
provides for semiannual adjustment to the Mortgage
Rate thereon and for corresponding adjustments to the
monthly payment amount due thereon, in each case on
each adjustment date applicable thereto (each such
date, an "Adjustment Date"); provided, however, that
</TABLE>
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in the case of approximately 76.72% of the Mortgage
Loans (each a "two year Delayed First Adjustment Date
Mortgage Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an initial period
of two years from the origination thereof; and in the
case of approximately 18.86% of the Mortgage Loans
(each a "one year Delayed First Adjustment Date
Mortgage Loan"), the first Adjustment Date for each
such Mortgage Loan will occur after an initial period
of one year from the origination thereof. On each
Adjustment Date for each Mortgage Loan, the Mortgage
Rate thereon will be adjusted to equal the sum,
rounded to the nearest multiple of 0.125%, of the
Index (as described below) and a fixed percentage (the
"Gross Margin"), subject to periodic and lifetime
limitations as described herein. See "The Mortgage
Pool" herein. None of the Mortgage Loans provides for
negative amortization or permits the related mortgagor
to convert the adjustable Mortgage Rate thereon to a
fixed Mortgage Rate.
The Index................................................... As of any Adjustment Date, the Index applicable to the
determination of the Mortgage Rate on each Mortgage
Loan will be the average of the interbank offered
rates for six-month United States dollar deposits in
the London market as published in The Wall Street
Journal and as most recently available as of the first
business day of the month preceding the month of such
Adjustment Date. See "The Mortgage Pool--The Index"
herein.
Registration of Offered Certificates........................ Holders of the Offered Certificates may hold their
interest in the Offered Certificates through The
Depository Trust Company ("DTC") in the United States,
or CEDEL, S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC, CEDEL
or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through
CEDEL or Euroclear, on the other, will be effected in
DTC through Citibank, N.A. or The Chase Manhattan
Bank, the relevant depositories (collectively, the
"Depositories") of CEDEL or Euroclear, respectively,
and each a participating member of DTC. Each Class of
Offered Certificates will be initially registered in
the name of CEDE & Co., the nominee of DTC. The
interests of the Holders of the Offered Certificates
will be represented by book-entries on the records of
DTC, its Participants and Indirect Participants for
the benefit of the beneficial owners of the Offered
Certificates (the "Certificate Owners"). Certificates
</TABLE>
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representing the Offered Certificates will be issued
in definitive form ("Definitive Certificates") only
under the limited circumstances described in the
Prospectus. In the case of the Offered Certificates,
all references herein to "Holders" or
"Certificateholders" reflect the rights of Certificate
Owners as they may indirectly exercise such rights
through DTC, CEDEL, Euroclear and participating
members thereof, except as otherwise specified herein.
Pass-Through Rates.......................................... The Pass-Through Rate on each Class of Offered
Certificates on each Distribution Date will be a rate
per annum equal to the lesser of (i) One-Month LIBOR
(as defined herein) plus the applicable Pass-Through
Margin (the "LIBOR Rate") and (ii) the Available Funds
Pass-Through Rate for such Distribution Date.
The "Pass-Through Margin" for each Class of Offered
Certificates will be as set forth below; provided,
however, that for each Interest Accrual Period
beginning after the Distribution Date on which the
aggregate Stated Principal Balance (as defined herein)
of the Mortgage Loans is 10% or less of the Stated
Principal Balance of the Mortgage Loans as of the
Cut-off Date (the "Cut-off Date Pool Principal
Balance") each such Pass-Through Margin will be
doubled for the Senior Certificates and increased by
50% for the Subordinated Certificates:
Class Pass-Thorough Margin
----- --------------------
A-1 0.205%
A-2 0.220%
M-1 0.420%
M-2 0.680%
B 1.220%
The "Available Funds Pass-Through Rate" will be, with
respect to any Distribution Date, the per annum rate
equal to the percentage obtained by dividing (x) the
amount of interest that accrued on the Mortgage Loans
in respect of the related Collection Period at the
weighted average of the related Mortgage Rates
applicable to monthly payments due on such Mortgage
Loans during such Collection Period, reduced by the
Expense Fee Rate, by (y) the product of (i) the
aggregate Class Certificate Balance and (ii) the
actual number of days elapsed during such Interest
Accrual Period divided by 360. Since the Pass-Through
Margin is different for each Class of Offered
Certificates, it is possible that, on any particular
Distribution Date, the LIBOR Rate applicable to one or
more Classes of Offered Certificates, may be less than
the Available Funds Pass-Through Rate, while
</TABLE>
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<S> <C>
the LIBOR Rate applicable to one or more other Classes
of Offered Certificates may exceed the Available Funds
Pass-Through Rate. In such event, the Agreement
provides that the excess moneys resulting from such
Classes having LIBOR Rates less than the Available
Funds Pass-Through Rate shall be applied to increase
the amount of interest payable with respect to the
Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, having LIBOR Rates
greater than the Available Funds Pass-Through Rate, up
to the amount of interest at the related LIBOR Rate
due to such Class.
The "Expense Adjusted Mortgage Rate" on any Mortgage
Loan is equal to the then applicable Mortgage Rate
thereon minus the sum of (i) the Trustee Fee Rate,
(ii) the Master Servicing Fee Rate and (iii) the
Servicing Fee Rate (collectively, the "Expense Fee
Rate"). For any Distribution Date, the Trustee Fee
Rate is 0.015% per annum, the Master Servicing Fee
Rate is 0.10% per annum and the Servicing Fee Rate is
0.40% per annum. See "Pooling and Servicing
Agreement--The Trustee" and "--Servicing and Other
Compensation and Payment of Expenses" herein.
Distributions--General....................................... Distributions on the Offered Certificates will be made
on the 20th day of each month or, if such day is not a
business day, on the next succeeding business day,
beginning in December 1997 (each, a "Distribution
Date") to the extent of funds available therefore as
described herein, and will generally reflect payments
with respect to the Mortgage Loans during the related
Collection Period. The Collection Period with respect
to the first Distribution Date is the period from
November 2, 1997 through the Determination Date in
December 1997. The Collection Period with respect to
any other Distribution Date is the period from the day
immediately following the prior Determination Date and
ending on the Determination Date in the month in which
such Distribution Date occurs. The Determination Date
with respect to any Distribution Date is the 10th day
of the month in which such Distribution Date occurs
or, if such 10th day is not a business day, then the
immediately preceding business day. The Interest
Accrual Period for any Distribution Date and the
Offered Certificates is the period from the
Distribution Date in the month immediately preceding
the month in which such Distribution Date occurs (or,
in the case of the first Distribution Date, from the
Closing Date) through the day before such Distribution
Date. All calculations of interest on the Offered
Certificates will be based on a 360-day year and the
actual number of days in the
</TABLE>
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applicable Interest Accrual Period. See "Description
of the Certificates" herein.
Interest Distributions...................................... On each Distribution Date, Holders of each Class of
Offered Certificates will be entitled to receive
interest distributions (the "Interest Distribution
Amount") as described herein under "Description of the
Certificates--Interest Distributions" in an amount
equal to the sum of (i) interest accrued during the
related Interest Accrual Period on the Class
Certificate Balance of such Class of Offered
Certificates at the then-applicable Pass-Through Rate,
subject to reduction only in the event of shortfalls
caused by the Relief Act (as defined herein) ("Accrued
Certificate Interest") and (ii) the Interest Carry
Forward Amount. The "Interest Carry Forward Amount"
for any Class of Offered Certificates and any
Distribution Date will equal the sum of (a) the
excess, if any, of the Accrued Certificate Interest
and any Interest Carry Forward Amount for the prior
Distribution Date, over the amount in respect of
interest actually distributed on such Class on such
prior Distribution Date and (b) 30 days' interest on
such excess at the applicable Pass-Through Rate.
Principal Distributions..................................... On each Distribution Date, to the extent funds are
available therefor, principal distributions in
reduction of the Class Certificate Balance of each
Class of Offered Certificates will be made in the
order and subject to the priorities set forth herein
under "Description of the Certificates--Principal
Distributions on the Certificates" in an aggregate
amount equal to such Class' allocable portion of the
Principal Distribution Amount.
LIBOR Shortfall and LIBOR Carryover Amount.................. If, on any Distribution Date, the Pass-Through Rate
for a Class of Offered Certificates is limited by the
Available Funds Pass-Through Rate, the excess of
interest for the related Interest Accrual Period at
the applicable LIBOR Rate over the interest for such
Interest Accrual Period at the applicable Pass-Through
Rate is the "LIBOR Shortfall" for such Class and
Distribution Date. On each Distribution Date, Holders
of the Offered Certificates will be entitled to
receive, from and to the limited extent of funds
available therefor as described herein, an amount
equal to the sum of (i) the LIBOR Shortfall for such
Distribution Date and (ii) the LIBOR Carryover Amount
for such Distribution Date. The "LIBOR Carryover
Amount" for any Class of Offered Certificates and any
Distribution Date will equal the sum of (i) the
excess, if any, of the LIBOR Shortfall for such Class
on the preceding Distribution Date and any LIBOR
Carryover Amount for such Class on such
</TABLE>
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preceding Distribution Date over the amount, if any,
actually distributed in respect thereof on such
preceding Distribution Date and (ii) 30 days' interest
on such excess at the LIBOR Rate applicable to such
Class and the current Distribution Date. The ratings
of the Offered Certificates do not address the
likelihood of the payment of any LIBOR Carryover
Amount.
Credit Enhancement
General................................................... Credit enhancement for the Offered Certificates will
consist of (a) the subordination of the Subordinated
Certificates to the Class A Certificates and the
further subordination within the Subordinated
Certificates, (b) the priority of application of
Realized Losses, (c) overcollateralization and (d) the
Monthly Excess Cash Flow.
Subordination............................................. The rights of Holders of the Subordinated Certificates
to receive distributions with respect to the Mortgage
Loans in the Trust Fund will be subordinated to such
rights of the Holders of the Class A Certificates, and
the rights of the Holders of each Class of
Subordinated Certificates (other than the Class M-1
Certificates) to receive distributions will be further
subordinated to such rights of the Holders of the
Class or Classes of Subordinated Certificates with
lower numerical Class designations, in each case only
to the extent described herein. For all purposes, the
Class B Certificates will be deemed to have the
highest numerical Class designation and the lowest
payment priority of any Class of Subordinated
Certificates.
The subordination of the Subordinated Certificates to
the Class A Certificates and the further subordination
within the Subordinated Certificates are each intended
to increase the likelihood of timely receipt by the
holders of Certificates with higher relative payment
priority of the maximum amount to which they are
entitled on any Distribution Date, and to provide such
holders protection against losses resulting from
defaults on the Mortgage Loans to the extent described
herein. However, in certain circumstances, the amount
of available subordination may be exhausted and
shortfalls in distributions on the Certificates could
result. Holders of the Class A Certificates will bear
their proportionate share of any losses realized on
the Mortgage Loans in excess of the available
subordination amount.
Application of Realized Losses............................ If, after giving effect to all distributions on a
Distribution Date, the aggregate Class Certificate
Balance of the Offered Certificates exceeds the Pool
</TABLE>
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Principal Balance, the Class Certificate Balance of
the Class of Subordinated Certificates then
outstanding with the highest numerical Class
designation (beginning with the Class B Certificates)
will be reduced by the amount of such excess. Any such
reduction is referred to as an "Applied Realized Loss
Amount." See "Description of the Certificates--Credit
Enhancement" herein.
Overcollateralization..................................... The cashflow provisions of the Trust Fund are expected
to result initially in an accelerated rate of
amortization of the Senior Certificates relative to
the amortization of the Mortgage Loans through the
application of excess interest received on the
Mortgage Loans to the payment of principal of the
Senior Certificates. As a result, the aggregate Stated
Principal Balances of the Mortgage Loans are expected
to exceed the aggregate Class Certificate Balance of
the Offered Certificates. Once the required level of
overcollateralization is reached, the accelerated rate
of amortization of the Offered Certificates will
cease, unless necessary to maintain the required level
of overcollateralization.
Aggregate Servicing Fee..................................... The Aggregate Servicing Fee will consist of (i) the
Master Servicing Fee to be retained by the Master
Servicer each month in an amount equal to 0.10% per
annum and (ii) the Servicing Fee to be retained by the
Servicer each month in an amount equal to 0.40% per
annum, in each case on the Stated Principal Balance of
each Mortgage Loan on the Determination Date.
Monthly Advances............................................ The Servicer is required to make advances in respect
of delinquent payments of principal and interest on
the Mortgage Loans, subject to the limitations
described herein. See "Description of the
Certificates--Monthly Advances" herein and
"Description of the Certificates--Advances in respect
of Delinquencies" in the Prospectus.
Record Date................................................. The Record Date for each Distribution Date will be the
close of business on the last business day of the
month preceding the month in which such Distribution
Date occurs. See "Description of the
Certificates--General" herein.
Optional Termination........................................ At its option, the majority holder of the Residual
Certificates may purchase all of the Mortgage Loans,
together with any properties in respect thereof
acquired by the Trustee, and thereby effect
termination and early retirement of the Certificates,
on any Distribution Date on which the aggregate
principal balance of the Mortgage Loans and such
properties remaining is 10% or less of the Cut-off
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Date Pool Principal Balance. If such holder does not
exercise such option, the Master Servicer or the
Servicer may do so when the aggregate principal
balance of the Mortgage Loans and such properties is
5% or less of the Cut-off Date Pool Principal Balance.
In the event the majority holder of the Residual
Certificates, the Master Servicer or the Servicer
exercises such option, the purchase price payable in
connection therewith generally will be equal to par
plus accrued interest for each Mortgage Loan at the
related Mortgage Rate to but not including the first
day of the month in which such repurchase price is
distributed, together with any amounts due to the
Master Servicer or the Servicer for servicing
compensation at the Master Servicing Fee Rate or
Servicing Fee Rate, as applicable. In the event the
majority holder of the Residual Certificates, the
Master Servicer or the Servicer exercises such option,
the portion of the purchase price allocable to each
Class of Offered Certificates will be, to the extent
of available funds, (i) 100% of the then outstanding
Class Certificate Balance thereof, plus (ii) one
month's interest on the then outstanding Class
Certificate Balance thereof at the then applicable
Pass-Through Rate, plus (iii) any previously accrued
but unpaid interest thereon, plus (iv) any related
LIBOR Carryover Amount. See "Pooling and Servicing
Agreement--Termination" herein and "Description of the
Certificates--Termination" in the Prospectus.
Special Prepayment Considerations........................... The rate and timing of distributions allocable to
principal on each Class of Offered Certificates will
depend, in general, on the rate and timing of
principal payments (including prepayments and
collections upon defaults, liquidations and
repurchases) on the Mortgage Loans and the priority of
the allocation thereof to pay principal on such Class
of Offered Certificates as provided herein. As is the
case with mortgage pass-through certificates
generally, the Offered Certificates are subject to
substantial inherent cash-flow uncertainties because
the Mortgage Loans may be prepaid at any time;
however, with respect to a majority of the Mortgage
Loans, a prepayment may subject the related mortgagor
to a prepayment charge. In addition, the Mortgage
Loans are assumable by persons meeting the then
applicable credit standards of the Mortgage Loan
Seller. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans tend to
decrease; a decrease in the prepayment rates on the
Mortgage Loans
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
investors in the Class or Classes of Offered
Certificates then entitled to such distributions at a
time when reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing
interest are declining, prepayment rates on mortgage
loans tend to increase; an increase in the prepayment
rates on the Mortgage Loans will result in a greater
rate of return of principal to investors in the Class
or Classes of Offered Certificates then entitled to
such distributions at a time when reinvestment at
comparable yields may not be possible.
Special Yield Considerations................................ An investor's yield to maturity on each Class of
Offered Certificates will depend, in general, on (i)
the related Pass-Through Rate, (ii) the purchase price
paid by such investor, (iii) the rate and timing of
principal payments (including prepayments and
collections upon defaults, liquidations and
repurchases) on the Mortgage Loans, and (iv) the
priority sequence for the application of principal
payments and the allocation of Applied Realized Loss
Amounts, in reduction of the Class Certificate Balance
of such Class of Offered Certificates, as well as
other factors.
The yield to investors in the Offered Certificates
will also be adversely affected by any allocation
thereto of any LIBOR Shortfalls, to the extent such
LIBOR Shortfalls are not funded on future Distribution
Dates.
In general, if an Offered Certificate is purchased at
a premium and principal distributions thereon occur at
a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will
be lower than that assumed at the time of purchase.
Conversely, if an Offered Certificates is purchased at
a discount and principal distributions thereon occur
at a rate slower than that assumed at the time of
purchase, the investor's actual yield to maturity will
be lower than that originally anticipated.
The proceeds to the Depositor from the sale of the
Offered Certificates were determined based on a number
of assumptions, including a prepayment assumption of
25% CPR (as defined herein), and weighted average
lives corresponding thereto. No representation is made
that the Mortgage Loans will prepay at such rate or at
any other rate. The yield assumptions for any Class of
Offered Certificates will vary as determined at the
time of sale.
</TABLE>
S-13
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<TABLE>
<S> <C>
Certain Federal Income Tax
Consequences.............................................. For federal income tax purposes, a real estate
mortgage investment conduit ("REMIC") election will be
made with respect to certain assets of the Trust Fund.
Upon the issuance of the Certificates, Stroock &
Stroock & Lavan LLP will deliver its opinion generally
to the effect that, assuming compliance with all
provisions of the Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under
Sections 860A through 860G of the Internal Revenue
Code of 1986, as amended (the "Code").
For federal income tax purposes, (i) the Residual
Certificates will be the sole class of "residual
interests" in the REMIC and (ii) the Offered
Certificates will be "regular interests" in, and
generally will be treated as debt instruments of, the
REMIC.
For federal income tax reporting purposes, it is
expected that the Offered Certificates will not be
treated as having been issued with original issue
discount. The prepayment assumption that will be used
in determining the rate of accrual of original issue
discount, premium and market discount, if any, for
federal income tax purposes is 25% CPR. No
representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See "Yield
on the Certificates" herein.
For further information regarding the federal income
tax consequences of investing in the Offered
Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Ratings..................................................... It is a condition of issuance of the Offered
Certificates that they receive the respective ratings
set forth below from Standard & Poor's Rating
Services, a Division of The McGraw-Hill Companies
("Standard & Poor's"), Duff & Phelps Credit Rating
Company ("DCR") and Fitch Investors Service L.P.
("Fitch," and together with Standard & Poor's and DCR,
the "Rating Agencies"):
Class Standard & Poor's DCR Fitch
----- ----------------- --- -----
A AAA AAA AAA
M-1 AA AA AA
M-2 A A A
B BBB BBB BBB
</TABLE>
S-14
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<TABLE>
<S> <C>
The Depositor has not requested that any rating agency
rate the Offered Certificates other than as stated
above. If another rating agency were to rate the
Offered Certificates, such rating agency may assign a
rating different from the ratings described above. A
security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. A security rating does not address the
frequency of prepayments on the Mortgage Loans or the
corresponding effect on yield to investors. The
ratings do not address the likelihood of the payment
of any LIBOR Carryover Amount. See "Yield on the
Certificates" and "Ratings" herein and "Yield
Considerations" in the Prospectus.
Legal Investment............................................ The appropriate characterization of the Offered
Certificates under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the Offered
Certificates, may be subject to significant
interpretive uncertainties. The Class A and Class M-1
Certificates will be "mortgage related securities"
within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are
rated in at least the second highest rating category
by a Rating Agency (as defined in the Prospectus) and,
as such, are legal investments for certain entities to
the extent provided in SMMEA. The Class M-2 and Class
B Certificates will not be "mortgage related
securities" for purposes of SMMEA. Accordingly,
investors should consult their own legal advisors to
determine whether and the extent to which the Offered
Certificates constitute legal investments for them.
See "Legal Investment" herein and in the Prospectus.
ERISA Considerations........................................ A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee
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 Offered Certificates could give rise to
a transaction that is prohibited or is not otherwise
permitted either under ERISA or Section 4975 of the
Code or whether there exists any statutory or
administrative exemption applicable to an investment
therein. The U.S. Department of Labor has issued 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
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of the
Class A Certificates (but excluding the Subordinated
Certificates), provided that certain conditions are
satisfied. In addition, Prohibited Transaction Class
Exemption 95-60 may be applicable to the purchase,
sale and holding of the Subordinated Certificates by
and to certain insurance company general accounts. A
fiduciary of any employee benefit plan subject to
ERISA or the Code should consult with its legal
advisors regarding the requirements of ERISA and the
Code. See "ERISA Considerations" herein and in the
Prospectus.
Use of Proceeds............................................. The net proceeds to be received from the sale of the
Offered Certificates will be used by the Depositor to
pay the purchase price of the Mortgage Loans to the
Mortgage Loan Seller.
</TABLE>
S-16
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
Subordination
The rights of the Holders of the Subordinated Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Holders of the Class A Certificates, and the rights of the Holders
of each Class of Subordinated Certificates (other than the Class M-1
Certificates) to receive such distributions will be further subordinated to such
rights of the Holders of the Class or Classes of Subordinated Certificates with
lower numerical Class designations, in each case only to the extent described
herein. The subordination described above is intended to increase the likelihood
of regular receipt by the Holders of Certificates with a higher relative payment
priority, of the full amount of monthly distributions allocable to them and to
afford such holders protection against losses. As a result, the yield on each
Class of Offered Certificates, in order of payment priority, will be
progressively more sensitive to the rate, timing and severity of Realized Losses
on the Mortgage Loans and other shortfalls in Available Funds. Investors in the
Offered Certificates, and particularly the Subordinated Certificates, should
carefully consider the related risks, including the risk that such investors may
suffer a loss on their investments.
The Subordinated Certificates will not be entitled to any principal
distributions until, at the earliest, the Stepdown Date. On and after the
Stepdown Date, principal will not be paid to the Subordinated Certificates if a
Trigger Event has occurred and is continuing (unless the Class Certificate
Balance of the Class A Certificates has been reduced to zero). As a result, the
weighted average lives of the Subordinated Certificates will be longer than
would be the case if distributions of principal were to be allocated on a pro
rata basis among the Class A Certificates and the Subordinated Certificates. As
a result of the longer weighted average lives of the Subordinated Certificates,
the Holders of such Certificates have a greater risk of suffering a loss on
their investments.
Underwriting Standards, Limited Operating History and Potential Delinquencies
Until late 1994, the Mortgage Loan Seller was engaged in the business
of originating and purchasing mortgage loans to borrowers with "A" quality
credit histories, a type of loan often referred to as "prime" mortgage loans.
Since that time, the Mortgage Loan Seller has focused its activities on
originating or acquiring mortgage loans that are ineligible for purchase by FNMA
or FHLMC due to borrower credit characteristics, property characteristics, loan
documentation guidelines or other characteristics that do not meet FNMA or FHLMC
underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such FNMA and FHLMC
underwriting guidelines and a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments or prior bankruptcies (such loans, "sub-prime" mortgage
loans). A borrower's past credit history may not preclude the Mortgage Loan
Seller from making a loan; however, it will generally reduce the size (and
consequently the Loan-to-Value Ratio) of the loan that the Mortgage Loan Seller
is willing to make. As a result of this approach to underwriting, the Mortgage
Loans in the Trust Fund may experience higher rates of delinquencies, defaults
and foreclosures than mortgage loans underwritten in a more traditional manner.
In addition, changes in the values of the Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated to conform to FNMA or
FHLMC guidelines. No assurance can be given that the values of the Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans.
The Mortgage Loan Seller commenced receiving applications for sub-prime
mortgage loans in November 1994. Accordingly, the Mortgage Loan Seller (whether
as an originator or acquirer of mortgage loans or as a servicer of such mortgage
loans) does not have representative historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of the Mortgage Loans.
S-17
<PAGE>
Geographic Concentration
Approximately 61.5% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are secured by Mortgaged Properties located in
the State of California. If the California residential real estate market should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the Mortgage Loans may be expected to increase, and may increase
substantially. See "The Mortgage Pool--Underwriting Standards; Representations"
herein.
Limited Liquidity
Prior to their issuance there has been no market for the Offered
Certificates and there can be no assurance that one will develop or, if it does
develop, that it will provide Certificate Owners with liquidity or will continue
for the lives of the Offered Certificates. The Underwriters intend, but are not
obligated, to make a market in the Offered Certificates.
Difficulty In Pledging
Since transactions in the Offered Certificates can be effected only
through DTC, CEDEL or Euroclear, their Participants and Indirect Participants,
the ability of a Certificate Owner to pledge an Offered Certificate to persons
or entities that do not participate in the DTC, CEDEL or Euroclear systems, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing such Certificates. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates"
herein.
Potential Delays In Receipt Of Distributions
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" herein.
Additional Risks Associated with the Mortgage Loans
Approximately 27.42% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, had a Loan-to-Value Ratio at origination in
excess of 80% but less than or equal to 90%, and such Mortgage Loans will not be
covered by a primary mortgage insurance policy. Mortgage Loans with higher
Loan-to-Value Ratios may present a greater risk of loss. See "The Mortgage
Pool--General" herein.
Limited Obligations
The Offered Certificates will not represent an interest in or
obligation of the Depositor, the Master Servicer, the Servicer, the Trustee or
any of their respective affiliates. The only obligations of the foregoing
entities with respect to the Certificates or any Mortgage Loan will be the
obligations of the Depositor and of the Master Servicer (in its capacity as
Mortgage Loan Seller) pursuant to certain limited representations and warranties
made with respect to the Mortgage Loans and of the Servicer with respect to its
servicing obligations under the Agreement (including the limited obligation to
make certain Monthly Advances). Neither the Certificates nor the underlying
Mortgage Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Master Servicer, the Servicer, the
Trustee or any of their respective affiliates. Proceeds of the assets included
in the Trust Fund (including the Mortgage Loans) will be the sole source of
payments on the Offered Certificates, and there will be no recourse to the
Depositor, the Master Servicer, the Servicer, the Trustee or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Offered Certificates.
S-18
<PAGE>
Yield Considerations
The yield to maturity on the Offered Certificates may be affected by
the resetting of the Mortgage Rates on the Mortgage Loans on the related
Adjustment Dates. In addition, because the Mortgage Rate for each Mortgage Loan
is based on the Index plus the related Gross Margin, such rate could be higher
than prevailing market interest rates, and this may result in an increase in the
rate of prepayments on the Mortgage Loans after such adjustment. Finally,
because the Mortgage Rates on the Mortgage Loans are based on the Index while
the Pass-Through Rates on the Offered Certificates are based in part on
One-Month LIBOR, and a substantial number of the Mortgage Loans are Delayed
First Adjustment Mortgage Loans, one or more Pass-Through Rates may be limited
by the Available Fund Pass-Through Rate. Although Holders of the Offered
Certificates are entitled to receive from and to the limited extent of funds
available therefor as described herein, any related LIBOR Carryover Amount,
there can be no assurance that such funds will be available or, if available,
sufficient for such purposes. The ratings of the Offered Certificates do not
address the likelihood of the payment of any LIBOR Carryover Amount.
The Status of the Mortgage Loans in the Event of Insolvency of the Mortgage
Loan Seller
The Depositor believes that the transfer of the Mortgage Loans by the
Mortgage Loan Seller to it will constitute an absolute and unconditional sale.
However, in the event of a bankruptcy of the Mortgage Loan Seller at a time when
it or any affiliate holds Certificates, the trustee in bankruptcy could attempt
to recharacterize the sale of the Mortgage Loans by the Mortgage Loan Seller as
a borrowing by the Mortgage Loan Seller or such affiliate from the Depositor,
secured by a pledge of the Mortgage Loans. Such an attempt, even if
unsuccessful, could result in delays in payments on the Certificates. If such an
attempt were successful, the trustee in bankruptcy could elect to liquidate the
Mortgage Loans and accelerate payment of the Certificates with the Holders
thereof entitled to the then outstanding principal amount thereof, if any,
together with interest at the applicable Pass-Through Rate to the date of
payment. Thus, the Holders of Certificates could lose the right to future
payments of interest, and might suffer reinvestment loss in a lower interest
rate environment. Stroock & Stroock & Lavan LLP will deliver a legal opinion in
connection with the issuance of the Certificates to the effect that, in the
event of the bankruptcy of the Mortgage Loan Seller, a court would not hold that
the transfer of the Mortgage Loans by the Mortgage Loan Seller to the Depositor
in exchange for the net proceeds of the sale of the Offered Certificates and the
delivery of the Class R Certificates is a loan secured by the Mortgage Loans
rather than a sale of the ownership interest in the Mortgage Loans evidenced by
the Offered Certificates.
THE MASTER SERVICER AND THE MORTGAGE LOAN SELLER
The information set forth in the following paragraph has been provided
by the Mortgage Loan Seller.
First Franklin Financial Corporation, a Delaware corporation
headquartered in San Jose, California (the "Mortgage Loan Seller"), will serve
as the Master Servicer for the Mortgage Loans pursuant to the Agreement (in such
capacity, the "Master Servicer"). The Mortgage Loan Seller is an indirect,
wholly-owned subsidiary of First Franklin Financial Companies, Inc., a
privately-owned financial services holding company. At August 31, 1997, the
Mortgage Loan Seller had approximately $365.3 million in assets, approximately
$335.6 million in liabilities and approximately $29.7 million in equity.
The Mortgage Loan Seller is a HUD-approved mortgagee and an approved
seller/servicer by both FNMA and FHLMC. It currently operates eighteen wholesale
branches in the United States including offices in Atlanta, GA; Bellevue, WA;
Boston, MA; Chicago, IL; Denver, CO; Detroit, MI; Las Vegas, NV; Orlando, FL;
Portland, OR; Phoenix, AZ; Salt Lake City, UT; and, Laguna Hills, San
Bernardino, San Diego, San Jose, Studio City, Walnut Creek, and Westlake
Village, CA. The Mortgage Loan Seller's primary source of originations is
through mortgage brokerage companies.
Founded in 1981, the Mortgage Loan Seller has grown from a small
mortgage broker to a full-service mortgage lender with a wide variety of
products. During the late 1980's and early 1990's, the Mortgage Loan Seller
focused primarily on originating and purchasing prime mortgage loans.
Origination volume peaked in 1993 at over $3.5 billion.
S-19
<PAGE>
In 1994, the Mortgage Loan Seller embarked on a transformation to a
full service "A" through "D" credit lender. Since that time, prime mortgage loan
origination volume has declined significantly as activities have been focused on
originating and acquiring sub-prime mortgage loans. In 1996, originations
totaled more than $1.0 billion and $440 million of prime and sub-prime mortgage
loans, respectively. As of September 30, 1997, originations have been
approximately $210 million and $714 million of prime and sub-prime mortgage
loans, respectively.
THE MORTGAGE POOL
General
The Mortgage Pool will consist of conventional, one- to four-family,
adjustable-rate Mortgage Loans secured by first liens on residential real
properties (the "Mortgaged Properties"). The Mortgage Loans have original terms
to maturity of 30 years. The Mortgage Loans will consist of approximately 2,018
Mortgage Loans having an aggregate principal balance as of the Cut-off Date of
approximately $300,096,194, application of payments of principal due on or
before the Cut-off Date (whether or not received).
The Mortgage Loans are secured by mortgages or deeds of trust or other
similar security instruments creating first liens on one- to four-family
residential properties consisting of detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments and manufactured housing. The
Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from the Mortgage Loan Seller. See "--Underwriting Standards;
Representations" herein.
All of the Mortgage Loans have scheduled monthly payments due on the
first day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan is assumable upon transfer or sale of the Mortgaged Property by
the related mortgagor if the purchaser or transferee meets the then current
credit requirements of the Mortgage Loan Seller.
Approximately 96% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years, four years or five years from the
date of origination of such Mortgage Loan. The amount of the prepayment charge
is as provided in the related Mortgage Note and generally equals six months'
interest on the amount of the prepayment in excess of 20% of the original
principal amount of the loan. Any prepayment charges received on the Mortgage
Loans will be retained as additional servicing compensation and will not be
available for distribution on the Certificates. In addition, the Mortgage Loans
are assumable in connection with the conveyance of the related Mortgage Property
by persons who meet the then current credit standards of the Mortgage Loan
Seller.
Each Mortgage Loan provides for semiannual adjustment to the Mortgage
Rate thereon and for corresponding adjustments to the monthly payment amount due
thereon, in each case on each adjustment date applicable thereto (each such
date, an "Adjustment Date"); provided, however, that in the case of
approximately 76.72% of the Mortgage Loans (each a "two year Delayed First
Adjustment Date Mortgage Loan"), the first Adjustment Date for each such
Mortgage Loan will occur after an initial period of two years from the
origination thereof; and in the case of approximately 18.86% of the Mortgage
Loans (each a "one year Delayed First Adjustment Date Mortgage Loan"), the first
Adjustment Date for each such Mortgage Loan will occur after an initial period
of one year from the origination thereof. On each Adjustment Date for each
Mortgage Loan, the Mortgage Rate thereon will be adjusted to equal the sum,
rounded to the nearest multiple of 0.125%, of the Index (as described below) and
a fixed percentage amount (the "Gross Margin"); provided, however, that the
Mortgage Rate on each such Mortgage Loan generally will not increase or decrease
by more than 100 basis points on any related Adjustment Date other than on the
first Adjustment Date (the "Periodic Rate Cap") and will not exceed a specified
maximum Mortgage Rate over the life of such Mortgage Loan (the "Maximum Mortgage
Rate") or be less than a specified minimum Mortgage Rate over the life of such
Mortgage Loan (the "Minimum Mortgage Rate"). In general, the two year Delayed
First Adjustment Date Mortgage Loans have a Periodic Rate Cap of 300 basis
points
S-20
<PAGE>
for their first Adjustment Date and the one year Delayed First Adjustment
Date Mortgage Loans have a Periodic Rate Cap of 200 basis points for their First
Adjustment Date, while both have subsequent Periodic Rate Caps of 100 basis
points for each Adjustment Date thereafter and have a Minimum Mortgage Rate
equal to the related initial Mortgage Rate. Effective with the first monthly
payment due on each Adjustable Rate Mortgage Loan after each related Adjustment
Date, the monthly payment amount will be adjusted to an amount that will
amortize fully the outstanding principal balance of the related Mortgage Loan
over its remaining term, and pay interest at the Mortgage Rate as so adjusted.
None of the Mortgage Loans permits the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
Statistical Information
Set forth below and in Appendix A is certain summary statistical
information regarding the Mortgage Loans expected to be included in the Trust
Fund as of the Closing Date. All such information is approximate and is given as
of the Cut-off Date. Prior to the Closing Date, Mortgage Loans may be removed
from the Trust Fund and other Mortgage Loans may be substituted therefor. In
addition, Mortgage Loans may be prepaid at any time. As a result, certain
characteristics of the Mortgage Loans in the Trust Fund may vary from the
characteristics set forth below and in Appendix A as of the Cut-off Date.
With respect to the Mortgage Loans as of the Cut-off Date: the Stated
Principal Balances ranged from $22,330 to $675,000; the average Stated Principal
Balance was $148,710; the Mortgage Rates ranged from 6.625% to 12.750%; the
weighted average Mortgage Rate was 9.129%; the original Loan-to-Value Ratios
ranged from 18.52% to 90.0%; the weighted average original Loan-to-Value Ratio
was 78.89%; the remaining terms to stated maturity ranged from 350 months to 360
months; the weighted average remaining term to stated maturity was 359 months;
the number of months since funding ranged from zero months to 6 months; the
weighted average number of months since funding was 1.49 months; the Gross
Margins ranged from 3.375% to 8.000%; the weighted average Gross Margin was
5.003%; the Minimum Mortgage Rates ranged from 6.625% to 12.750%; the weighted
average Minimum Mortgage Rate was 9.129%; the Maximum Mortgage Rates ranged from
12.625% to 18.750%; the weighted average Maximum Mortgage Rate was 15.129%; the
weighted average number of months to the next Adjustment Date was 20 months; and
no more than 0.79% of the Mortgage Loans are secured by Mortgaged Properties
located in any one postal zip code area.
The average principal balance of the Mortgage Loans in Sub-Pool I and
Sub-Pool II at origination was $134,674 and $163,641, respectively. No Mortgage
Loan in Sub-Pool I had a principal balance at origination of less than $75,120
or greater than $214,200. No Mortgage Loan in Sub-Pool II had a principal
balance at origination of less than $22,350 or greater than $675,000.
The Index
As of any Adjustment Date, the Index applicable to the determination of
the Mortgage Rate on each Adjustable Rate Mortgage Loan will be the average of
the interbank offered rates for six-month United States dollar deposits in the
London market ("Six-Month LIBOR") as published in The Wall Street Journal and as
most recently available as of the first business day of the month preceding the
month of such Adjustment Date, as specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise
unpublished, the Master Servicer will select a comparable alternative index over
which it has no direct control and which is readily verifiable.
S-21
<PAGE>
The table below sets forth historical average rates of Six-Month LIBOR
for the months indicated as made available from FNMA, which rates may differ
from the rates of the Index, which is six-month LIBOR as published in The Wall
Street Journal as described above. The table does not purport to be
representative of the subsequent rates of the Index which will be used to
determine the Mortgage Rate on each Adjustable Rate Mortgage Loan.
<TABLE>
<CAPTION>
Year
--------------------------------------------------------------------------
Month 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 5.71% 5.34% 6.69% 3.39% 3.44% 4.25% 7.13% 8.44%
February 5.68 5.29 6.44 4.00 3.33 4.38 6.89 8.44
March 5.96 5.52 6.44 4.25 3.38 4.55 6.53 8.69
April 6.08 5.42 6.31 4.63 3.31 4.27 6.31 9.00
May 6.01 5.64 6.06 5.00 3.44 4.25 6.19 8.50
June 5.94 5.84 5.88 5.25 3.56 4.13 6.56 8.44
July 5.83 5.92 5.88 5.33 3.56 3.63 6.31 8.05
August 5.86 5.74 5.94 5.33 3.44 3.63 5.88 8.19
September 5.85 5.75 5.99 5.69 3.38 3.31 5.69 8.42
October 5.80 5.58 5.95 6.00 3.50 3.64 5.36 8.06
November 5.55 5.74 6.44 3.52 3.89 4.94 8.38
December 5.62 5.56 7.00 3.50 3.64 4.25 7.56
</TABLE>
Underwriting Standards; Representations
The Mortgage Loans will be acquired by the Depositor from the Mortgage
Loan Seller. All of the Mortgage Loans were originated or acquired by the
Mortgage Loan Seller, generally in accordance with the underwriting criteria
described herein.
The Mortgage Loan Seller's underwriting standards are primarily
intended to assess the ability and willingness of the borrower to repay the debt
and to evaluate the adequacy of the mortgaged property as collateral for the
mortgage loan. All of the Mortgage Loans were underwritten with a view toward
the resale thereof in the secondary mortgage market. The Mortgage Loan Seller
considers, among other things, a mortgagor's credit history, repayment ability
and debt service-to-income ratio ("Debt Ratio"), as well as the value, type and
use of the mortgaged property. The Mortgage Loans generally bear higher rates of
interest than mortgage loans that are originated in accordance with FNMA and
FHLMC standards, and may experience rates of delinquencies and foreclosures that
are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in a more traditional manner. Unless
prohibited by state law or otherwise waived by the Mortgage Loan Seller upon the
payment by the related mortgagor of higher origination fees and a higher
Mortgage Rate, a majority of the Mortgage Loans provide for the payment by the
mortgagor of a prepayment charge on certain full or partial prepayments made
within one year, two years, three years, four years or five years from the date
of origination of the related Mortgage Loan as described under "--General"
above. The amount of the prepayment charge is as provided in the related
Mortgage Note but is generally equal to six month's interest on any amounts
prepaid in excess of 20% of the original principal balance of the related
Mortgage Loan.
Substantially all of the Mortgage Loans originated by the Mortgage Loan
Seller are based on loan application packages submitted through mortgage
brokerage companies. These brokers must meet minimum standards set by the
Mortgage Loan Seller based on an analysis of the following information submitted
with an application for approval: resumes of the principals, company financial
statements, applicable state lending license (in good standing) and satisfactory
credit report. Once approved, mortgage brokerage companies are eligible to
submit loan application packages in compliance with the terms of a signed broker
agreement.
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The Mortgage Loan Seller has two underwriting programs, the Standard
Program and the Direct Access Program, and three documentation programs within
each, the Full Documentation Program, the Limited Income Verification Program
(the "LIV") and the No Income Verification Program (the "NIV"). While each
underwriting program is intended to assess the risk of default, the Direct
Access Program makes use of credit bureau risk scores (the "Credit Bureau Risk
Score"). The Credit Bureau Risk Score is a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company ("Fair, Isaac") and the
three national credit repositories--Equifax, Trans Union and Experian (formerly
TRW). The Credit Bureau Risk Scores available from the three national credit
repositories are calculated by the assignment of weightings to the most
predictive data collected by the credit repositories and range from the 400s to
the 800s. Although the Credit Bureau Risk Scores are based solely on the
information at the particular credit repository, such Credit Bureau Risk Scores
have been calibrated to indicate the same level of credit risk regardless of
which credit repository is used. The Credit Bureau Risk Score is used as an aid
to, not a substitute for, the underwriter's judgment.
The Direct Access Program was developed to simplify the origination
process for the mortgage brokerage companies approved by the Mortgage Loan
Seller. In contrast to assignment of credit grades according to traditional
sub-prime credit assessment methods, i.e., mortgage and other credit
delinquencies and problems, Direct Access relies upon a borrower's Credit Bureau
Risk Score initially to determine a borrower's likely future credit performance.
Mortgage brokerage companies are able to access Credit Bureau Risk Scores at the
initial phases of the loan application process and use the score to determine a
borrower's interest rate based upon the Mortgage Loan Seller's Direct Access
Program risk-based pricing matrix (subject to final loan approval by the
Mortgage Loan Seller).
Under the Direct Access Program, the Mortgage Loan Seller requires that
the Credit Bureau Risk Score of the primary borrower (the borrower with the
highest income) be used to determine program eligibility. Credit Bureau Risk
Scores must be obtained from at least two national credit repositories, with the
lower of the two scores being utilized in program eligibility determination. If
Credit Bureau Risk Scores are obtained from three credit repositories, the
middle of the three scores can be utilized. In all cases, a borrower's complete
credit history must be detailed in the credit report that produces a given
Credit Bureau Risk Score or the borrower is not eligible for the Direct Access
Program. Generally, the minimum Credit Bureau Risk Score allowed under the
Direct Access Program is 550. The weighted average Credit Bureau Risk Score of
the Mortgage Loans underwritten in accordance with the Direct Access Program is
651.
The Credit Bureau Risk Score, along with LTV, is an important tool in
assessing the creditworthiness of a Direct Access borrower. However, these two
factors are not the only considerations in underwriting a Direct Access loan.
The Mortgage Loan Seller's underwriting staff fully reviews each Direct Access
loan to determine whether the Mortgage Loan Seller's guidelines for income,
assets, employment and collateral are met.
All of the Mortgage Loans were underwritten by the Mortgage Loan
Seller's underwriters having the appropriate signature authority. Each
underwriter is granted a level of authority commensurate with their proven
judgment, maturity and credit skills. The underwriters generally may approve
loans up to $250,000 with a loan-to-value ratio ("LTV") not to exceed 85%. Loans
exceeding the underwriters, signature authority level must be submitted to a
senior underwriter at the Corporate Office (headquarters) for approval. Under
the Standard Program, on a case by case basis and only with the approval of the
Corporate Office, the Mortgage Loan Seller may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include, but are not limited to, low LTV,
low Debt Ratio, substantial liquid assets, good credit history, stable
employment and time in residence at the applicant's current address. It is
expected that a substantial portion of the Mortgage Loans to be included in the
Mortgage Pool may represent such underwriting exceptions.
The Mortgage Loan Seller's underwriters verify the income of each
applicant under various documentation programs as follows: under the Full
Documentation Program, applicants are generally required to submit verification
of stable income for the two year period preceding the application. Under the
LIV Program, applicants are generally required to submit verification of
adequate cash flow to meet credit obligations for the 12 month period preceding
the application. Under the NIV Program, applicants may be qualified based on
monthly income as
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stated on the mortgage application. In all cases, the income stated must be
reasonable and customary for the applicant's line of work. Although the income
is not verified under the LIV and NIV Programs, a preclosing audit generally
will confirm that the business exists. Verification may be made through phone
contact to the place of business, obtaining a valid business license or through
Dun and Bradstreet Information Services.
The applicant must have a sufficiently established credit history to
qualify for the appropriate credit grade under the Standard Program (as
described below) or the appropriate Credit Bureau Risk Score range under the
Direct Access Program. This credit history is substantiated by a two repository
merged report prepared by an independent credit report agency. The report
typically summarizes the applicant's entire credit history, and generally
includes a seven year public record search for each address where the applicant
has lived during the two years prior to the issuance of the credit report and
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. Under the Standard
Program, the applicant must generally provide a letter explaining all late
payments on mortgage debt and, generally, consumer (non-mortgage) debt within
the last two years and credit inquiries made within the last 90 days.
The Mortgage Loan Seller originates loans secured by 1-4 unit
residential properties made to eligible borrowers with a vested fee simple (or
in some cases a leasehold) interest in the property. The Mortgage Loan Seller's
guidelines are applied in accordance with a procedure which complies with
applicable federal and state laws and regulations and require an appraisal of
the mortgaged property which conforms to FHLMC and/or FNMA standards; and if
appropriate, a review appraisal. Generally, appraisals are provided by
appraisers approved by the Mortgage Loan Seller. Review appraisals may only be
provided by appraisers approved by the Mortgage Loan Seller.
Qualified independent appraisers must meet minimum standards of
licensing and provide errors and omissions insurance in most states to become
approved to do business with the Mortgage Loan Seller. Each appraisal includes a
market data analysis based on recent sales of comparable homes in the area and,
where deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. The review appraisal may be a desk, field review or
an automated valuation report that confirms or supports the original appraiser's
value of the mortgaged premises. Under the Standard Program, the Mortgage Loan
Seller's guidelines permit single-family loans with maximum LTVs at origination
of up to 90% on A1 and A- credit grades. Lower LTVs generally are required in
the B, C and D credit grades, depending on the type and occupancy of the
property. In general, the maximum loan amount for mortgage loans originated
under the Standard Program is $500,000, however mortgage loans on a case by case
basis may be originated with higher balances subject to Corporate Office
approval.
The Mortgage Loan Seller requires title insurance on all mortgage loans
secured by liens on real property. The Mortgage Loan Seller also requires that
fire and extended coverage casualty insurance be maintained on the secured
property in an amount at least equal to the principal balance of the related
residential loan or the replacement cost of the property, whichever is less.
None of the mortgage loans will be covered by a primary mortgage insurance
policy.
The Mortgage Loan Seller conducts a number of quality control
procedures, including a post-funding compliance audit as well as a full
reunderwriting of a random selection of loans to assure asset quality. Under the
compliance audit, all loans are reviewed to verify credit grading, documentation
compliance and data accuracy. Under the asset quality procedure, a random
selection of each month's originations is reviewed. The loan review confirms the
existence and accuracy of legal documents, credit documentation, appraisal
analysis and underwriting decision. A report detailing audit findings and level
of error is sent monthly to each branch for response. The audit findings and
branch responses are then reviewed by the Mortgage Loan Seller's senior
management. Adverse findings are tracked monthly and over a rolling six month
period. This review procedure allows the Mortgage Loan Seller to assess programs
for potential guideline changes, program enhancements, appraisal policies, areas
of risk to be reduced or eliminated and the need for additional staff training.
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<PAGE>
Under the mortgage loan programs, various risk categories are used to
grade the likelihood that the applicant will satisfy the repayment conditions of
the loan. These risk categories establish the maximum permitted LTV and loan
amount, given the occupancy status of the mortgaged property and the applicant's
credit history and Debt Ratio. In general, higher credit risk mortgage loans are
graded in categories which permit higher Debt Ratios and more (or more recent)
major derogatory credit items such as outstanding judgments or prior
bankruptcies; however these loan programs establish lower maximum LTVs and
maximum loan amounts for loans graded in such categories. In all categories
under the Standard Program, for purposes of determining whether a prospective
mortgagor has been 30-days late, the Mortgage Loan Seller uses a "rolling 30-day
period," i.e. a continuous sequence of 30-day late payments will be considered
as a single 30-day late payment.
The Mortgage Loan Seller's guidelines under the Direct Access Program
generally have the following criteria for borrower eligibility for the specified
Credit Bureau Risk Score range.
"(greater than or equal to) 620": Collections, charge-offs, or
judgments not affecting title with individual balances of $1000 or less may
remain open after the funding of the loans unless the time elapsed since the
collection, charge-off, or judgment exceeds three years. No liens or judgments
affecting title may remain open after the funding of the loan. The maximum LTV
of 90% is permitted for owner occupied single family property. The maximum LTV
generally is reduced by 5% on a mortgaged property consisting of 2-4 units and
condominiums properties and reduced by 5-10% on properties with rural
characteristics. LTVs for nonowner occupied properties and second homes are
limited to 80%. The Debt Ratio generally may not exceed 50% or, if the LTV does
not exceed 80% the Debt Ratio may not exceed 60%.
"600-619": Collections, charge-offs, or judgments not affecting title
with individual balances of $1000 or less may remain open after the funding of
the loan unless the time elapsed since the collection, charge-off, or judgment
exceeds three years. No liens or judgments affecting title may remain open after
the funding of the loan. A maximum LTV of 90% is permitted for a purchase,
rate/term, or debt consolidation transaction and 85% for a cash-out transaction
on an owner occupied single family property. The maximum LTV generally is
reduced by 5% on a mortgaged property consisting of 2-4 units and condominium
properties and reduced by 5-10% on properties with rural characteristics. LTVs
for nonowner occupied properties and second homes are limited to 80%. The Debt
Ratio generally may not exceed 55% or, if the LTV does not exceed 75% the Debt
Ratio may not exceed 60%.
"570-599": Collections, charge-offs, or judgments not affecting title
with individual balances of $1500 or less may remain open after the funding of
the loan unless the time elapsed since the collection, charge-off, or judgment
exceeds two years. No liens or judgments affecting title may remain open after
the funding of the loan. A maximum LTV of 85% is permitted for a purchase,
rate/term, or debt consolidation transaction and 80% for a cash-out transaction
on an owner occupied single family property. The maximum LTV generally is
reduced by 5% on a mortgaged property consisting of 2-4 units and condominium
properties and reduced by 5-10% on properties with rural characteristics. LTVs
for nonowner occupied properties are limited to 70% and second homes are limited
to 75%. Generally Debt Ratio must be 50% or less, but this may increase to 55%
and 60% at reduced LTVs. Debt Ratios greater than 55% require a predetermined
minimum gross income.
"550-569": Collections, charge-offs, or judgments not affecting title
with individual balances of $2500 or less may remain open after the funding of
the loan unless the time elapsed since the collection, charge-off, or judgment
exceeds 12 months. No liens or judgments affecting title may remain open after
the funding of the loan. A maximum LTV of 80% is permitted for a purchase,
rate/term, or debt consolidation transaction and 75% for a cash-out transaction
on an owner occupied single family property. The maximum LTV generally is
reduced by 5% on a mortgaged property consisting of 2-4 units and condominium
properties and reduced by 5-10% on properties with rural characteristics. LTVs
for nonowner occupied properties and second homes are limited to 65%. Debt Ratio
must be 60% or less. Debt Ratios greater than 55% require a predetermined
minimum gross income.
For all of the above, collections, charge-offs, judgments and liens not
affecting title may remain open for LTVs (less than or equal to) 75%.
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<PAGE>
The Mortgage Loan Seller's guidelines under the Standard Program
generally have the following categories and criteria for grading the potential
likelihood that an applicant will satisfy the repayment obligations of a
mortgage loan:
"A1": Within the A1 risk category, the applicant must have demonstrated
steady employment over the last two years. The applicant must have generally
repaid installment and revolving debt according to its terms with a maximum of
25% of total credit no more than 30 days delinquent in the past 12 months. A
maximum of one 30-day late payment, and no 60-day late payments within the last
12 months is permitted on an existing mortgage loan for LTVs up to and including
80%, (no 30 day late payments are permitted for LTVs greater than 80%)
Collections, charge-offs, or judgments not affecting title with individual
balances of $500 or less may remain after the funding of the loan. No liens or
judgments affecting title to the property may remain open after the funding of
the loan. No bankruptcy, discharge or notice of default filings may have
occurred during the preceding three years. The mortgaged property must be in at
least average condition. A maximum LTV of 90% is permitted for an owner occupied
single family property. The maximum LTV ratio generally is reduced by 5% on a
mortgaged property consisting of two-to-four units and condominium properties
and reduced by 5-10% on properties with rural characteristics. LTVs for nonowner
occupied properties and second homes are limited to 80%. The Debt Ratio
generally may not exceed 45%.
"A-": Within the A- risk category, the applicant must have demonstrated
steady employment over the last two years. The applicant generally must have
repaid installment and revolving debt according to its terms with a maximum of
50% of total credit no more than 30 days delinquent in the last twelve months,
except for isolated minor occurrences up to 60 days delinquent. A maximum of two
30-day late payments (one 30-day late payment for loans with LTVs greater than
85%) and no 60-day late payments within the last 12 months are permitted on an
existing mortgage loan. Collections, charge-offs or judgments not affecting
title with balances of $1000 or less may remain open after the funding of the
loan unless the time elapsed since the occurrence exceeds three years. No liens
or judgments affecting title to the property may remain open. No bankruptcy
discharge may have occurred during the preceding two years while no notice of
default filing may have occurred during the preceding three years. The mortgaged
property must be in at least average condition. A maximum LTV of 90% is
permitted for a purchase and 85% for a refinance mortgage loan on an owner
occupied single family property. The maximum LTV generally is reduced by 5% on a
mortgaged property consisting of two-to-four units and condominium properties
and reduced by 5-10% on properties with rural characteristics. LTVs for nonowner
occupied properties generally are limited to 80% purchase, 75% refinance, and
second homes are limited to 80% purchase or refinance. Generally, the Debt Ratio
may not exceed 47%, however this may be allowed to increase to 55% based on
reduced LTVs. Debt Ratios greater than 50% require a predetermined minimum
monthly gross income.
"B": Within the B risk category, the applicant must have demonstrated
steady employment over the last two years. The applicant must have generally
repaid installment and revolving debt according to its terms with a maximum of
one 90-day late payment permitted on any account in the last 12 months. A
maximum of four 30-day late payments and no 60-day late payments, or three
30-day late payments and one 60-day late payment within the last 12 months are
permitted on an existing mortgage loan. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding two years. For LTVs of
75% and less, the bankruptcy may have been discharged at least 12 months
(instead of 24 months). Collections, charge-offs, or judgments not affecting
title with balances of $1500 or less may remain open after the funding of the
loan unless the time elapsed since the occurrence exceeds two years. No liens or
judgments affecting title to the property may remain open after the funding of
the loan. The mortgaged property must be in at least average condition. A
maximum LTV of 80% is permitted for an owner occupied single family property.
The maximum LTV generally is reduced by 5% on a mortgaged property consisting of
two-to-four units and condominium properties and reduced by 5-10% on properties
with rural characteristics. LTVs for nonowner occupied properties generally are
limited to 70% and second homes are limited to 75%. Generally the Debt Ratio
must be 50% or less, but this may increase to 60% at reduced LTVs. Debt Ratios
greater than 50% require a predetermined minimum monthly gross income.
"C": Within the C risk category, the applicant must have demonstrated
steady employment over the last 12 months. The applicant may have experienced
significant credit problems in the past. Consumer credit derogatory items may
not exceed one 120-days delinquent on any account in the last 12 months. A
maximum of six
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<PAGE>
30-day, two 60-day, and one 90 day late payments within the last 12 months are
permitted on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted. However, an
existing mortgage loan can be no more than 90 days delinquent at the time of
loan closing. No notice of foreclosure filing may have occurred during the
preceding 12 months. For LTVs of greater than 70%, no bankruptcy filing or
discharge may have occurred during the preceding 12 months. For LTVs of 70% or
less, any Chapter 7 bankruptcy must have been discharged prior to loan closing;
however a Chapter 13 may be paid at closing provided a mortgage pay history
reflects no more than two 30-day late payments since the bankruptcy filing and
the payments to the bankruptcy trustee have been made timely. Collections,
charge-offs, or judgments not affecting title with balances of $2500 or less may
remain open after the funding of the loan unless the time elapsed since the
occurrence exceeds two years. No liens or judgments affecting title to the
property may remain open after the funding of the loan. The mortgaged property
must be in at least average condition. A maximum LTV of 80% is permitted for an
owner occupied single family property, while 65% is permitted for nonowner
occupied properties or second homes. The maximum LTV generally is reduced by 5%
on a mortgaged property consisting of two-to-four units and reduced by 5-10% on
properties with rural characteristics. LTVs for condominium units generally are
restricted to 70% LTV. Generally the Debt Ratio must be 55% or less, but this
may increase to 60% at reduced LTVs. Debt Ratios greater than 50% require a
predetermined minimum monthly gross income.
"D": Within the D risk category, the applicant may have experienced
significant credit problems in the past. An existing mortgage loan is not
required to be current at the time the application is submitted, however, an
existing mortgage loan can be no more than 120 days delinquent at the time of
loan closing. Notice of foreclosure filings must be consummated prior to loan
closing. An open Notice of Default (NOD) may be paid through loan proceeds on an
owner occupied primary residence only to a maximum 65% LTV. Any Chapter 7
bankruptcy must have been discharged prior to loan closing; however a Chapter 13
may be paid at closing provided a mortgage pay history reflects no more than
four 30-day late payments since the bankruptcy filing and the payments to the
bankruptcy trustee have been made timely. Collections, charge-offs, or judgments
not affecting title to the property may remain open after the funding of the
loan. All liens and judgments affecting title to the property must be paid in
full at closing. The mortgaged property must be in at least average condition. A
maximum LTV of 70% is permitted for an owner occupied single family property
only. The maximum LTV generally is reduced by 5% on a mortgaged property
consisting of two-to-four units and condominium properties. Generally the Debt
Ratio may not exceed 60%. Debt Ratios greater than 50% require a predetermined
minimum monthly gross income.
For all of the above, collections, charge-offs, judgments and liens
not affecting title to the property may remain open for LTVs (less than or equal
to) 75%.
The Mortgage Loan Seller will make representations and warranties with
respect to the Mortgage Loans as of the Closing Date. The Mortgage Loan Seller
will be obligated to repurchase or substitute for Mortgage Loans in respect of
which a material breach of the representations and warranties it has made has
occurred (other than those breaches which have been cured). For a discussion of
the representations and warranties made and the repurchase obligation, see
"Description of the Agreements--Representations and Warranties; Repurchases" in
the Prospectus.
YIELD ON THE CERTIFICATES
Certain Shortfalls in Collections of Interest
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. Principal prepayments in full received, and
partial principal prepayments applied, from the first day through the
Determination Date in the month (other than the month of the Cut-off Date) will
be distributed on the Distribution Date in the same month thereby eliminating
any shortfall to Certificateholders. Principal prepayments in full received and
partial principal prepayments applied after the Determination Date (or in the
case of the first Distribution Date, from the Cut-off Date through the thirtieth
day), in the month will be distributed on the Distribution Date in the following
month. Regarding the interest shortfalls attributable to the latter full and
partial prepayments by the mortgagors on the
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<PAGE>
Mortgage Loans ("Prepayment Interest Shortfalls"), the Servicer will be
obligated to pay from its own funds such shortfalls, but only to the extent of
its Servicing Fee for the related Collection Period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein. In
addition, the application of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), to any Mortgage Loan will adversely affect,
for an indeterminate period of time, the ability of the Servicer to collect full
amounts of interest on such Mortgage Loan. The effect of any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
Certificateholders. See "Certain Legal Aspects of the Mortgage Loans--Soldiers'
and Sailors' Civil Relief Act of 1940 in the Prospectus.
General Prepayment Considerations
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yield to
maturity of the Offered Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of
such Mortgage Loans as the same change to accommodate changes in the Mortgage
Rates and by the rate of principal prepayments thereon (including for this
purpose payments resulting from refinancings, liquidations of the Mortgage Loans
due to defaults, casualties, condemnations and repurchases, whether optional or
required, by the Depositor or the Mortgage Loan Seller, as the case may be). The
Mortgage Loans generally may be prepaid by the mortgagors at any time; however,
as described under "The Mortgage Pool" herein, with respect to a majority of the
Mortgage Loans, a prepayment may subject the related mortgagor to a prepayment
charge. In addition, the Mortgage Loans are assumable in connection with the
conveyance of the related Mortgaged Property by persons who meet the then
current credit standards of the Mortgage Loan Seller.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the Holders of the Offered
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Mortgage Loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Since the rate of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of the Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such Certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the Mortgage Loans. Further, in
the case of Offered Certificates purchased at a discount, an investor should
consider the risk that a slower than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of Offered Certificates
purchased at a premium, an investor should consider the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
prepayment of principal on the Mortgage Loans, the greater will be the effect on
the yield to maturity of an investor in the Offered Certificates. As a result,
the effect on an investor's yield of principal payments occurring on the
Mortgage Loans at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the Offered
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate, and the prepayment charges imposed in connection with prepayments
on certain of the Mortgage Loans will have an uncertain effect on the rate and
timing of prepayments on the Mortgage Loans. Moreover, the timing of prepayments
on the Mortgage Loans may significantly affect the actual yield to maturity on
the Offered Certificates, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans
is influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage
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<PAGE>
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions. The
existence of the Periodic Rate Cap, Maximum Mortgage Rates and Minimum Mortgage
Rates also may affect the prepayment experience on the Mortgage Loans. In
addition, the prepayment experience on the Delayed First Adjustment Date
Mortgage Loans may differ from that on the other Mortgage Loans, especially as
they approach their first Adjustment Date. At such time, the prepayment
experience on the Delayed First Adjustment Date Mortgage Loans may be more
sensitive to relatively small changes in market interest rates. There can be no
certainty as to the rate of prepayments on the Mortgage Loans during any period
or over the life of the Certificates. See "Yield Considerations" and "Maturity
and Prepayment Considerations" in the Prospectus.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates generally are
higher for mortgage loans used to refinance an existing mortgage loan than on
mortgage loans used to purchase a home. In the event of a mortgagor's default on
a Mortgage Loan, other than as provided by the overcollateralization provisions
of the Trust Fund, there can be no assurance that recourse will be available
beyond the specific Mortgaged Property pledged as security for repayment. See
"The Mortgage Pool--Underwriting Standards; Representations" herein.
Special Yield Considerations with respect to the Mortgage Loans
The Mortgage Rates on the Mortgage Loans adjust semi-annually (in the
case of the Delayed First Adjustment Date Mortgage Loans, after an initial
period of one or two years) based upon the Index, whereas the Pass-Through Rates
on the Offered Certificates adjust monthly based upon One-Month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" herein, subject to the Available Funds Pass-Through Rate. As a result,
increases in the Pass-Through Rates on the Offered Certificates may be limited
for extended periods in a rising interest rate environment. In addition, because
each Pass-Through Rate is determined, to some extent, by the Mortgage Rates on
the Mortgage Loans, disproportionate prepayments of Mortgage Loans with Mortgage
Rates above the then current weighted average Mortgage Rate may adversely affect
the Pass-Through Rate on one or more Classes of Offered Certificates by lowering
the Available Funds Pass-Through Rate. Investors should note that approximately
76.72% of the Mortgage Loans are two year Delayed First Adjustment Date Mortgage
Loans and approximately 18.86% of the Mortgage Loans are one year Delayed First
Adjustment Date Mortgage Loans. The interest due on the Mortgage Loans during
any Collection Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable Pass-Through Margin during the related
Interest Accrual Period in which case the applicable Pass-Through Rate will be
limited to the Available Funds Pass-Through Rate. Although Holders of the
Offered Certificates are entitled to receive from and to the limited extent of
funds available therefor as described herein, any related LIBOR Carryover
Amount, there can be no assurance that such funds will be available or, if
available, sufficient for such purposes. The ratings of the Offered Certificates
do not address the likelihood of the payment of any LIBOR Carryover Amount.
Since the Pass-Through Margin is different for each Class of Offered
Certificates, it is possible that, on any particular Distribution Date, the
LIBOR Rate applicable to one or more Classes of Offered Certificates, may be
less than the Available Funds Pass-Through Rate, while the LIBOR Rate applicable
to one or more other Classes of Offered Certificates may exceed the Available
Funds Pass-through Rate. In such event, the Agreement provides that the excess
moneys resulting from such Classes having LIBOR Rates less than the Available
Funds Pass-Through Rate shall be applied to increase the amount of interest
payable with respect to the Class A, Class M-1, Class M-2 and Class B
Certificates, in that order, having LIBOR Rates greater than the Available Funds
Pass-Through Rate, up to the amount of interest at the related LIBOR Rate due to
such Class. In addition, the Index and One-Month LIBOR may respond differently
to economic and market factors. Thus, it is possible, that if both One-Month
LIBOR and the Index rise during the same period, One-Month LIBOR may rise more
rapidly than the Index or may rise higher than the Index. In addition, the Index
and/or One-Month LIBOR may not move at the same time or in the same direction as
market interest rates generally. It is possible that market interest rates may
fall at the same time that One- Month LIBOR and/or the Index is rising.
S-29
<PAGE>
The Subordinated Certificates
The weighted average lives of, and the yields to maturity on, the
Subordinated Certificates, in increasing order of their numerical Class
designations, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinated Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such Holder
based on such assumption. The timing of losses on the Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Applied Realized Loss Amounts on the
Mortgage Loans will reduce the Class Certificate Balance of the applicable Class
of Subordinated Certificates, without the receipt of cash attributable to such
reduction. As a result of such reductions, less interest will accrue on such
Class of Subordinated Certificates than otherwise would be the case.
The Principal Remittance Amount includes the net proceeds in respect of
principal received upon liquidation of a Liquidated Mortgage Loan. If such net
proceeds are less than the unpaid principal balance, the Pool Principal Balance
will decline more than the aggregate Class Certificate Balance of the Offered
Certificates, thereby reducing the Overcollateralization Amount. If such
difference is not covered by the Overcollateralization Amount, or the
application of excess interest, the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation will bear such loss as
a result of the application of Applied Realized Loss Amounts. In addition, the
Subordinated Certificates will not be entitled to any principal distributions
prior to the Stepdown Date or during the continuation of a Trigger Event (unless
all of the Certificates with a higher payment priority have been paid in full).
Because of the disproportionate distribution of principal of the Class A
Certificates, depending on the timing of Realized Losses, the Subordinated
Certificates may bear a disproportionate percentage of the Realized Losses on
the Mortgage Loans.
For all purposes, the Class B Certificates will be deemed to have the
highest numerical Class designation and the lowest payment priority of any Class
of Subordinated Certificates.
Weighted Average Lives
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a prepayment rate of 25% CPR. The Constant
Prepayment Rate model ("CPR") assumes that the outstanding principal balance of
a pool of mortgage loans prepays at a specified constant annual rate or CPR. In
generating monthly cash flows, this rate is converted to an equivalent constant
monthly rate. To assume 25% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year. No representation is made that the Mortgage
Loans will prepay at 25% CPR or at any other rate. Neither the prepayment model
used herein nor any other prepayment model or assumption purports to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans included in the Mortgage Pool.
The tables following the next paragraph indicate the percentage of the
initial Class Certificate Balance of each Class of Offered Certificates that
would be outstanding after each of the dates shown at various percentages of the
Prepayment Assumption and the corresponding weighted average lives. The tables
are based on the following assumptions (the "Modeling Assumptions"): (i) the
Mortgage Pool consists of Mortgage Loans with the characteristics set forth in
the table below, (ii) distributions on such Certificates are received, in cash,
on the 20th day of each month, commencing in December 1997, (iii) the Mortgage
Loans prepay at the percentages of the
S-30
<PAGE>
Prepayment Assumption indicated, (iv) no defaults or delinquencies occur in the
payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act are incurred, (v) none of
the Depositor, the Mortgage Loan Seller, the majority holder of the Residual
Certificates, the Servicer or any other person purchases from the Trust Fund any
Mortgage Loan pursuant to any obligation or option under the Agreement, except
as indicated in footnote two in the tables, (vi) scheduled monthly payments on
the Mortgage Loans are received on the first day of each month commencing in
December 1997, and are computed prior to giving effect to any prepayments
received in the prior month, and the number of days of accrual on the Mortgage
Loans in the first accrual period is the same as the number of days in the first
Interest Accrual Period for the Certificates, (vii) prepayments representing
payment in full of individual Mortgage Loans are received on the last day of
each month commencing in November 1997, and include 30 days' interest thereon,
(viii) the scheduled monthly payment for each Mortgage Loan is calculated based
on its principal balance, Mortgage Rate, original term to maturity and remaining
term to maturity such that the Mortgage Loan will amortize in amounts sufficient
to repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity, (ix) the Certificates are purchased on December 3, 1997, (x)
the Index remains constant at 5.8125% per annum and the Mortgage Rate on each
Mortgage Loan is adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates if necessary) to equal the Index plus the applicable Gross
Margin, subject to the applicable Periodic Rate Cap, (xi) One-Month LIBOR
remains constant at 5.65625% per annum, (xii) the monthly payment on each
Mortgage Loan is adjusted on the Due Date immediately following the next
Adjustment Date (and on subsequent Adjustment Dates, if necessary) to equal a
fully amortizing monthly payment as described in clause (viii) above, and (xiii)
the Expense Fee Rate is equal to 0.515% per annum.
S-31
<PAGE>
Hypothetical Mortgage Loans (6 Month LIBOR):
<TABLE>
<CAPTION>
Sub - Pool I
Original Remaining Periodic
Maximum Minimum Term to Term to Cap (%)
Principal Months to Interest Gross Interest Interest Maturity Maturity Initial/
Balance ($) Rate Change Rate (%) Margin (%) Rate (%) Rate (%) (Months) (Months) Subsequent
- ----------- ----------- -------- ---------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
540,418.96 3 9.240 5.932 15.240 9.240 360 357 1.0000/1.0000
1,538,217.52 4 7.856 4.636 13.856 7.856 360 358 1.0000/1.0000
1,331,653.37 5 8.329 4.805 14.329 8.329 360 359 1.0000/1.0000
2,748,007.07 6 8.675 5.249 14.675 8.675 360 360 1.0000/1.0000
1,603,262.58 8 9.175 5.090 15.175 9.175 360 356 2.0000/1.0000
6,653,377.42 10 8.866 5.042 14.866 8.866 360 358 2.0000/1.0000
7,063,132.61 11 8.759 5.048 14.759 8.759 360 359 1.9750/1.0000
7,828,570.00 12 8.746 5.005 14.746 8.746 360 360 1.9830/1.0000
1,374,394.31 19 10.111 5.874 16.111 10.111 360 355 3.0000/1.0000
1,758,981.19 20 9.693 5.559 15.693 9.693 360 356 3.0000/1.0000
6,140,661.65 21 9.657 5.321 15.657 9.657 360 357 3.0000/1.0000
36,631,030.97 22 9.316 5.035 15.316 9.316 360 358 3.0000/1.0000
31,998,434.04 23 9.169 4.904 15.169 9.169 360 359 2.9870/1.0000
31,674,835.23 24 9.205 4.912 15.205 9.205 360 360 3.0000/1.0000
<CAPTION>
Sub - Pool II
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1,447,511.71 2 7.678 4.843 13.678 7.678 360 356 1.0000/1.0000
1,427,261.24 4 8.694 5.437 14.694 8.694 360 358 1.0000/1.0000
1,445,239.70 5 9.516 6.148 15.516 9.516 360 359 1.0000/1.0000
2,792,411.15 6 8.686 5.339 14.686 8.686 360 360 1.0000/1.0000
4,327,950.59 8 8.669 5.029 14.669 8.669 360 356 1.9350/1.0000
9,048,014.25 10 8.873 5.084 14.873 8.873 360 358 2.0000/1.0000
8,869,843.12 11 8.686 4.906 14.686 8.686 360 359 2.0000/1.0000
11,204,887.00 12 8.659 4.896 14.659 8.659 360 360 2.0000/1.0000
4,098,879.14 19 9.808 5.582 15.808 9.808 360 355 3.0000/1.0000
3,656,172.63 20 9.279 5.076 15.279 9.279 360 356 3.0000/1.0000
5,937,130.06 21 9.505 5.184 15.505 9.505 360 357 3.0000/1.0000
35,469,364.94 22 9.187 4.918 15.187 9.187 360 358 3.0000/1.0000
36,538,362.56 23 9.175 4.943 15.175 9.175 360 359 3.0000/1.0000
34,948,189.00 24 9.218 4.982 15.218 9.218 360 360 3.0000/1.0000
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of the initial Class
Certificate Balance outstanding (and the weighted average life) of each Class of
Offered Certificates set forth in the tables. In addition, since the actual
Mortgage Loans will have characteristics that differ from those assumed in
preparing the tables set forth below and, since it is not likely the level of
the Index will remain constant as assumed, each Class of Offered Certificates
may mature earlier or later than indicated by the tables. Variations in the
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Class Certificate Balances (and
weighted average lives) shown in the following tables. Such variations may occur
even if the average prepayment experience of all such Mortgage Loans equals any
of the specified percentages of the Prepayment Assumption.
S-32
<PAGE>
Percent of Initial Class Certificate Balance Outstanding
<TABLE>
<CAPTION>
Class A-1 Certificates
-------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 3, 1997 100 100 100 100 100 100 100
November 25, 1998 97 79 73 67 61 55 49
November 25, 1999 96 63 54 44 36 28 21
November 25, 2000 95 50 38 28 18 10 4
November 25, 2001 95 39 30 23 18 10 4
November 25, 2002 94 33 24 17 12 9 0
November 25, 2003 93 27 19 13 9 0 0
November 25, 2004 92 23 15 10 0 0 0
November 25, 2005 90 19 12 0 0 0 0
November 25, 2006 89 16 9 0 0 0 0
November 25, 2007 88 14 0 0 0 0 0
November 25, 2008 86 11 0 0 0 0 0
November 25, 2009 84 10 0 0 0 0 0
November 25, 2010 82 8 0 0 0 0 0
November 25, 2011 80 0 0 0 0 0 0
November 25, 2012 77 0 0 0 0 0 0
November 25, 2013 74 0 0 0 0 0 0
November 25, 2014 71 0 0 0 0 0 0
November 25, 2015 68 0 0 0 0 0 0
November 25, 2016 64 0 0 0 0 0 0
November 25, 2017 59 0 0 0 0 0 0
November 25, 2018 55 0 0 0 0 0 0
November 25, 2019 49 0 0 0 0 0 0
November 25, 2020 43 0 0 0 0 0 0
November 25, 2021 37 0 0 0 0 0 0
November 25, 2022 32 0 0 0 0 0 0
November 25, 2023 27 0 0 0 0 0 0
November 25, 2024 21 0 0 0 0 0 0
November 25, 2025 15 0 0 0 0 0 0
November 25, 2026 0 0 0 0 0 0 0
Weighted Avg. Life in 20.08 4.40 3.27 2.54 2.00 1.58 1.23
Years (1) (2)
Weighted Avg. Life in 20.11 4.74 3.55 2.77 2.20 1.74 1.34
Years (3)
</TABLE>
- ----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchases the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is 10% or less
of Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement-Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
S-33
<PAGE>
Percent of Initial Class Certificate Balance Outstanding
<TABLE>
<CAPTION>
Class A-2 Certificates
-------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 3, 1997 100 100 100 100 100 100 100
November 25, 1998 97 79 73 67 61 55 49
November 25, 1999 96 63 54 44 36 28 21
November 25, 2000 95 50 38 28 18 10 4
November 25, 2001 95 39 30 23 18 10 4
November 25, 2002 94 33 24 17 12 9 0
November 25, 2003 93 27 19 13 9 0 0
November 25, 2004 92 23 15 10 0 0 0
November 25, 2005 90 19 12 0 0 0 0
November 25, 2006 89 16 9 0 0 0 0
November 25, 2007 88 14 0 0 0 0 0
November 25, 2008 86 11 0 0 0 0 0
November 25, 2009 84 10 0 0 0 0 0
November 25, 2010 82 8 0 0 0 0 0
November 25, 2011 80 0 0 0 0 0 0
November 25, 2012 77 0 0 0 0 0 0
November 25, 2013 74 0 0 0 0 0 0
November 25, 2014 71 0 0 0 0 0 0
November 25, 2015 68 0 0 0 0 0 0
November 25, 2016 64 0 0 0 0 0 0
November 25, 2017 59 0 0 0 0 0 0
November 25, 2018 55 0 0 0 0 0 0
November 25, 2019 49 0 0 0 0 0 0
November 25, 2020 43 0 0 0 0 0 0
November 25, 2021 37 0 0 0 0 0 0
November 25, 2022 32 0 0 0 0 0 0
November 25, 2023 27 0 0 0 0 0 0
November 25, 2024 21 0 0 0 0 0 0
November 25, 2025 14 0 0 0 0 0 0
November 25, 2026 0 0 0 0 0 0 0
Weighted Avg. Life in 20.06 4.40 3.27 2.54 2.00 1.58 1.23
Years (1) (2)
Weighted Avg. Life in 20.09 4.74 3.55 2.77 2.20 1.74 1.34
Years (3)
</TABLE>
- -----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchases the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is 10% or less
of Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement-Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
S-34
<PAGE>
Percent of Initial Class Certificate Balance Outstanding
<TABLE>
<CAPTION>
Class M-1 Certificates
------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 3, 1997 100 100 100 100 100 100 100
November 25, 1998 100 100 100 100 100 100 100
November 25, 1999 100 100 100 100 100 100 100
November 25, 2000 100 100 100 100 100 100 100
November 25, 2001 100 100 80 62 47 71 100
November 25, 2002 100 86 63 46 33 22 0
November 25, 2003 100 72 50 34 23 0 0
November 25, 2004 100 61 40 25 0 0 0
November 25, 2005 100 51 32 0 0 0 0
November 25, 2006 100 43 25 0 0 0 0
November 25, 2007 100 36 0 0 0 0 0
November 25, 2008 100 30 0 0 0 0 0
November 25, 2009 100 25 0 0 0 0 0
November 25, 2010 100 21 0 0 0 0 0
November 25, 2011 100 0 0 0 0 0 0
November 25, 2012 100 0 0 0 0 0 0
November 25, 2013 100 0 0 0 0 0 0
November 25, 2014 100 0 0 0 0 0 0
November 25, 2015 100 0 0 0 0 0 0
November 25, 2016 100 0 0 0 0 0 0
November 25, 2017 100 0 0 0 0 0 0
November 25, 2018 100 0 0 0 0 0 0
November 25, 2019 100 0 0 0 0 0 0
November 25, 2020 100 0 0 0 0 0 0
November 25, 2021 98 0 0 0 0 0 0
November 25, 2022 85 0 0 0 0 0 0
November 25, 2023 71 0 0 0 0 0 0
November 25, 2024 56 0 0 0 0 0 0
November 25, 2025 38 0 0 0 0 0 0
November 25, 2026 0 0 0 0 0 0 0
Weighted Avg. Life in 27.08 8.72 6.48 5.20 4.56 4.40 4.40
Years (1) (2)
Weighted Avg. Life in 27.18 9.55 7.16 5.75 5.02 4.77 5.06
Years (3)
</TABLE>
- -----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchases the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is 10% or less
of Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement-Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
S-35
<PAGE>
Percent of Initial Class Certificate Balance Outstanding
<TABLE>
<CAPTION>
Class M-2 Certificates
------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 3, 1997 100 100 100 100 100 100 100
November 25, 1998 100 100 100 100 100 100 100
November 25, 1999 100 100 100 100 100 100 100
November 25, 2000 100 100 100 100 100 100 100
November 25, 2001 100 100 80 62 47 35 29
November 25, 2002 100 86 63 46 33 22 0
November 25, 2003 100 72 50 34 23 0 0
November 25, 2004 100 61 40 25 0 0 0
November 25, 2005 100 51 32 0 0 0 0
November 25, 2006 100 43 25 0 0 0 0
November 25, 2007 100 36 0 0 0 0 0
November 25, 2008 100 30 0 0 0 0 0
November 25, 2009 100 25 0 0 0 0 0
November 25, 2010 100 21 0 0 0 0 0
November 25, 2011 100 0 0 0 0 0 0
November 25, 2012 100 0 0 0 0 0 0
November 25, 2013 100 0 0 0 0 0 0
November 25, 2014 100 0 0 0 0 0 0
November 25, 2015 100 0 0 0 0 0 0
November 25, 2016 100 0 0 0 0 0 0
November 25, 2017 100 0 0 0 0 0 0
November 25, 2018 100 0 0 0 0 0 0
November 25, 2019 100 0 0 0 0 0 0
November 25, 2020 100 0 0 0 0 0 0
November 25, 2021 98 0 0 0 0 0 0
November 25, 2022 85 0 0 0 0 0 0
November 25, 2023 71 0 0 0 0 0 0
November 25, 2024 56 0 0 0 0 0 0
November 25, 2025 38 0 0 0 0 0 0
November 25, 2026 0 0 0 0 0 0 0
Weighted Avg. Life in 27.08 8.72 6.48 5.16 4.40 4.02 3.86
Years (1) (2)
Weighted Avg. Life in 27.17 9.42 7.05 5.62 4.79 4.33 4.12
Years (3)
</TABLE>
- -----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchases the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is 10% or less
of Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement-Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
S-36
<PAGE>
Percent of Initial Class Certificate Balance Outstanding
<TABLE>
<CAPTION>
Class B Certificates
------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 3, 1997 100 100 100 100 100 100 100
November 25, 1998 100 100 100 100 100 100 100
November 25, 1999 100 100 100 100 100 100 100
November 25, 2000 100 100 100 100 100 100 100
November 25, 2001 100 100 80 62 47 35 25
November 25, 2002 100 86 63 46 33 21 0
November 25, 2003 100 72 50 34 21 0 0
November 25, 2004 100 61 40 25 0 0 0
November 25, 2005 100 51 32 0 0 0 0
November 25, 2006 100 43 25 0 0 0 0
November 25, 2007 100 36 0 0 0 0 0
November 25, 2008 100 30 0 0 0 0 0
November 25, 2009 100 25 0 0 0 0 0
November 25, 2010 100 19 0 0 0 0 0
November 25, 2011 100 0 0 0 0 0 0
November 25, 2012 100 0 0 0 0 0 0
November 25, 2013 100 0 0 0 0 0 0
November 25, 2014 100 0 0 0 0 0 0
November 25, 2015 100 0 0 0 0 0 0
November 25, 2016 100 0 0 0 0 0 0
November 25, 2017 100 0 0 0 0 0 0
November 25, 2018 100 0 0 0 0 0 0
November 25, 2019 100 0 0 0 0 0 0
November 25, 2020 100 0 0 0 0 0 0
November 25, 2021 98 0 0 0 0 0 0
November 25, 2022 85 0 0 0 0 0 0
November 25, 2023 71 0 0 0 0 0 0
November 25, 2024 56 0 0 0 0 0 0
November 25, 2025 38 0 0 0 0 0 0
November 25, 2026 0 0 0 0 0 0 0
Weighted Avg. Life in 27.08 8.70 6.46 5.12 4.32 3.85 3.56
Years (1) (2) 27.12 8.99 6.69 5.31 4.48 3.97 3.67
Weighted Avg. Life in
Years (3)
</TABLE>
- -----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchases the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is 10% or less
of Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement-Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
S-37
<PAGE>
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the Prepayment Assumption indicated in the table
above, or to any other level, or that the actual weighted average life of any
Class of Offered Certificates will conform to any of the weighted average lives
set forth in the table above. Furthermore, the information contained in the
table with respect to the weighted average lives that might be calculated or
projected under different or varying prepayment or Index Level assumptions. The
characteristics of the Mortgage Loan will differ from those assumed in preparing
the table above. In addition, it is unlikely that any Mortgage Loan will prepay
at any constant percentage until maturity, that all of the Mortgage Loans will
prepay at the same rate or that the level of the Index will remain constant or
any level for any period of time. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments and the level of the Index is
consistent with the expectations of investors.
Final Scheduled Distribution Dates
The Final Scheduled Distribution Date of each Class of Offered
Certificates is set forth under "Summary of Prospectus Supplement." The Expected
Final Maturity Date for the Class A Certificates has been calculated on the
basis of the Modeling Assumptions and the assumptions that there are no
prepayments and no Monthly Excess Interest Amounts are used to create
overcollateralization. The Final Scheduled Distribution Date for each other
Class of Offered Certificates has been set to equal the Distribution Date in the
thirteenth month after the month of maturity of the latest maturing Mortgage
Loan. Since the rate of distributions in reduction of the Class Certificate
Balance of each Class of Offered Certificates will depend on the rate of payment
(including prepayments) of the Mortgage Loans, the Class Certificate Balance of
any such Class could be reduced to zero significantly earlier or later than the
Final Scheduled Distribution Date. The rate of payments on the Mortgage Loans
will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will consist of (i) the Class A-1 Certificates and
Class A-2 Certificates (collectively, the "Class A Certificates"), (ii) the
Class M-1 Certificates and the Class M-2 Certificates (collectively, the
"Mezzanine Certificates"), (iii) the Class B Certificates (collectively with the
Mezzanine Certificates, the "Subordinated Certificates") and (iv) the Class R
Certificates (the "Residual Certificates). Only the Class A Certificates and the
Subordinated Certificates (collectively, the "Offered Certificates") are offered
hereby. The Residual Certificates, which are not being offered hereby, may be
sold at any time on or after the Closing Date in accordance with the Agreement.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of a
pool (the "Mortgage Pool") of conventional, one-to four-family, first lien
mortgage loans having original terms to maturity of 30 years (the "Mortgage
Loans.") The Class A Certificates evidence an initial beneficial interest in the
Trust Fund of 83.75% and the Class M-1, Class M-2 and Class B Certificates
evidence initial beneficial interests in the Trust Fund of 6.50%, 6.50% and
3.25%, respectively.
The "Class Certificate Balance" of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof reduced by
the sum of (i) all amounts previously distributed to Holders of Certificates of
such Class as payments of principal and (ii) in the case of any Class of
Subordinated Certificates, any Applied Realized Loss Amounts allocated to such
Class.
All distributions to Holders of the Offered Certificates, other than
the final distribution on the Offered Certificates, will be made by or on behalf
of the Trustee to the persons in whose names such Offered Certificates are
registered at the close of business on each Record Date. Such distributions will
be made either (i) by check mailed to the address of each such Certificateholder
as it appears in the Certificate Register or (ii) upon written request to the
Trustee at least five business days prior to the relevant Record Date by any
Holder of Offered Certificates
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having an aggregate initial Certificate Principal Balance that is in excess of
$5,000,000 by wire transfer in immediately available funds to the account of
such Certificateholder specified in the request. The final distribution on any
Class of Offered Certificates will be made in like manner, but only upon
presentment and surrender of such Certificates at the corporate trust office of
the Trustee or such other location specified in the notice to Certificateholders
of such final distribution.
Book Entry Registration and Definitive Certificates
The Offered Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof. The Offered
Certificates will initially be represented by one or more global certificates
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the "Clearing Agency"), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be CEDE & Co. ("CEDE"). No Certificate Owner will be entitled to receive a
certificate representing such person's interest, except as set forth below.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the Offered Certificates refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to distributions, notices, reports and statements to Certificateholders with
respect to the Offered Certificates refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the Offered Certificates,
for distribution to Certificate Owners in accordance with DTC procedures.
Holders of Offered Certificates may hold their Certificates through DTC
(in the United States) or CEDEL, S.A. ("CEDEL" ) or the Euroclear System
("Euroclear") in Europe. Transfers within DTC, CEDEL or Euroclear, as the case
may be, will be in accordance with the usual rules and operating procedures of
the relevant system (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositories which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank, N.A. will act as depositary for CEDEL and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Depositary" and collectively the "Depositaries"). Transfers
between Participants (as defined below) will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants (each as defined
below) will occur in accordance with their respective rules and operating
procedures.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Beneficial owners of the Offered Certificates ("Certificate Owners") or
prospective owners, as the case may be, that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in the Offered Certificates may do so only through Participants
and Indirect Participants. In addition, such Certificate Owners will receive all
distributions of principal and interest on the Offered Certificates from the
Trustee or the applicable paying agent through DTC and its Participants. Under a
book-entry format, Certificateholders may receive payments after the related
Distribution Date because, while payments are required to be forwarded to CEDE &
Co., as nominee for DTC on each such date, DTC will forward such payments to its
only "Certificateholder" (as such term is used in the Agreement) will be CEDE &
Co., as nominee of DTC, and the Certificate Owners will not be recognized by the
Trustee as Certificateholders under the Agreement. Certificate
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Owners will be permitted to exercise the rights of Certificate Owners under the
Agreement only indirectly through DTC and its Participants who in turn will
exercise their rights though 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 Certificates and is
required to receive and transmit distributions of principal of and interest on
the Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn on
behalf of Indirect Participants and certain other entities, the ability of a
Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services including lending and
borrowing and interfaces with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
company
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of New York (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, and not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly. The Euroclear
Operator is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear system and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences." CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions on
its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Certificateholder under the Agreement only at the direction of one
or more Participants to whose account with DTC the Certificates are credited.
Certificates initially issued as Book-Entry Certificates will be issued
as Definitive Certificates only if (i) DTC or the Depositor advises the Trustee
in writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the Certificates and
the Servicer is unable to locate a qualified successor or (ii) the Depositor, at
its option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default, if Holders of Offered Certificates
evidencing not less than 51% of the Voting Rights advise the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical certificates being issued to
Certificate Owners is no longer in the best interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Certificates. Upon
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for registration, the Trustee will issue such
Certificates in the form of Definitive Certificates as Certificateholders under
the Agreement and such Holders of Definitive Certificates will deal directly
with the Trustee with respect to transfers, notices and distributions. In the
event that Definitive Certificates are issued or DTC ceases to be the clearing
agency for the Certificates, the Agreement will provide that the applicable
Certificateholders will be notified of such event.
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Pass-Through Rates
The Pass-Through Rate on each Class of Offered Certificates on each
Distribution Date will be a rate per annum equal to the lesser of (i) One-Month
LIBOR (as defined herein) plus the applicable Pass-Through Margin (the "LIBOR"
Rate") and (ii) the Available Funds Pass-Through Rate for such Distribution
Date. The "Pass-Through Margin" for each Class of Offered Certificates will be
as set forth below; provided, however, that for each Interest Accrual Period
beginning after the Distribution Date on which the aggregate Stated Principal
Balance (as defined herein) of the Mortgage Loans is 10% or less of the Stated
Principal Balance of the Mortgage Loans as of the Cut-Off Date (the "Cut-Off
Date Pool Principal Balance") each such Pass-Through Margin will be doubled for
the Senior Certificates and increased by 50% for the Subordinated Certificates:
Class Pass-Through Margin
----- -------------------
A-1 0.205%
A-2 0.220%
M-1 0.420%
M-2 0.680%
B 1.220%
The "Available Funds Pass-Through Rate" will be, with respect to any
Distribution Date, the per annum rate equal to the percentage obtained by
dividing (x) the amount of interest that accrued on the Mortgage Loans in
respect of the related Collection Period at the weighted average of the related
Mortgage Rates applicable to monthly payments due on such Mortgage Loans during
such Collection Period, reduced by the Expense Fee Rate, by (y) the product of
(i) the aggregate Class Certificate Balance and (ii) the actual number of days
elapsed during such Interest Accrual Period divided by 360. Since the
Pass-Through Margin is different for each Class of Offered Certificates, it is
possible that, on any particular Distribution Date, the LIBOR Rate applicable to
one or more Classes of Offered Certificates, may be less than the Available
Funds Pass-Through Rate, while the LIBOR Rate applicable to one or more other
Classes of Offered Certificates may exceed the Available Funds Pass-Through
Rate. In such event, the Agreement provides that the excess moneys resulting
from such Classes having LIBOR Rates less than the Available Funds Pass-Through
Rate shall be applied to increase the amount of interest payable with respect to
the Class A, Class M-1, Class M-2 and Class B Certificates, in that order,
having LIBOR Rates greater than the Available Funds Pass-Through Rate, up to the
amount of interest at the related LIBOR Rate due to such Class.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to
the then applicable Mortgage Rate thereon minus the sum of (i) the Trustee Fee
Rate, (ii) the Master Servicing Fee Rate and (iii) the Servicing Fee Rate
(collectively, the "Expense Fee Rate"). For any Distribution Date, the Trustee
Fee Rate is 0.015% per annum, the Master Servicing Fee Rate is 0.10% per annum
and the Servicing Fee Rate is 0.40% per annum.
The Pass-Through Rate on each Class of Offered Certificates for the
current Interest Accrual Period, to the extent it has been determined, and for
the immediately preceding Interest Accrual Period may be obtained by telephoning
the Trustee at (713) 216-5884.
Calculation of One-Month LIBOR
The Pass-Through Rates for the first Distribution Date will be
determined on the second business day preceding the Closing Date. Thereafter, on
the second business day preceding each Distribution Date (each such date, an
"Interest Determination Date"). The Trustee will determine the London interbank
offered rate for one-month U.S. dollar deposits ("One-Month LIBOR") for the next
Interest Accrual Period on the basis of the offered rates of the Reference Banks
for one-month U.S. dollar deposits, as such rates appear on the Reuter Screen
LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination Date.
As used in this section: "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuter
Screen LIBO Page" means the display designated as page "LIBO" on the Reuter
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place
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of business in London, (ii) whose quotations appear on the Reuter Screen LIBO
Page on the Interest Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) which are not controlling, controlled
by, or under common control with, the Depositor or the Mortgage Loan Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Accrual Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the arithmetic mean of
such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.001%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the higher of (x)
One-Month LIBOR as determined on the previous Interest
Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.001%) of
the one-month U.S. dollar lending rates which New York City banks
selected by the Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading
banks in the London interbank market or, in the event that the
Trustee can determine no such arithmetic mean, (ii) the lowest
one-month U.S. dollar lending rate which New York City banks
selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to each Class of Offered Certificates for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Interest Distributions
On each Distribution Date the Interest Remittance amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Holders of the Class A Certificates, the related Accrued
Certificate Interest plus the Class A Interest Carry Forward Amount;
Third, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class M-1 Certificates, the related Accrued Certificate
Interest;
Fourth, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class M-2 Certificates, the related Accrued Certificate
Interest;
Fifth, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class B Certificates, the related Accrued Certificate
Interest; and
Sixth, the amount, if any, of the Interest Remittance Amount remaining
in the Certificate Account after application with respect to the priorities set
forth above is defined as the "Monthly Excess Interest Amount" for such
Distribution Date and will be applied as described below under "--Application of
Monthly Excess Cashflow Amounts."
"Interest Remittance Amount" means, as of any Determination Date, the
sum, without duplication, of (i) all interest due and collected or advanced
during the related Collection Period on the Mortgage Loans (less the Servicing
Fee and Master Servicing Fee), (ii) all Compensating Interest paid by the
Servicer on such Determination
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Date and (iii) the portion of any payment in connection with any substitution,
Purchase Price or Net Liquidation Proceeds relating to interest.
The "Interest Accrual Period" for any Distribution Date is the period
from the Distribution Date in the month immediately preceding the month in which
such Distribution Date occurs (or, in the case of the first Distribution Date,
from the Closing Date) through the day before such Distribution Date. All
distributions of interest will be based on a 360-day year and the actual number
of days in the applicable Interest Accrual Period.
Principal Distributions on the Certificates
With respect to each Distributions Date (a) before the Stepdown Date or
(b) with respect to which a Trigger Event is in effect, Holders of the Class A
Certificates will be entitled to receive 100% of the Principal Distribution
Amount for such Distribution Date until the Class Certificate Balance thereof
has been reduced to zero.
In the event that on any Distribution Date on or after the Stepdown
Date on which a Trigger Event is in effect the Holders of the Class A
Certificates will be entitled to receive 100% of the Principal Distribution
Amount until the Class Certificate Balance of the Class A Certificates has been
reduced to zero. Once the Class Certificate Balance of the Class A Certificates
has been reduced to zero, the Holders of the Class M-1 Certificates will be
entitled to receive 100% of the Principal Distribution Amount for such
Distribution Date until the Class Certificate Balance of the Class M-1
Certificates has been reduced to zero. Similarly if the Class Certificate
Balance of the Class M-1 Certificates has been reduced to zero, the Holders of
the Class M-2 Certificates will be entitled to receive 100% of the Principal
Distribution Amount until the Class Certificate Balance of the Class M-2
Certificates has been reduced to zero. Finally, if the Class Certificate Balance
of the Class M-2 Certificates has been reduced to zero, the Holders of the Class
B Certificates will be entitled to receive 100% of the Principal Distribution
Amount until the Class Certificate Balance of the Class B Certificates has been
reduced to zero
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Holders of all
Classes of Offered Certificates will be entitled to receive payments of
principal, in the order of priority and in the amounts set forth below and to
the extent of the Principal Distribution Amount:
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution amount will be distributed to the Class A
Certificates until the Class Certificate Balance thereof has been reduced to
zero as follows:
(1) amounts constituting principal collections attributable to
Sub-Pool I, together with a pro rata portion (based on the
relative amounts of such principal collections) of any Extra
Principal Distribution Amount, to the Class A-1 Certificates;
and
(2) amounts constituting principal collections attributable to
Sub-Pool II, together with a pro rata portion (based on the
relative amounts of such principal collections) of any Extra
Principal Distribution Amount, to the Class A-2 Certificates;
provided that if the Certificate Principal Balance of the Class A-1
Certificates or Class A-2 Certificates is reduced to zero, the Class A
Principal Distribution Amount shall be distributed to the remaining
Class A Certificates; provided further that on any Distribution Date on
which the Certificate Principal Balance of the Class A Certificates are
equal to or greater than the Pool Principal Balance, the Class A
Principal Distribution Amount shall be distributed pro rata to the
Class A Certificates without respect to which Sub-Pool the principal is
attributable to.
Second, the lesser of (x) the excess of (i) the Principal Distribution
amount over (ii) the amount distributed to the Class A Certificates in clause
First above and (y) the Class M-1 Principal Distribution Amount will be
distributed to the Class M-1 Certificates, until the Class Certificate Balance
thereof has been reduced to zero;
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Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
in clause First above and the amount distributed to the Class M-1 Certificates
in clause Second above and (y) the Class M-2 Principal Distribution Amount will
be distributed to the Class M-2 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
pursuant to Clause First above, the amount distributed to the Class M-1
Certificates pursuant to clause Second above and the amount distributed to the
Class M-2 Certificates pursuant to clause Third above and (y) the Class B
Principal Distribution Amount will be distributed to the Class B Certificates,
until the Class Certificate Balance thereof has been reduced to zero; and
Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in clauses First, Second, Third and Fourth above
will be included as part of the Monthly Excess Cashflow Amount and will be
applied as described below under "--Application of Monthly Excess Cashflow
Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class A Principal Distribution Amount" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event is
in effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the Class Certificate Balance of the Class A Certificates and (b) on or after
the Stepdown Date and as long as a Trigger Event is not in effect, the positive
difference, if any, of the excess of (x) the Class Certificate Balance of the
Class A Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) approximately 63.5% and (ii) the Pool Principal
Balance as of the last day of the related Collection Period and (B) the Pool
Principal Balance as of the last day of the related Collection Period minus
$1,500,481.
"Class M-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
Class Certificate Balance of the Class A Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date) and (ii) the Class Certificate Balance of the Class M-1 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) approximately 76.5% and (ii) the Pool Principal Balance as of the
last day of the related Collection Period and (B) the Pool Principal Balance as
of the last day of the related Collection Period minus $1,500,481.
"Class M-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
Class Certificate Balance of the Class A Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date), (ii) the Class Certificate Balance of the Class M-1 Certificates (after
taking into account the payment of the Class M-1 Principal Distribution Amount
on such Distribution Date) and (iii) the Class Certificate Balance of the Class
M-2 Certificates immediately prior to such Distribution Date over (y) the lesser
of (A) the product of (i) approximately 89.5% and (ii) the Pool Principal
Balance as of the last day of the related Collection Period and (B) the Pool
Principal Balance as of the last day of the related Collection Period minus
$1,500,481.
"Class B Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
Class Certificate Balance of the Class A Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date), (ii) the Class Certificate Balance of the Class M-1 Certificates (after
taking into account the payment of the Class M-1 Principal Distribution Amount
on such Distribution Date), (iii) the Class Certificate Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date), and (iv) the Class Certificate
Balance of the Class B Certificates immediately prior to such Distribution Date
over (y) the lesser of (A) the product of (i) approximately 96.0% and (ii) the
Pool Principal Balance as of the last day of the related Collection Period and
(B) the Pool Principal Balance as of the last day of the related Collection
Period minus $1,500,481.
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"Extra Principal Distribution Amount" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such Distribution
Date and (y) the Overcollateralization Deficiency for such Distribution Date,
provided that on the first Distribution Date the accrual period for the Mortgage
Loans will be equal to the accrual period for the Certificates, which will
reduce the amount available on the first Distribution Date for distribution as
Extra Principal Distribution Amount.
"Liquidated Mortgage Loan" means as to any Distribution Date, a
Mortgage Loan with respect to which the Master Servicer has determined, in
accordance with the servicing procedures specified in the Agreement, as of the
end of the preceding Collection Period, that all Liquidation Proceeds which it
expects to recover with respect to such Mortgage Loan have been recovered.
"Overcollateralization Amount" means as of any Distribution Date the
excess, if any, of (x) the Pool Principal Balance as of the last day of the
immediately preceding Collection Period over (y) the aggregate Class Certificate
Balance of all Classes of Offered Certificates (after taking into account all
distributions of principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Balances of all
Classes of the Offered Certificates resulting from the distribution of the
Principal Remittance Amount (but not the Extra Principal Distribution Amount) on
such Distribution Date, but prior to taking into account any Applied Realized
Loss Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date after the Stepdown Date on which a Trigger Event is not in
effect, the lesser of (x) the Principal Remittance Amount for such Distribution
Date and (y) the excess, if any, of (i) the Overcollateralization Amount for
such Distribution Date, assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on the Offered Certificates on such Distribution
Date over (ii) the Targeted Overcollateralization Amount for such Distribution
Date.
"Principal Distribution Amount" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus, for Distribution Dates
occurring on and after the Stepdown Date and for which a Trigger Event is not in
effect, the Overcollateralization Release Amount, if any) and (ii) the Extra
Principal Distribution Amount, if any.
"Principal Remittance Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein the amount
equal to the sum of the following amounts (without duplication) with respect to
the immediately preceding Collection Period: (i) each payment of principal on a
Mortgage Loan received by the Master Servicer during such Collection Period,
including all full and partial principal prepayments and any Advances with
respect thereto, (ii) the Net Liquidation Proceeds allocable to principal
actually collected by the Master Servicer during the related Collection Period,
(iii) the portion of the Purchase Price allocable to principal of all
repurchased Defective Mortgage Loans with respect to such Collection Period and
(iv) any Substitution Adjustment Amounts received on or prior to the previous
Determination Date and not yet distributed.
"Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Class
Certificate Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case after taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Principal Balance as of the last day of the related Collection
Period.
"Senior Specified Enhancement Percentage" on any date of determination
thereof means 36.5%.
Stepdown Date" means the earlier to occur of (i) the later to occur of
(x) the Distribution Date in November 2000 and (y) the first Distribution Date
on which the Senior Enhancement Percentage (after taking into account
distributions of principal on such Distribution Date) is greater than or equal
to the Senior Specified
S-46
<PAGE>
Enhancement Percentage and (ii) the Distribution Date on which the Class
Certificate Balance of the Class A Certificates has been reduced to zero.
"Targeted Overcollateralization Amount" means as of any Distribution
Date, (x) prior to the Stepdown Date, 2.0% of the initial Class Certificate
Balance of the Offered Certificates and (y) on and after the Stepdown Date and
assuming a Trigger Event is not in effect, the greater of (i) 4.0% of the Pool
Principal Balance as of the last day of the related Collection Period and (ii)
$1,500,481. If a Trigger Event is in effect on and after the Stepdown Date, the
Targeted Overcollateralization Amount shall be equal to the Targeted
Overcollateralization Amount for the immediately preceding Distribution Date.
A "Trigger Event" has occurred on a Distribution Date if the
three-month rolling average of 60+ Day Delinquent Loans equals or exceeds
one-half of the Senior Enhancement Percentage; provided, that if the Class
Certificate Balance of the Class A Certificates has been reduced to zero, a
Trigger Event will have occurred if the three-month rolling average of 60+ Day
Delinquent Loans equals or exceeds 18.25%.
Credit Enhancement
The credit enhancement consists of the subordination of the
Subordinated Certificates to the Class A Certificates, the further subordination
of each other Class of Subordinated Certificates that is junior in priority of
distribution, the priority of the application of the Applied Realized Loss
Amounts and the overcollateralization provisions of the Trust Fund as described
herein.
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated, to the
extent described herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates of the full amount of
their scheduled monthly payment of interest and principal and to afford such
Certificateholders protection against Realized Losses. The protection afforded
to the holders of the Class A Certificates by means of the subordination of the
Subordinated Certificates will be accomplished by the preferential right of the
holders of the Class A Certificates to receive, prior to any distribution being
made on a Distribution Date in respect of the Subordinated Certificates, the
amounts of interest due them and principal available for distribution on such
Distribution Date.
In addition, the rights of the holders of the Class M-2 and Class B
Certificates to receive distributions will be subordinated, to the extent
described herein, to such rights of the holders of the Class A Certificates and
the Class M-1 Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates and the
Class M-1 Certificates of the amount of interest due them and principal
available for distribution and to afford such Certificateholders with protection
against losses.
The rights of the holders of the Class B Certificates to receive
distributions will be subordinated in the same manner to such rights of the
holders of the Class A Certificates, the Class M-1 Certificates and the Class
M-2 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates, the Class M-1
Certificates and the Class M-2 Certificates of the amount of interest due them
and principal available for distribution and to afford such Certificateholders
with protection against losses.
The protection afforded to the Class B Certificateholders against
losses or provided by the Overcollateralization Amount and the Monthly Excess
Amounts, as described below.
Allocation of Losses
If a Mortgage Loan becomes a Liquidated Mortgage Loan during a
Collection Period, the Net Liquidation Proceeds relating thereto and allocated
to principal may be less than the Stated Principal Balance of such Mortgage
Loan. The amount of such insufficiency is a "Realized Loss." Realized Losses
will, in effect, be absorbed first by the Class R Certificates (through the
application of the Monthly Excess Interest Amount to fund such deficiency, as
well as through a reduction in the Overcollateralization Amount).
S-47
<PAGE>
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Class Certificate
Balance of the Offered Certificates exceeds the Pool Principal Balance as of the
end of the related Collection Period, such excess will be allocated against the
Class B, Class M-2 and Class M-1 Certificates, in that order and until the
respective Class Certificate Balances thereof are reduced to zero. Any
allocation of such excess in reduction of a Class Certificate Balance is
referred to as an "Applied Realized Loss Amount." Any such reduction of a Class
Certificate Balance will not be reversed or reinstated. However, on future
Distribution Dates, Certificateholders of the related Class may receive amounts
in respect of prior reductions in the related Class Certificate Balances as
described below. Such subsequent payments will be applied in the reverse of the
order set forth above.
Application of Monthly Excess Cashflow Amounts
The weighted average Net Mortgage Rate for the Mortgage Loans is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses, will not be necessary to fund
interest distributions on the Offered Certificates. The Agreement provides that
this excess interest be applied, to the extent available, to make accelerated
payments of principal (i.e., the Extra Principal Distribution Amount) to the
Class or Classes then entitled to receive distributions of principal. Such
application will cause the aggregate Class Certificate Balance to amortize more
rapidly than the Mortgage Loans, resulting in overcollateralization. This excess
interest for a Collection Period, together with interest on the
Overcollateralization Amount itself, is the "Monthly Excess Interest Amount."
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially (i.e., prior to the Stepdown Date) $6,001,924. Since the
actual level of the Overcollateralization Amount is essentially zero as of the
Closing Date, in the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, Extra Principal Distribution
Amounts will be paid, with the result that the Overcollateralization Amount will
increase to the level of the Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses not accounted for by an application of the Monthly Excess
Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Pool Principal
Balance without giving rise to a corresponding reduction of the aggregate Class
Certificate Balance). The cashflow priorities of the Trust Fund require that, in
this situation, an Extra Principal Distribution Amount be paid (subject to the
availability of any Monthly Excess Cashflow Amount in subsequent months) for the
purpose of re-establishing the Overcollateralization Amount at the then-required
Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Agreement permits a portion
of the Principal Remittance Amount for such Distribution Date not to be passed
through as a distribution of principal on such Distribution Date. This has the
effect of decelerating the amortization of the Offered Certificates relative to
the Pool Principal Balance, thereby reducing the actual level of the
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This portion of the Principal Remittance Amount not distributed as
principal on the Offered Certificates therefore releases overcollateralization
from the Trust Fund. The amount of such releases are the "Overcollateralization
Release Amounts".
On any Distribution Date, the sum of the Monthly Excess Interest Amount
and the Overcollateralization Release Amount is the "Monthly Excess Cashflow
Amount", which is required to be applied in the following order of priority on
such Distribution Date:
(1) to fund the Class A Interest Carry Forward Amount, if any;
(2) to fund the Extra Principal Distribution Amount for such
Distribution Date;
S-48
<PAGE>
(3) to fund the Class M-1 Interest Carry Forward Amount, if any;
(4) to fund the Class M-1 Realized Loss Amortization Amount for such
Distribution Date;
(5) to fund the Class M-2 Interest Carry Forward Amount, if any.
(6) to fund the Class M-2 Realized Loss Amortization Amount for such
Distribution Date;
(7) to fund the Class B Interest Carry Forward Amount, if any;
(8) to fund the Class B Realized Loss Amortization Amount for such
Distribution Date;
(9) to fund the aggregate amount of LIBOR Carryover Amount, among
all Classes of Offered Certificates in proportion to the
respective LIBOR Carryover Amounts for each such Class in the
same priority order as interest distributions; and
(10) to fund a distribution to the Holders of the Class R
Certificates.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class B Applied Realized Loss Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the Applied Realized Loss Amount as of such
Distribution Date.
"Class B Realized Loss Amortization Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Class B
Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess of
(i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A Interest
Carry Forward Amount, the Extra Principal Distribution Amount, the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class M-1 Interest Carry Forward Amount, the Class M-2 Interest
Carry Forward Amount and the Class B Interest Carry Forward Amount, in each case
for such Distribution Date.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount and the Class B Applied Realized Loss Amount, in each case as of
such Distribution Date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-1 Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess
of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A
Interest Carry Forward Amount, the Extra Principal Distribution Amount and the
Class M-1 Interest Carry Forward Amount, in each case for such Distribution
Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B Applied Realized Loss
Amount and the Class B Applied Realized Loss Amount, in each case as of such
Distribution Date.
S-49
<PAGE>
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-2 Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess
of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-1 Realized Loss
Amortization Amount and the related Class M-2 Interest Carry Forward Amount, in
each case for such Distribution Date.
"Unpaid Realized Loss Amount" means for any Class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Distribution Dates over (y) the aggregate, cumulative amount
of related Realized Loss Amortization Amounts with respect to such Class for all
prior Distribution Dates.
Monthly Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced before each Distribution Date its own funds in
an amount equal to the aggregate of all payments of principal and interest, net
of the Servicing Fee Rate, that were due during the related Collection Period on
the Mortgage Loans and that were delinquent on the related Determination Date,
plus certain amounts representing assumed payments not covered by any current
net income on the Mortgaged Properties acquired by foreclosure or deed in lieu
of foreclosure (any such advance, a "Monthly Advance").
Monthly Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Servicer will not be required to
make any Monthly Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to bankruptcy proceedings or the
application of the Relief Act.
All Monthly Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Monthly Advances was made. In addition, any
Monthly Advances or Servicing Advances previously made in respect of any
Mortgage Loan that are deemed by the Servicer to be nonrecoverable from related
late collections, insurance proceeds or liquidation proceeds may be reimbursed
to the Servicer out of any funds in the Collection Account prior to the
distributions on the Certificates. In the event the Servicer fails in its
obligations to make any such advance, the Trustee will be obligated to make any
such advance, to the extent required in the Agreement.
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Agreement, a form of
which is filed as an exhibit to the Registration Statement. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages
and other related documents, (ii) all payments on or collections in respect of
the Mortgage Loans received after the Cut-off Date (other than payments due on
or before the Cut-off Date), together with any proceeds thereof, (iii) any
Mortgaged Properties acquired on behalf of Certificateholders by foreclosure or
by deed in lieu of foreclosure, and any revenues received thereon, (iv) the
rights of the Trustee under all insurance policies required to be maintained
pursuant to the Agreement and (v) the rights of the Depositor under the Mortgage
Loan Purchase Agreement between the Depositor and the Mortgage Loan Seller.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the Trust Fund, the terms and conditions of the
Agreement and the Offered Certificates. The Offered Certificates will be
transferable and exchangeable at the corporate trust offices of the Trustee,
located in Houston, Texas. The Depositor will provide to a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Agreement. Requests should be addressed to the Secretary, Merrill Lynch
Mortgage Investors, Inc.
S-50
<PAGE>
Assignment of the Mortgage Loans
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the original mortgage note endorsed without recourse to the Trustee to
reflect the transfer of the Mortgage Loan, (ii) the original mortgage with
evidence of recording indicated thereon and (iii) an original assignment of the
mortgage in recordable form to the Trustee, reflecting the transfer of the
Mortgage Loan. Such assignments of Mortgage Loans are required to be recorded by
or on behalf of the Depositor in the appropriate offices for real property
records. The Trustee, concurrently with the Depositor's assignment, will deliver
the Certificates to the Depositor in exchange for the Mortgage Loans.
The Servicer
The Mortgage Loans will be serviced on behalf of the Master Servicer
and the Trust Fund by Option One Mortgage Corporation ("Option One"). The
information set forth in the following paragraphs has been provided by Option
One. Option One was incorporated in 1992, commenced receiving applications for
mortgage loans under its regular lending program in February 1993 and began
funding such mortgage loans indirectly in the same month. The principal business
of Option One is the origination, sale and servicing of non-conforming mortgage
loans.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank, Rhode
Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. ("Fleet").
On June 17, 1997, Fleet consummated the sale of Option One to H&R Block, Inc.,
and as a result, Option One is a wholly-owned subsidiary of Block Financial
Corporation. As of September 30, 1997, Option One had three loan origination
centers in California, and one loan origination center in each of Connecticut,
Florida, Georgia, Illinois, Ohio, Rhode Island, Texas, Virginia and Wisconsin.
Option One operates as a stand-alone mortgage banking company. Option
One is a Fannie Mae approved servicer. Option One assumed full servicing
responsibilities for the non-conforming credit servicing portfolio of PHMC on
May 4, 1995, all of which portfolio had been originated by Option One. Prior to
such acquisition, Option One acted as subservicer on such portfolio performing
the functions of delinquency advancing, investor reporting, remitting cash
collected, preparing pertinent reports and making collections on delinquent
mortgage loans, foreclosures and real estate owned.
The following tables set forth, as of December 31, 1994, 1995, 1996 and
September 30, 1997, certain information relating to the delinquency experience
(including delinquencies related to imminent foreclosures, foreclosures in
progress and bankruptcies) of one- to four-family residential mortgage loans
included in Option One's entire servicing portfolio (which portfolio includes
mortgage loans originated by Option One and mortgage loans that are subserviced
for others) at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis. Such tables restate PHMC's performance
statistics relating only to the non-conforming mortgage loans previously
subserviced by Option One. Such servicing was subsequently transferred to Option
One.
S-51
<PAGE>
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, 1994 At December 31, 1995 At December 31, 1996 At September 30, 1997
-------------------- -------------------- -------------------- ---------------------
Number Number Number Number
of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
------- -------- -------- ---------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 6,115 $615,488 14,625 $1,367,031 20,107 $1,865,636 31,059 $3,027,860
Period of Delinquency**
31 - 59 days 0.52 0.53 1.10 1.21 1.64 1.61 1.19 1.10
60 - 89 days 0.28 0.27 0.71 0.74 0.80 0.80 0.78 0.72
90 days or more 0.46 0.58 2.65 2.95 3.84 3.78 3.28 3.15
------- -------- -------- ---------- ------- ---------- -------- ----------
Total Delinquent Loans 1.26 1.38 4.46 4.90 6.28 6.19 5.25 4.97
Loans in Foreclosure* 0.82 0.87 2.65 2.85 3.37 3.30 3.05 2.95
</TABLE>
- ----------------------------
* Loans in foreclosure are also included under the heading "Total Delinquency
Loans."
** Percentage of number of Loans delinquent for the period.
Real Estate Owned
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, 1994 At December 31, 1995 At December 31, 1996 At September 30, 1997
---------------------- --------------------- -------------------- ------------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount of By No. Amount of By No. Amount of By No. of Amount of
of Loans Loans of Loans Loans of Loans Loans Loans Loans
-------- --------- -------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 6,115 $615,488 14,625 $1,367,031 20,107 $1,865,636 31,059 $3,027,860
Foreclosed Loans (1) 12 1,512 100 9,632 323 30,677 309 27,708
Foreclosure Ratio (2) 0.20 0.25 0.68 0.70 1.61 1.64 0.99 0.92
</TABLE>
- ------------------
(1) For the purpose of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, of mortgage loans in the Total Portfolio at the end of the
indicated period.
S-52
<PAGE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------ Nine Months Ended
1994 1995 1996 September 30, 1997
---- ---- ---- ------------------
<S> <C> <C> <C> <C>
Total Portfolio(1)..................... $ 615,488 $ 1,367,031 $ 1,865,636 $ 3,027,860
Net Losses(2).......................... $ 17 $ 1,506 $ 8,451 $ 17,991
Net Losses as a Percentage of Total
Portfolio(3)........................... 0.00% 0.11% 0.45% 0.79%
</TABLE>
- ----------------
(1) "Total Portfolio" on the date stated above is the principal balances of
the mortgage loans outstanding on the last day of the period.
(2) "Net Losses" means "Gross Losses" minus "Recoveries." "Gross Losses"
are actual losses incurred on liquidated properties for each respective
period. Losses are calculated after repayment of all principal,
foreclosures costs and accrued interest to the date of liquidation.
"Recoveries" are recoveries from liquidation proceeds and delinquency
judgments.
(3) For the Nine Months Ending September 30, 1997, "Net Losses as a
Percentage of Total Portfolio" was annualized by multiplying "Net
Losses" by 1.33 before calculating the percentage of "Net Losses as a
Percentage of Total Portfolio."
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
Option One's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for Option One's
mortgage servicing portfolio (which may differ substantially from the Mortgage
Pool with respect to credit underwriting standards and other factors) only for
the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans comprising the Mortgage Pool will depend on the results obtained
over the life of the Mortgage Pool. There can be no assurance that the Mortgage
Loans comprising the Mortgage Pool will perform consistent with the delinquency
or foreclosure experience described herein. It should be noted that if the
residential real estate market should experience an overall decline in property
values, the actual rates of delinquencies and foreclosures could be higher than
those previously experienced by Option One. In addition, adverse economic
conditions may affect the timely payment by Mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
The Trustee
Texas Commerce Bank National Association will act as Trustee for the
Certificates pursuant to the Agreement. The Trustee's offices for notices under
the Agreement are located at 600 Travis Street, 8th Floor, Houston, Texas 77002
and its telephone number is (713) 216-5884. The principal compensation to be
paid to the Trustee in respect of its obligations under the Agreement will be
equal to accrued interest at the Trustee Fee Rate of 0.015% per annum on the
Stated Principal Balance of each Mortgage Loan. The Agreement will provide that
the Trustee and any director, officer, employee or agent of the Trustee will be
indemnified by the Trust Fund and will be held harmless against any loss,
liability or expense (not including expenses, disbursements and advances
incurred or made by the Trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the Trustee's
performance in accordance with the provisions of the Agreement) incurred by the
Trustee arising out of or in connection with the acceptance or administration of
its obligations and duties under the Agreement, other than any loss, liability
or expense (i) resulting from the Master Servicer's or Servicer's actions
S-53
<PAGE>
or omissions in connection with the Agreement and the Mortgage Loans, (ii) that
constitutes a specific liability of the Trustee under the Agreement or (iii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer and the
Servicer in respect of their servicing activities for the Certificates will be
equal to accrued interest at the Master Servicing Fee Rate of 0.10% per annum
and at the Servicing Fee Rate of 0.40% per annum, in each case with respect to
each Mortgage Loan on the Stated Principal Balance of each Mortgage Loan. As
additional servicing compensation, the Master Servicer or the 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 Servicer will be obligated to offset any Prepayment Interest
Shortfall on any Distribution Date (payments made by the Servicer in
satisfaction of such obligation, "Compensating Interest") to the extent of the
Servicing Fee for such Distribution Date. The Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Servicer in connection with its
responsibilities with respect to the Mortgage Loans and is entitled to
reimbursement therefor as provided in the Agreement. See "Description of the
Certificates--Retained Interest; Servicing Compensation and Payment of Expenses"
in the Prospectus for information regarding expenses payable by the Master
Servicer and "Certain Federal Income Tax Consequences" herein regarding certain
taxes payable by the Master Servicer.
Voting Rights
With respect to any date of determination, the percentage of all the
voting rights (the "Voting Rights") allocated among Holders of each Class of
Offered Certificates and of the Residual Certificates will be the fraction,
expressed as a percentage, the numerator of which is the Class Certificate
Balance of such Class and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans then outstanding. The Voting Rights
allocated to each Class of Certificates will be allocated among all Holders of
each such Class in proportion to the outstanding Certificate Principal Balance
of such Certificates.
Termination
The circumstances under which the obligations created by the Agreement
will terminate in respect of the Certificates are described in "Description of
the Certificates--Termination" in the Prospectus. The majority holder of the
Residual Certificates will have the right to purchase all remaining Mortgage
Loans and any properties acquired in respect thereof and thereby effect early
retirement of the Certificates on any Distribution Date following the Collection
Period during which the aggregate principal balance of the Mortgage Loans and
such properties at the time of purchase is 10% or less of the Cut-off Date Pool
Principal Balance. If such holder does not exercise such option, the Master
Servicer or the Servicer may do so when the aggregate principal balance of the
Mortgage Loans and such properties is 5% or less of the Cut-off Date Pool
Principal Balance. In the event the majority holder of the Residual Certificates
or the Master Servicer or the Servicer exercises such option, the purchase price
payable in connection therewith generally will be equal to par plus accrued
interest for each Mortgage Loan at the related Mortgage Rate to but not
including the first day of the month in which such repurchase price is
distributed, together with any amounts due to the Master Servicer or the
Servicer for servicing compensation at the Master Servicing Fee Rate or
Servicing Fee Rate, as applicable. In the event the holder of the Residual
Certificates or the Master Servicer or the Servicer exercises such option, the
portion of the purchase price allocable to the each Class of Offered
Certificates will be, to the extent of available funds (i) 100% of the then
outstanding Class Certificate Balance thereof, plus (ii) one month's interest on
the then outstanding Class Certificate Balance thereof at the then applicable
Pass-Through Rate, plus (iii) any previously accrued but unpaid interest
thereon, plus (iv) any related LIBOR Carryover Amount. In no event will the
trust created by the Agreement continue beyond the expiration of 21 years from
the death of the survivor of the persons named in the Agreement. See
"Description of the Certificates--Termination" in the Prospectus.
S-54
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Stroock & Stroock & Lavan LLP
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the Agreement, for federal income tax purposes, the Trust Fund
will qualify as a REMIC under the Code.
For federal income tax purposes, (i) the Residual Certificates will be
the sole class of "residual interests" in the REMIC and (ii) the Offered
Certificates will be the "regular interests" in the REMIC and will be treated as
debt instruments of the REMIC. See "Certain Federal Income Tax
Consequences--REMIC--Classification of REMICs" in the Prospectus.
For federal income tax reporting purposes, it is expected that the
Offered Certificates will not be treated as having been issued with original
issue discount. The prepayment assumption that will be used in determining the
rate of accrual of original issue discount, premium and market discount, if any,
for federal income tax purposes will be based on the assumption that subsequent
to the date of any determination the Mortgage Loans will prepay at a constant
rate of 25% CPR. No representation is made that the Mortgage Loans will prepay
at such rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Offered Certificates. Because of the uncertainty
concerning the application of Section 1272(a)(6) of the Code to such
Certificates, the IRS could assert that the Offered Certificates should be
treated as issued with original issue discount or should be treated in some
other manner not yet set forth in regulations. Prospective purchasers of the
Offered Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates if such Certificates are
required to be treated as issued with original issue discount generally would be
to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable Index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable Index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See" Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)of
the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code, generally to the extent that the Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. The Offered Certificates also will be treated as "qualified mortgages"
under Section 860G(a)(3) of the Code. See "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any such tax
is imposed on the Trust Fund, such tax will be borne (i) by the Trustee, if the
Trustee has breached its obligations with respect to REMIC compliance under the
Agreement,(ii) the Master Servicer, if the Master Servicer has breached its
obligations with respect to REMIC compliance under the
S-55
<PAGE>
Agreement, and (iii) otherwise by the Trust Fund, with a resulting reduction in
amounts otherwise distributable to Holders of the Offered Certificates. See
"Description of the Certificates--General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee and/or the Master Servicer. See
"Certain Federal Income Tax Consequences--REMICs--Reporting and Other
Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Offered Certificates will be applied by the Depositor to the purchase price
of the Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Offered Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated and PaineWebber Incorporated (the "Underwriters"), and each
of the Underwriters has severally agreed to purchase, the principal amount of
the Offered Certificates set forth opposite its name below:
Class A-1 Certificates
Underwriters Principal Amount
- ------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated $58,158,000
PaineWebber Incorporated $58,158,000
Class A-2 Certificates
Underwriters Principal Amount
- ------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated $67,507,00
PaineWebber Incorporated $67,507,00
Class M-1 Certificates
Underwriters Principal Amount
- ------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated $9,753,000
PaineWebber Incorporated $9,753,000
Class M-2 Certificates
Underwriters Principal Amount
- ------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated $9,753,000
PaineWebber Incorporated $9,753,000
S-56
<PAGE>
Class B Certificates
Underwriters Principal Amount
- ------------ ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated $4,877,000
PaineWebber Incorporated $4,877,000
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the related Class Certificate Principal Balance). The Underwriters
may allow and such dealers may reallow a discount not in excess of the
respective amounts set forth in the table below to certain other dealers. After
the initial public offering of the Offered Securities, the public offering price
and such concessions and allowances may be changed.
Reallowance
Class Selling Concession Discount
----- ------------------ --------
A-1 0.120% 0.100%
A-2 0.120% 0.100%
M-1 0.300% 0.250%
M-2 0.400% 0.350%
B 0.500% 0.450%
In connection with this offering and in compliance with applicable law
and industry practice, the Underwriters may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Offered
Certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid , the
effecting or any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Merrill Lynch & Co. Inc., as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Offered Certificates originally sold by the
syndicate member are purchased in syndicate covering transactions. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
All of the Mortgage Loans evidenced by the Certificates will have been
acquired by the Depositor in a privately negotiated transaction with the
Mortgage Loan Seller.
The Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
LEGAL MATTERS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Mortgage Loan Seller and the Depositor by Stroock & Stroock
& Lavan LLP, New York, New York, and for the Underwriters by Dewey Ballantine,
New York, New York.
S-57
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Certificates that they receive
the respective ratings set forth below from Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") , Duff &
Phelps Credit Rating Company ("DCR") and Fitch Investors Service L.P. ("Fitch,"
and together with Standard & Poor's and DCR, the "Rating Agencies"):
Class Standard & Poor's DCR Fitch
----- ----------------- --- -----
A AAA AAA AAA
M-1 AA AA AA
M-2 A A A
B BBB BBB BBB
The ratings of the Rating Agencies assigned to mortgage pass-through
certificates address the likelihood of the receipt by Certificateholders of all
distributions to which such Certificateholders are entitled. The rating process
addresses structural and legal aspects associated with the Certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which such prepayments will differ from that originally anticipated.
The ratings do not address the likelihood of the payment of any LIBOR Carryover
Amount.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Offered Certificates as stated above.
LEGAL INVESTMENT
The Class A and Class M-1 Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") so long as they are rated in the second highest rating
category by a rating agency, and, as such, are legal investments for certain
entities to the extent provided in SMMEA. SMMEA provided the states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA. The Class M-2 and Class B Certificates will not be
"mortgage related securities" for purposes of SMMEA.
The Depositor makes no representation as to the proper characterization
of the Offered Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Offered Certificates under
applicable legal investment restrictions. The uncertainties may adversely affect
the liquidity of the Offered Certificates. Accordingly, all institutions whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and the extent to
which the Offered Certificates constitute a legal investment under SMMEA or is
subject to investment, capital or other restrictions. See "Legal Investment" in
the Prospectus.
S-58
<PAGE>
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans or
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 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 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 Merrill
Lynch, Pierce, Fenner & Smith Incorporated , which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code and Section 502(i) of ERISA, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
discussion, the term "Underwriter" shall include (a) Merrill Lynch, Pierce,
Fenner & Smith Incorporated, (b) any person directly or indirectly, through one
or more intermediaries, controlling, controlled by or under common control with
Merrill Lynch, Pierce, Fenner & Smith Incorporated and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to the Class A Certificates.
The Exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class A Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by certain employee benefit plans
subject to Section 4975 of the Code (each, a "Plan"), must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests evidenced
by the Class A Certificates must not be subordinate to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Company or Fitch Investors Service, L.P. ("National
Credit Ratings Agencies"). Fourth, the Trustee cannot be an affiliate of any
member of the "Restricted Group," which consists of any Underwriter, the
Depositor, the Master Servicer, each sub-servicer and any mortgagor with respect
to the Mortgage Loans constituting more than 5% of the aggregate unamortized
principal balance of the Mortgage Loans as of the date of initial issuance of
the Class A Certificates. Fifth, the sum of all payments made to and retained by
the Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the 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; the sum of all payments made to and retained by the Master Servicer
and any sub-servicer must represent not more than reasonable compensation for
such person's services under the Agreement and reimbursement of such person's
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule 501
(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. Seventh, (i) the investment pool consists
only of assets of the type enumerated in the exemption and which have been
included in other investment pools; (ii) certificates evidencing interests in
such other investment pools have been rated in one of the three highest generic
rating categories by one of the National Credit Rating Agencies for at least one
year prior to a Plan's acquisition of certificates; and (iii)certificates
evidencing interests in such other investment pools have been purchased by
investors other than Plans for at least one year prior to a Plan's acquisition
of certificates. See "ERISA Considerations" in the Prospectus.
In addition, the Exemption will not apply to a Plan's investment in
Class A Certificates if the plan fiduciary responsible for the decision to
invest in Class A Certificates is a mortgagor or obligor with respect to more
than 5% of the fair market value of the obligations constituting the Mortgage
Loans or an affiliate of such person, unless: (1) in the case of an acquisition
in connection with the initial issuance of any Certificates, at least
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<PAGE>
50% of each Class of Certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of acquisition;
(3) immediately after such acquisition, no more than 25% of the Plan assets with
respect to which the investing fiduciary has discretionary authority or renders
investment advice are invested in Certificates evidencing interest in trusts
sponsored or containing assets sold or serviced by the same entity; and (4) the
Plan is not sponsored by any member of the Restricted Group.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
Because the characteristics of the Class M-1, Class M-2 and Class B
Certificates may not meet the requirements of the Exemption or any other issued
exemption under ERISA, the purchase and holding of the Class M-1, Class M-2 and
Class B Certificates by a Plan or by individual retirement accounts or other
plans subject to Section 4975 of the Code may result in prohibited transactions
or the imposition of excise taxes or civil penalties. Consequently, transfers of
the Class M-1, Class M-2 and Class B Certificates will not be registered by the
Trustee unless the Trustee receives: (i) a representation from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or a plan or arrangement subject to
Section 4975 of the Code, nor a person acting on behalf of any such plan or
arrangement nor using the assets of any such plan or arrangement to effect such
transfer; (ii) if the purchaser is an insurance company, a representation that
the purchaser is an insurance company which is purchasing such Certificates with
funds contained in an "insurance company general account" (as such term is
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE
95-60")) and that the purchase and holding of such Certificates are covered
under PTCE 95-60; or (iii) an opinion of counsel satisfactory to the Trustee
that the purchase or holding of such Certificate by a Plan, any person acting on
behalf of a Plan or using such Plan's assets, will not result in the assets of
the Trust Fund being deemed to be "plan assets" and subject to the prohibited
transaction requirements of ERISA and the Code and will not subject the Trustee
to any obligation in addition to those undertaken in the Agreement. Such
representation as described above shall be deemed to have been made to the
Trustee by a beneficial owner's acceptance of a Class M-1, Class M-2 or Class B
Certificate in book-entry form. In the event that such representation is
violated, or any attempt to transfer to a Plan or person acting on behalf of a
Plan or using such Plan's assets is attempted without such opinion of counsel,
such attempted transfer or acquisition shall be void and of no effect.
Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
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<PAGE>
Appendix A
Principal Balances at Origination
<TABLE>
<CAPTION>
% of
Number Aggregate Original Aggregate Original
Range of Origination Date Principal Balances of Loans Principal Balance Principal Balance
- -------------------------------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00 4 $ 95,750 0.03
25,000.01 - 50,000.00 68 2,845,140 0.95
50,000.01 - 75,000.00 223 14,401,525 4.80
75,000.01 - 100,000.00 312 27,521,828 9.16
100,000.01 - 125,000.00 308 34,742,114 11.57
125,000.01 - 150,000.00 317 43,308,486 14.42
150,000.01 - 175,000.00 207 33,535,354 11.17
175,000.01 - 200,000.00 189 35,452,763 11.80
200,000.01 - 225,000.00 112 23,690,832 7.89
225,000.01 - 250,000.00 71 16,917,411 5.63
250,000.01 - 275,000.00 53 13,917,374 4.63
275,000.01 - 300,000.00 45 12,978,075 4.32
300,000.01 - 325,000.00 30 9,359,968 3.12
325,000.01 - 350,000.00 26 8,827,900 2.94
350,000.01 - 375,000.00 17 6,150,900 2.05
375,000.01 - 400,000.00 10 3,893,250 1.30
400,000.01 - 425,000.00 5 2,071,000 0.69
425,000.01 - 450,000.00 3 1,320,000 0.44
450,000.01 - 500,000.00 10 4,730,250 1.57
500,000.01 - 550,000.00 4 2,096,750 0.70
550,000.01 - 600,000.00 2 1,156,800 0.39
600,000.01 - 650,000.00 1 645,000 0.21
650,000.01 - 700,000.00 1 675,000 0.22
----- ------------ ------
Total 2,018 $300,333,470 100.00%
===== ============ ======
</TABLE>
The average principal balance of the Mortgage Loans at origination was
approximately $148,827. No Mortgage Loan had a principal balance at origination
of less than $22,350 or greater than $675,000. The average principal balance of
Sub-Pool I and Sub-Pool II at origination was $134,674 and $163,641,
respectively. No Mortgage Loan in Sub-Pool I had a principal balance at
origination of less than $75,120 or greater than $214,200. No Mortgage Loan in
Sub-pool II had a principal balance at origination of less than $22,350 or
greater than $675,000.
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<PAGE>
Principal Balances as of the Cut-Off Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Cut-Off Date Principal Balances of Loans the Cut-Off Date the Cut-off Date
- ---------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - 25,000.00 4 $ 95,672 0.03
25,000.01 - 50,000.00 68 2,842,876 0.95
50,000.01 - 75,000.00 223 14,389,556 4.79
75,000.01 - 100,000.00 312 27,503,008 9.16
100,000.01 - 125,000.00 309 34,839,119 11.61
125,000.01 - 150,000.00 316 43,146,673 14.38
150,000.01 - 175,000.00 207 33,508,172 11.17
175,000.01 - 200,000.00 189 35,432,478 11.81
200,000.01 - 225,000.00 112 23,675,116 7.89
225,000.01 - 250,000.00 71 16,905,959 5.63
250,000.01 - 275,000.00 53 13,908,842 4.63
275,000.01 - 300,000.00 45 12,952,027 4.32
300,000.01 - 325,000.00 30 9,353,320 3.12
325,000.01 - 350,000.00 26 8,821,945 2.94
350,000.01 - 375,000.00 17 6,147,175 2.05
375,000.01 - 400,000.00 10 3,890,496 1.3
400,000.01 - 425,000.00 5 2,069,555 0.69
425,000.01 - 450,000.00 3 1,317,846 0.44
450,000.01 - 500,000.00 10 4,725,745 1.57
500,000.01+ 8 4,570,614 1.52
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The average principal balance of Mortgage Loans as of the Cut-off Date was
approximately $148,710. No Mortgage Loan had a principal balance as of the
Cut-off Date of less than $22,330 or greater than $675,000. The average
principal balance of Sub-Pool I and Sub-Pool II as of the Cut-off Date was
$134,578 and $163,500, respectively. No Mortgage Loan in Sub-Pool I had a
principal balance as of the Cut-off Date of less than $75,120 or greater than
$213,988. No Mortgage Loan in Sub-Pool II had a principal balance as of the
Cut-off Date of less than $22,330 or greater than $675,000.
Property Types
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Cut-Off Date the Cut-off Date
- ------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Single Family 1,562 $228,771,339 76.24
Planned Unit Development 252 43,737,393 14.57
Condo 141 18,376,779 6.12
Two- to Four-Family 47 7,747,013 2.58
Manufactured Housing 16 1,463,670 0.49
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
S-62
<PAGE>
Occupancy Status
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Occupancy of Loans the Cut-Off Date the Cut-off Date
- --------- -------- ---------------- ----------------
<S> <C> <C> <C>
Non Owner-Occupied 115 $ 11,067,183 3.69
Owner-Occupied 1,903 289,029,011 96.31
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the Mortgagor
in its loan application.
Mortgage Rates as of the Cut-Off Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Mortgage Rates of Loans the Cut-Off Date the Cut-off Date
- ----------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
6.500 - 6.999 5 $ 1,328,906 0.44
7.000 - 7.499 7 1,310,275 0.44
7.500 - 7.999 91 16,169,979 5.39
8.000 - 8.499 296 47,204,353 15.73
8.500 - 8.999 512 78,715,586 26.23
9.000 - 9.499 358 51,654,295 17.21
9.500 - 9.999 411 61,540,350 20.51
10.000 - 10.499 162 21,596,416 7.20
10.500 - 10.999 106 12,574,267 4.19
11.000 - 11.499 38 4,753,517 1.58
11.500 - 11.999 19 2,161,558 0.72
12.000 - 12.499 8 777,663 0.26
12.500 - 12.999 5 309,029 0.10
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
was approximately 9.129% per annum and ranged from 6.625% to 12.750%. As of the
Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans of the
Sub-Pool I and Sub-Pool II was approximately 9.162% and 9.101% per annum,
respectively. Sub-Pool I Mortgages Rates ranged from 6.625% to 12.375%. Sub-Pool
II Mortgage Rates ranged from 6.625% to 12.750%.
S-63
<PAGE>
Original Loan-to-Value Ratios
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Original Loan-to-Value Ratios of Loans the Cut-Off Date the Cut-off Date
- -------------------------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
10.01 - 20.00 1 $ 74,955 0.02
20.01 - 30.00 7 389,780 0.13
30.01 - 40.00 9 477,955 0.16
40.01 - 50.00 28 2,543,629 0.85
50.01 - 60.00 81 9,447,003 3.15
60.01 - 70.00 237 31,296,638 10.43
70.01 - 80.00 1,159 173,585,353 57.84
80.01 - 90.00 496 82,280,881 27.42
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage Loans
was approximately 78.89%. No Mortgage Loan had a Loan-to-Value Ratio at
origination less than 18.52% or greater than 90.00%.
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
State of Loans the Cut-Off Date the Cut-off Date
- ----- -------- ----------------- ----------------
<S> <C> <C> <C>
Alabama 5 $ 549,346 0.18
Arizona 92 9,961,491 3.32
California 1,068 184,642,658 61.52
Colorado 85 10,722,658 3.57
Florida 3 205,821 0.07
Georgia 1 78,237 0.03
Idaho 9 980,883 0.33
Illinois 11 2,062,793 0.69
Indiana 6 420,881 0.14
Michigan 23 2,329,602 0.78
Minnesota 1 109,600 0.04
Montana 1 63,977 0.02
New Mexico 40 4,989,721 1.66
Nevada 43 4,820,144 1.61
Ohio 6 654,026 0.22
Oregon 232 28,005,651 9.33
Utah 179 22,580,134 7.52
Washington 200 25,665,968 8.55
Wisconsin 13 1,252,603 0.42
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
S-64
<PAGE>
Purpose of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Purpose of Loans the Cut-Off Date the Cut-off Date
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C>
Cashout 534 $ 71,376,686 23.79
Purchase 1,185 182,585,821 60.84
Refinance 299 46,133,687 15.37
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
Mortgage Loan Programs
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Documentation of Loans the Cut-Off Date the Cut-off Date
- ------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation Program 1,690 $251,724,435 83.88
Limited Income Verification 66 10,219,613 3.41
No Income Verification 262 38,152,146 12.71
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
Mortgage Loan Risk Categories
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Risk Categories of Loans the Cut-Off Date the Cut-off Date
- --------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Direct Access 1,299 $196,093,393 65.34
A1 200 33,988,418 11.33
A- 231 36,186,329 12.06
B 143 18,517,167 6.17
C 106 11,293,339 3.76
D 39 4,017,548 1.34
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
S-65
<PAGE>
Credit Bureau Risk Score for Direct Access Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Credit Bureau Risk Score of Loans the Cut-Off Date the Cut-off Date
- ------------------------ -------- ---------------- ----------------
<S> <C> <C> <C>
820 - 801 2 $ 183,733 0.09
800 - 781 9 1,122,331 0.57
780 - 761 14 2,170,138 1.11
760 - 741 45 6,785,333 3.46
740 - 721 53 7,555,909 3.85
720 - 701 74 10,288,722 5.25
700 - 681 98 14,214,905 7.25
680 - 661 181 28,675,067 14.62
660 - 641 246 38,385,480 19.58
640 - 621 231 36,875,113 18.8
620 - 601 192 28,721,943 14.65
600 - 581 86 11,892,314 6.06
580 - 561 57 7,600,180 3.88
560 - 541 11 1,622,225 0.83
----- ------------ ------
Total 1,299 $196,093,393 100.00%
===== ============ ======
</TABLE>
The weighted average Credit Bureau Risk Score of the Direct Access Mortgage
Loans as of the Cut-off Date was approximately 651.
Maximum Mortgage Rates
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Maximum Mortgage Rate of Loans the Cut-Off Date the Cut-off Date
- --------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
12.500 - 12.999 5 $ 1,328,906 0.44
13.000 - 13.499 7 1,310,275 0.44
13.500 - 13.999 91 16,169,979 5.39
14.000 - 14.499 296 47,204,353 15.73
14.500 - 14.999 512 78,715,586 26.23
15.000 - 15.499 358 51,654,295 17.21
15.500 - 15.999 411 61,540,350 20.51
16.000 - 16.499 162 21,596,416 7.20
16.500 - 16.999 106 12,574,267 4.19
17.000 - 17.499 38 4,753,517 1.58
17.500 - 17.999 19 2,161,558 0.72
18.000 - 18.499 8 777,663 0.26
18.500 - 18.999 5 309,029 0.1
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The weighted average Maximum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 15.129% per annum from 12.625% to 18.750%.
S-66
<PAGE>
Minimum Mortgage Rates
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Minimum Mortgage Rates of Loans the Cut-Off Date the Cut-off Date
- ---------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
6.500 - 6.999 5 $ 1,328,906 0.44
7.000 - 7.499 7 1,310,275 0.44
7.500 - 7.999 91 16,169,979 5.39
8.000 - 8.499 296 47,204,353 15.73
8.500 - 8.999 512 78,715,586 26.23
9.000 - 9.499 358 51,654,295 17.21
9.500 - 9.999 411 61,540,350 20.51
10.000 - 10.499 162 21,596,416 7.20
10.500 - 10.999 106 12,574,267 4.19
11.000 - 11.499 38 4,753,517 1.58
11.500 - 11.999 19 2,161,558 0.72
12.000 - 12.499 8 777,663 0.26
12.500 - 12.999 5 309,029 0.10
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The weighted average Minimum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 9.129% per annum from 6.625% to 12.750%.
Gross Margin
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Gross Margin of Loans the Cut-Off Date the Cut-off Date
- ------------ -------- ---------------- ----------------
<S> <C> <C> <C>
3.250 - 3.499 4 $1,065,422 0.36
3.500 - 3.749 15 2,727,305 0.91
3.750 - 3.999 57 8,624,809 2.87
4.000 - 4.249 217 34,298,341 11.43
4.250 - 4.499 181 26,349,996 8.78
4.500 - 4.749 239 35,754,561 11.91
4.750 - 4.999 226 36,359,525 12.12
5.000 - 5.249 256 41,133,466 13.71
5.250 - 5.499 228 32,297,293 10.76
5.500 - 5.749 206 30,803,400 10.26
5.750 - 5.999 143 18,988,344 6.33
6.000 - 6.249 87 11,385,242 3.79
6.250 - 6.499 72 9,507,371 3.17
6.500 - 6.749 44 5,673,332 1.89
6.750 - 6.999 22 3,208,998 1.07
7.000 - 7.249 11 1,176,457 0.39
7.250 - 7.499 7 563,747 0.19
7.500 - 7.749 2 125,000 0.04
8.000 - 8.249 1 53,585 0.02
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
The weighted average Gross Margin of the Mortgage Loans as of the Cut-off Date
was approximately 5.003% and ranged from 3.375% to 8.000%.
S-67
<PAGE>
Next Adjustment Dates for the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Month of Next Adjustment Date of Loans the Cut-Off Date the Cut-off Date
- ----------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
12/1/97 1 $ 483,771 0.16
1/1/98 4 370,100 0.12
2/1/98 5 1,134,060 0.38
3/1/98 22 2,965,479 0.99
4/1/98 21 2,776,893 0.93
5/1/98 34 5,540,418 1.85
6/1/98 7 1,287,065 0.43
7/1/98 7 1,576,100 0.53
8/1/98 17 3,068,048 1.02
9/1/98 94 15,701,392 5.23
10/1/98 95 15,932,976 5.31
11/1/98 104 19,033,457 6.34
1/1/99 1 159,205 0.05
3/1/99 1 101,724 0.03
4/1/99 1 83,760 0.03
5/1/99 4 728,095 0.24
6/1/99 34 4,400,489 1.47
7/1/99 40 5,415,154 1.80
8/1/99 94 12,077,792 4.02
9/1/99 505 72,100,396 24.03
10/1/99 463 68,536,796 22.84
11/1/99 463 66,474,274 22.15
12/1/99 1 148,750 0.05
----- ------------ ------
Total 2,018 $300,096,194 100.00%
===== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average next Adjustment Date of the
Mortgage Loans was June, 1999.
S-68
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------
The Asset Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities') offered
hereby and by Supplements to this Prospectus (the 'Offered Securities') will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the 'Trust Fund') consisting of one or
more segregated pools of various types of single family and/or multifamily
mortgage loans (or certain balances thereof) (collectively, the 'Mortgage
Loans'), unsecured home improvement installment sales contracts and installment
loans ('Unsecured Home Improvement Loans'), mortgage participations ('Mortgage
Participations'), mortgage pass-through certificates or mortgage-backed
securities evidencing interests in Mortgage Loans or secured thereby (the
'MBS'), manufactured housing installment sale contracts or installment loan
agreements ('Contracts'), certain direct obligations of the United States,
agencies thereof or agencies created thereby (the 'Government Securities'),
certain small business loans described herein or a combination of Mortgage
Loans, Unsecured Home Improvement Loans, Mortgage Participations, MBS,
Contracts, Government Securities and/or such small business loans (with respect
to any series, collectively, 'Assets'). The Mortgage Loans, Mortgage
Participations and MBS are collectively referred to herein as the 'Mortgage
Assets.' If a series of Securities includes Notes, such Notes will be issued and
secured pursuant to an indenture and will represent indebtedness of the Trust
Fund. If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any series, collectively, 'Credit Support'), and
currency or interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any series, collectively, 'Cash Flow
Agreements'). See 'Description of the Trust Funds,' 'Description of the
Securities' and 'Description of Credit Support.'
(cover continued on next page)
------------------------
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 JUNE 19, 1997.
<PAGE>
(cover continued from previous page)
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of two
or more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds, in each case as described in
the related Prospectus Supplement. Any such classes may include classes of
Offered Securities. See 'Description of the Securities.'
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund will
be guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption 'Yield
Considerations' herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
'real estate mortgage investment conduit' for federal income tax purposes. See
also 'Certain Federal Income Tax Consequences' herein.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION 'SPECIAL CONSIDERATIONS' HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH
UNDER THE CAPTION 'RISK FACTORS' IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED SECURITY.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of 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
2
<PAGE>
made and designation of the regular interests and residual interests; (vii) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Securities; (viii) information as to any Master
Servicer, any Sub-Servicer and the Trustee, as applicable; (ix) information as
to the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and (x)
whether such Securities will be initially issued in definitive or book-entry
form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Securities. This Prospectus and the Prospectus Supplement relating to each
series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ('Cede'), as nominee of
The Depository Trust Company ('DTC') and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the 'Securityholders') upon request
to their respective DTC participants. See 'Description of the Securities--
Reports to Securityholders' and 'Description of the Agreements--Evidence as to
Compliance.' The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), the rules and
regulations of the Commission thereunder, as interpreted by the staff of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a 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.
3
<PAGE>
TABLE OF CONTENTS
------------------------
PAGE
----
Prospectus Supplement.......................................... 2
Available Information.......................................... 3
Incorporation of Certain Information by Reference.............. 3
Summary of Prospectus.......................................... 5
Special Considerations......................................... 13
Description of the Trust Funds................................. 19
Use of Proceeds................................................ 25
Yield Considerations........................................... 25
The Depositor.................................................. 29
Description of the Securities.................................. 30
Description of the Agreements.................................. 38
Description of Credit Support.................................. 57
Certain Legal Aspects of Mortgage Loans........................ 59
Certain Legal Aspects of the Contracts......................... 69
Certain Federal Income Tax Consequences........................ 73
State Tax Considerations....................................... 105
ERISA Considerations........................................... 105
Legal Investment............................................... 107
Plan of Distribution........................................... 109
Legal Matters.................................................. 110
Financial Information.......................................... 110
Rating......................................................... 110
Index of Principal Definitions................................. 111
4
<PAGE>
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 Certificates.... Asset-Backed Certificates (the 'Certificates') and
Asset Backed Notes (the 'Notes' and, together with the
Certificates, the 'Securities'), issuable in series.
Depositor................ Merrill Lynch Mortgage Investors, Inc. (the
'Depositor'), a wholly owned subsidiary of Merrill
Lynch Mortgage Capital, Inc., which is a wholly-owned
indirect subsidiary of Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated. Neither Merrill Lynch &
Co., Inc. nor any of its affiliates, including the
Depositor and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, will insure or guarantee the
Certificates or the Mortgage Loans or be otherwise
obligated in respect thereof.
Master Servicer.......... The master servicer or master servicers (each, a
'Master Servicer'), if any, or a servicer for
substantially all the Mortgage Loans for each series
of Securities, which servicer or master servicer(s)
may be affiliates of the Depositor, will be named in
the related Prospectus Supplement. See 'Description of
the Agreements--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, Unsecured Home Improvement Loans,
Contracts, Government Securities and the small
business loans described herein may be referred to
collectively or individually as 'Assets'):
(a) Mortgage The Mortgage Assets with respect to a series of
Assets.......... Certificates will consist of a pool of single family
and/or multifamily loans (or certain balances thereof)
(collectively, the 'Mortgage Loans'), mortgage
participations ('Mortgage Participations') or mortgage
pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by
Mortgage Loans (collectively, the 'MBS') or a
combination of Mortgage Loans, Mortgage Participations
and/or MBS. The Mortgage Loans will not be guaranteed
or insured by the Depositor or any of its affiliates
or, unless otherwise provided in the Prospectus
Supplement, by any governmental agency or
instrumentality or other person. The Mortgage Loans
will be secured by first and/or junior liens on (i)
one- to four-family residential properties or security
interests in shares issued by cooperative housing
corporations ('Single Family Properties') and/or (ii)
residential properties consisting of five or more
dwelling units, including mixed residential and
commercial structures ('Multifamily Properties'). The
Mortgage Loans may 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 or the Commonwealth of
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Puerto Rico. The Prospectus Supplement will indicate
additional jurisdictions (which may be outside the
United States), if any, in which the Mortgaged
Properties may be located. Unless otherwise provided
in the related Prospectus Supplement, all Mortgage
Loans will have individual principal balances at
origination of not less than $25,000 and original
terms to maturity of not more than 40 years. All
Mortgage Loans will have been originated by persons
other than the Depositor, and all Mortgage Assets will
have been purchased, either directly or indirectly, by
the Depositor on or before the date of initial
issuance of the related series of Certificates. The
related Prospectus Supplement will indicate if any
such persons are affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest
thereon at an interest rate (a 'Mortgage Rate') that
is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the mortgagor's
election, in each case as described in the related
Prospectus Supplement. Adjustable Mortgage Rates on
the Mortgage Loans in a Trust Fund may be based on one
or more indices. Each Mortgage Loan may provide for
scheduled payments to maturity, payments that adjust
from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain
events, and may provide for negative amortization or
accelerated amortization, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan
may be fully amortizing or require a balloon payment
due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each
Mortgage Loan may contain prohibitions on prepayment
or require payment of a premium or a yield maintenance
penalty in connection with a prepayment, in each case
as described in the related Prospectus Supplement. The
Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly,
quarterly, semi-annually or at such other interval as
is specified in the related Prospectus Supplement. See
'Description of the Trust Funds--Assets.'
(b) Unsecured Home
Improvement
Loans........... The Assets with respect to a series of Securities may
consist of or include home improvement installment
sales contracts or installment loans that are
unsecured ('Unsecured Home Improvement Loans'). The
Unsecured Home Improvement Loans may have any of the
features described under '(a) Mortgage Assets' above,
except that they will not be secured by a lien on or
other security interest in any property. Unless the
context otherwise requires, references in this
Prospectus to Mortgage Loans, Whole Loans and related
terms shall include Unsecured Home Improvement Loans
and related terms to the extent relevant (e.g., a
reference to a Mortgaged Property or hazard insurance
does not relate to an Unsecured Home Improvement
Contract).
(c) Contracts....... The Contracts with respect to a series of Securities
will consist of manufactured housing installment sale
contracts and installment loan agreements secured by a
security interest in a new or used manufactured home
(each, a 'Manufactured Home'), and, to the extent, if
any, indicated in the related Prospectus Supplement,
by real property. The Contracts will 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
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all Contracts will have been purchased, either
directly or indirectly, by the Depositor on or before
the date of initial issuance of the related series of
Certificates. The related Prospectus Supplement will
indicate if any such persons are affiliates of the
Depositor. Each Contract may provide for an annual
percentage rate thereon (a 'Contract Rate') that is
fixed over its term or that adjusts as described in
the related Prospectus Supplement. The manner of
determining scheduled payments due on the Contract
will be described in the Prospectus Supplement. The
Prospectus Supplement will describe the minimum
principal balance of the Contracts at origination and
the maximum original term to maturity of the
Contracts.
(d) Government
Securities...... If so provided in the related Prospectus Supplement,
the Trust Fund may include, in addition to Mortgage
Assets and/or Contracts, certain direct obligations of
the United States, agencies thereof or agencies
created thereby which provide for payment of interest
and/or principal (collectively, 'Government
Securities').
(e) SBA Loans and
SBA 504 Loans... If so provided in the related Prospectus Supplement,
the Trust Fund may include (i) the unguaranteed
portion of loans ('SBA Loans') originated under the
general business loan program (the 'Section 7(a)
Program') of the U.S. Small Business Association (the
'SBA') created pursuant to Section 7(a) of the Small
Business Act of 1953 (the 'SBA Act') and/or (ii) loans
('SBA 504 Loans') originated under the SBA's 504
program (the 'SBA 504 Loan Program'). The loans
originated by the originators under the SBA 504 Loan
Program are not guaranteed by the SBA. Unless the
context otherwise requires, references in this
Prospectus to Mortgage Loans and related terms shall
include SBA Loans and SBA 504 Loans and related terms
to the extent relevant (e.g., a reference to a
Mortgaged Property or hazard insurance does not relate
to a SBA Loan or a SBA 504 Loan).
(f) Collection
Accounts........ Each Trust Fund will include one or more accounts
established and maintained on behalf of the
Securityholders into which the person or persons
designated in the related Prospectus Supplement will,
to the extent described herein and in such Prospectus
Supplement, deposit all payments and collections
received or advanced with respect to the Assets and
other assets in the Trust Fund. Such an account may be
maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as
cash or invested in certain short-term, investment
grade obligations, in each case as described in the
related Prospectus Supplement. See 'Description of the
Agreements--Collection Account and Related Accounts.'
(g) Credit If so provided in the related Prospectus Supplement,
Support......... 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
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of Securities evidencing an interest in a Trust Fund
that includes MBS will describe any similar forms of
credit support that are provided by or with respect
to, or are included as part of the trust fund
evidenced by or providing security for, such MBS. See
'Special Considerations--Credit Support Limitations'
and 'Description of Credit Support.'
(h) Cash Flow
Agreements...... If so provided in the related Prospectus Supplement,
the Trust Fund may include guaranteed investment
contracts pursuant to which moneys held in the funds
and accounts established for the related series will
be invested at a specified rate. The Trust Fund may
also include certain other agreements, such as
interest rate exchange agreements, interest rate cap
or floor agreements, currency exchange agreements or
similar agreements provided to reduce the effects of
interest rate or currency exchange rate fluctuations
on the Assets or on one or more classes of Securities.
(Currency exchange agreements might be included in the
Trust Fund if some or all of the Mortgage Assets (such
as Mortgage Loans secured by Mortgaged Properties
located outside the United States) were denominated in
a non-United States currency.) The principal terms of
any such guaranteed investment contract or other
agreement (any such agreement, a 'Cash Flow
Agreement'), including, without limitation, provisions
relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination
thereof, will be described in the Prospectus
Supplement for the related series. In addition, the
related Prospectus Supplement will provide certain
information with respect to the obligor under any such
Cash Flow Agreement. The Prospectus Supplement for any
series of Securities evidencing an interest in a Trust
Fund that includes MBS will describe any cash flow
agreements that are included as part of the trust fund
evidenced by or providing security for such MBS. See
'Description of the Trust Funds--Cash Flow
Agreements.'
(i) Pre-Funding
Account......... To the extent provided in a Prospectus Supplement, the
Depositor will be obligated (subject only to the
availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to
the satisfaction of certain conditions described in
the applicable Agreement), additional Assets (the
'Subsequent Assets') from time to time (as frequently
as daily) within the number of months specified in the
Prospectus Supplement after the issuance of such
series of Securities having an aggregate principal
balance 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
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<PAGE>
Security Balance, if any, and the Pass-Through Rate or
interest rate for each class of Securities or, in the
case of a variable or adjustable Pass-Through Rate or
interest rate, the method for determining the
Pass-Through Rate or interest rate.
Distributions on
Securities............. Each series of Securities will consist of one or more
classes of Securities that may (i) provide for the
accrual of interest thereon based on fixed, variable
or adjustable rates; (ii) be senior (collectively,
'Senior Securities') or subordinate (collectively,
'Subordinate Securities') to one or more other classes
of Securities in respect of certain distributions on
the Securities; (iii) be entitled to principal
distributions, with disproportionately low, nominal or
no interest distributions (collectively, 'Stripped
Principal Securities'); (iv) be entitled to interest
distributions, with disproportionately low, nominal or
no principal distributions (collectively, 'Stripped
Interest Securities'); (v) provide for distributions
of accrued interest thereon commencing only following
the occurrence of certain events, such as the
retirement of one or more other classes of Securities
of such series (collectively, 'Accrual Securities');
(vi) provide for distributions of principal as
described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination
of two or more components thereof with one or more of
the characteristics described in this paragraph,
including a Stripped Principal Security component and
a Stripped Interest Security component, to the extent
of available funds, in each case as described in the
related Prospectus Supplement. If so specified in the
related Prospectus Supplement, distributions on one or
more classes of a series of Securities may be limited
to collections from a designated portion of the
Mortgage Loans in the related Mortgage Pool or
Contracts in the related Contract Pool (each such
portion of Mortgage Loans, a 'Mortgage Loan Group' and
each such portion of the Contracts, a 'Contract
Group'). See 'Description of the Securities--General.'
Any such classes may include classes of Offered
Securities. With respect to Securities with two or
more components, references herein to Security
Balance, notional amount and Pass-Through Rate or
interest rate refer to the principal balance, if any,
notional amount, if any, and the Pass-Through Rate or
interest rate, if any, for any such component.
The Securities will not be guaranteed or insured by
the Depositor or any of its affiliates, by any
governmental agency or instrumentality or by any other
person, unless otherwise provided in the related
Prospectus Supplement. See 'Special Considerations--
Limited Assets' and 'Description of the Securities.'
(a) Interest........ Interest on each class of Offered Securities (other
than Stripped Principal Securities and certain classes
of Stripped Interest Securities) of each series will
accrue at the 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 'Special Considerations--
Average Life of Securities; Prepayments; Yields,'
'Yield Considerations' and 'Description of the
Securities--Distributions of Interest on the
Securities.'
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<PAGE>
(b) Principal....... The Securities of each series initially will have an
aggregate Security Balance no greater than the
outstanding principal balance of the Assets as of,
unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of
the month of formation of the related Trust Fund (the
'Cut-off Date'), after application of scheduled
payments due on or before such date, whether or not
received. The Security Balance of a Security
outstanding from time to time represents the maximum
amount that the holder thereof is then entitled to
receive in respect of principal from future cash flow
on the assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus
Supplement, distributions of principal will be made on
each Distribution Date to the class or classes of
Securities entitled thereto until the Security
Balances of such Securities have been reduced to zero.
Unless otherwise specified in the related Prospectus
Supplement, distributions of principal of any class of
Securities will be made on a pro rata basis among all
of the Securities of such class or by random
selection, as described in the related Prospectus
Supplement or otherwise established by the related
Trustee. Stripped Interest Securities with no Security
Balance will not receive distributions in respect of
principal. See 'Description of the Securities--
Distributions of Principal of the Securities.'
Advances................. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated as
part of its servicing responsibilities to make certain
advances that in its good faith judgment it deems
recoverable with respect to delinquent scheduled
payments on the Whole Loans or Contracts in such Trust
Fund. Neither the Depositor nor any of its affiliates
will have any responsibility to make such advances.
Advances made by a Master Servicer are reimbursable
generally from subsequent recoveries in respect of
such Whole Loans or Contracts and otherwise to the
extent described herein and in the related Prospectus
Supplement. If and to the extent provided in the
Prospectus Supplement for any series, the Master
Servicer will be entitled to receive interest on its
outstanding advances, payable from amounts in the
related Trust Fund. The Prospectus Supplement for any
series of Securities evidencing an interest in a Trust
Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with
such MBS. See 'Description of the Securities--Advances
in Respect of Delinquencies.'
Termination.............. If so specified in the related Prospectus Supplement,
a series of Securities may be subject to optional
early termination through the repurchase of the Assets
in the related Trust 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 If so provided in the related Prospectus Supplement,
Securities............. 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
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<PAGE>
applicable, are issued under the limited circumstances
described herein. See 'Special Considerations--
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 'Certain
Federal Income Tax Consequences' herein and in the
related Prospectus Supplement.
The Offered Certificates evidencing an interest in a
Trust Fund containing Mortgage Loans (not including
Unsecured Home Improvement Loans, SBA Loans and SBA
504 Loans) will be treated as (i) 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 'Certain
Federal Income Tax Consequences' herein and in the
related Prospectus Supplement.
(b) Grantor Trust... If the related Prospectus Supplement specifies that
the related Trust Fund will be a grantor trust, the
Trust Fund will be classified as a grantor trust and
not as an association taxable as a corporation for
federal income tax purposes, and therefore holders of
Certificates will be treated as the 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 'Certain Federal Income Tax
Consequences' herein and in the related Prospectus
Supplement.
Tax Status of Notes...... Unless otherwise specified in the related Prospectus
Supplement, Notes of a series will be treated as
indebtedness for federal and state income tax purposes
and the Noteholder, in accepting the Note, will agree
to treat such Note as indebtedness. See 'Certain
Federal Income Tax Consequences' herein and in such
Prospectus Supplement.
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Investors are advised to consult their tax advisors
and to review 'Certain Federal Income Tax
Consequences' herein and in the related Prospectus
Supplement.
ERISA Considerations..... A fiduciary of an employee benefit plan and certain
other retirement plans and arrangements, including
individual retirement accounts, annuities, Keogh
plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or
arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), or Section 4975 of the Code should
carefully review with its legal advisors whether the
purchase or holding of Offered Securities could give
rise to a transaction that is prohibited or is not
otherwise permissible either under ERISA or Section
4975 of the Code. See 'ERISA Considerations' herein
and in the related 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.
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SPECIAL CONSIDERATIONS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Contracts, the Master Servicer's and any Sub-Servicer's servicing obligations
under the related Agreement (including the limited obligation to make certain
advances in the event of delinquencies on the Mortgage Loans or Contracts, but
only to the extent deemed recoverable) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Mortgage Assets or Contracts
may have been made and/or assigned in connection with transfers of such Mortgage
Assets or Contracts prior to the Closing Date, the rights of the Trustee and the
Securityholders with respect to such representations or warranties will be
limited to their rights as an assignee thereof. Unless otherwise specified in
the related Prospectus Supplement, none of the Depositor, the Master Servicer or
any affiliate thereof will have any obligation with respect to representations
or warranties made by any other entity. Unless otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying Assets
will be guaranteed or insured by any governmental agency or instrumentality, or
by the Depositor, the Master Servicer, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Fund for each
series of Securities (including the Assets and any form of credit enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Depositor or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
AVERAGE LIFE OF SECURITIES; PREPAYMENTS; YIELDS
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may 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,
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geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Assets in any Trust Fund or that the rate of
payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the applicable
mortgage interest rates, principal prepayments are likely to be higher than if
prevailing rates remain at or above the rates borne by the Mortgage Loans
underlying or comprising the Mortgage Assets in any Trust Fund. As a result, the
actual maturity of any class of Securities evidencing an interest in a Trust
Fund containing Mortgage Assets could occur significantly earlier than expected.
The relationship of prevailing interest rates and prepayment rates on Contracts
will be discussed in the related Prospectus Supplement. In addition, certain
prepayments may result in the collection of less interest than would otherwise
be the case in the month of prepayment.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate. See 'Yield
Considerations' herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, become
equal to or greater than the value of the Mortgaged Properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, in the case
of Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are 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
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variable payments by the mortgagor under the Mortgage Loan, as to which the
mortgagor is generally qualified on the basis of the initial payment amount. In
some instances the mortgagors' income may not be sufficient to enable them to
continue to make their loan payments as such payments increase and thus the
likelihood of default will increase. In addition to the foregoing, certain
geographic regions of the United States from time to time will experience weaker
regional economic conditions and housing markets, and, consequently, will
experience higher rates of loss and delinquency than will be experienced on
mortgage loans generally. The Mortgage Loans underlying certain series of
Certificates may be concentrated in these regions, and such concentration may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. Furthermore, the rate of
default on Mortgage Loans that are refinance or limited documentation mortgage
loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than
for other types of Mortgage Loans. Additionally, a decline in the value of the
Mortgaged Properties will increase the risk of loss particularly with respect to
any related junior Mortgage Loans. See '--Junior Mortgage Loans.'
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property
typically is directly related to the net operating income derived from such
property. If the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Certificates may be described in the related Prospectus Supplement. See also
'Certain Legal Aspects of Mortgage Loans' herein.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the 'Balloon Mortgage Loans') as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the 'senior lien'),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien 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
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senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage.
CONTRACTS AND MANUFACTURED HOMES IN GENERAL
An investment in Certificates evidencing an interest in a Trust Fund
containing Contracts may be affected by, among other things, a downturn in
national, regional or local economic conditions. The geographic location of the
Manufactured Homes in any Contract Pool at origination of the related Contract
will be set forth in the related Prospectus Supplement under 'The Contract
Pool'. Regional and local economic conditions are often volatile and,
historically, regional and local economic conditions, as well as national
economic conditions, have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts and/or
installment loan contracts (hereinafter generally referred to as 'contracts' or
'manufactured housing contracts'). Moreover, regardless of its location,
manufactured housing generally depreciates in value. Thus, such Securityholders
should expect that, as a general matter, the market value of any Manufactured
Home will be lower than the outstanding principal balance of the related
Contract. Sufficiently high delinquencies and liquidation losses on the
Contracts in a Contract Pool will have the effect of reducing, and could
eliminate, the protection against loss afforded by any credit enhancement
supporting any class of the related Securities. If such protection is eliminated
with respect to a class of Securities, the holders of such Securities will bear
all risk of loss on the related Contracts and will have to rely on the value of
the related Manufactured Homes for recovery of the outstanding principal of and
unpaid interest on any defaulted Contracts in the related Contract Pool. See
'Description of Credit Support.'
SECURITY INTERESTS AND CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the Master Servicer will not amend any certificates of title to change
the lienholder specified therein from the Asset Seller to the Trustee and will
not deliver any certificate of title to the Trustee or note thereon the
Trustee's interest. Consequently, in some states, in the absence of such an
amendment, the assignment to the Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller or a trustee in bankruptcy of
the Asset Seller. In addition, numerous federal and state consumer protection
laws impose requirements on lending under installment sales contracts and
installment loan agreements such as the Contracts, and the failure by the lender
or seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as result of such lender's or seller's
noncompliance. These laws would apply to the Trustee as assignee of the
Contracts. The Asset Seller of the Contracts to the Depositor will warrant that
each Contract complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Asset Seller to repurchase such Contract unless such breach is
cured. If the Credit Support is exhausted and recovery of amounts due on the
Contracts is dependent on repossession and resale of Manufactured Homes securing
Contracts that are in default, certain other factors may limit the ability of
the Certificateholders to realize upon the Manufactured Home or may limit the
amount realized to less than the amount due. See 'Certain Legal Aspects of the
Contracts.'
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UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property, and the Trust Fund will be a general unsecured
creditor as to such obligations. In the event of a default under an Unsecured
Home Improvement Loan, the related Trust Fund will have recourse only against
the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
a borrower on an Unsecured Home Improvement Loan, the obligations of the
borrower under such Unsecured Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a 'Covered
Trust'), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels. See '--Limited Nature of Ratings,' 'Description of the
Securities' and 'Description of Credit Support.'
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
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SUBORDINATION OF THE SUBORDINATE CERTIFICATES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See 'Description of the Securities--General' and
'--Allocation of Losses and Shortfalls.'
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in 'Certain Federal Income Tax Consequences--
REMICs.' Accordingly, under certain circumstances, holders of Offered Securities
that constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of the
cash received during such period. Individual holders of REMIC Residual
Certificates may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, REMIC Residual Certificates are subject to
certain restrictions on transfer. Because of the special tax treatment of REMIC
Residual Certificates, the taxable income arising in a given year on a REMIC
Residual Certificate will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the REMIC
Residual Certificate may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics. Additionally,
prospective purchasers of a REMIC Residual Certificate should be aware that
recently issued temporary regulations provide restrictions on the ability to
mark-to-market certain 'negative value' REMIC residual interests. See 'Certain
Federal Income Tax Consequences--REMICs.'
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as 'Securityholders' (as that term is to be used in the related
Agreement). Hence, until such time, 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.'
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the 'Assets') will include (i)
single family and/or multifamily mortgage loans (or certain balances thereof)
(collectively, the 'Mortgage Loans'), including without limitation, Home Equity
Loans and Home Improvement Contracts, (ii) unsecured home improvement loans
('Unsecured Home Improvement Loans'), (iii) mortgage participations ('Mortgage
Participations'), (iv) pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by one or more Mortgage Loans or
other similar participations, certificates or securities ('MBS'), (v)
manufactured housing installment sale contracts and installment loan agreements
(the 'Contracts'), (vi) direct obligations of the United States, agencies
thereof or agencies created thereby which are not subject to redemption prior to
maturity at the option of the issuer and are (a) interest-bearing securities,
(b) non-interest-bearing securities, (c) originally interest-bearing securities
from which coupons representing the right to payment of interest have been
removed, or (d) interest-bearing securities from which the right to payment of
principal has been removed (the 'Government Securities'), (vii) certain small
business loans defined below ('SBA Loans' and 'SBA 504 Loans') or (viii) a
combination of Mortgage Loans, Unsecured Home Improvement Loans, Mortgage
Participations, Contracts, MBS and Government Securities. As used herein,
'Mortgage Loans' refers to both whole Mortgage Loans (or certain balances
thereof) and Mortgage Loans underlying Mortgage Participations or MBS. Mortgage
Loans that secure, or interests in which are evidenced by, MBS are herein
sometimes referred to as 'Underlying Mortgage Loans.' Mortgage Loans (or certain
balances thereof) that are not Underlying Mortgage Loans are sometimes referred
to as 'Whole Loans.' Any pass-through certificates or other asset-backed
certificates in which an MBS evidences an interest or which secure an MBS are
sometimes referred to herein also as MBS or as 'Underlying MBS.' Mortgage Loans,
Mortgage Participations and MBS are sometimes referred to herein as 'Mortgage
Assets.' The Mortgage Assets will not be guaranteed or insured by Merrill Lynch
Mortgage Investors, Inc. (the 'Depositor') or any of its affiliates or, unless
otherwise provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an 'Asset Seller'), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or Contract or the
issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to four-family residential property (a 'Single Family Property' and
the related Mortgage Loan a 'Single Family Mortgage Loan') or a residential
property consisting of five or more dwelling units in multi-story structures (a
'Multifamily Property' and the related Mortgage Loan a 'Multifamily Mortgage
Loan') or (ii) a security interest in shares issued by private cooperative
housing corporations ('Cooperatives'). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use. Mortgaged
Properties will be located, unless otherwise specified in the related Prospectus
Supplement, in any one of the fifty states, the District of Columbia or the
Commonwealth of Puerto Rico. To the extent specified in the related Prospectus
Supplement, the Mortgage Loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by Cooperatives. The Mortgaged Properties may include leasehold
interests in properties, the title to which is held by third party lessors.
Unless otherwise specified in the Prospectus Supplement, the term of any such
leasehold shall exceed the term of the related mortgage note by at least five
years. Each Mortgage Loan will have been originated by a person (the
'Originator') other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the 'Mortgage Notes') secured by
mortgages, deeds of trust or other security instruments (the 'Mortgages')
creating a lien on the Mortgaged Properties.
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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,
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quarterly or semi-annually or at such other interval as is specified in the
related Prospectus Supplement. Each Mortgage Loan may provide for no accrual of
interest or for accrual of interest thereon at an interest rate (a 'Mortgage
Rate') that is fixed over its term or that adjusts from time to time, or that
may be converted from an adjustable to a fixed Mortgage Rate or a different
adjustable Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from
time to time pursuant to an election or as otherwise specified on the related
Mortgage Note, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the Mortgage Rate or to
reflect the occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due on
its stated maturity date, in each case as described in the related Prospectus
Supplement. Each Mortgage Loan may contain prohibitions on prepayment (a
'Lock-out Period' and, the date of expiration thereof, a 'Lock-out Date') or
require payment of a premium or a yield maintenance penalty (a 'Prepayment
Premium') in connection with a prepayment, in each case as described in the
related Prospectus Supplement. In the event that holders of any class or classes
of Offered Securities will be entitled to all or a portion of any Prepayment
Premiums collected in respect of Mortgage Loans, the related Prospectus
Supplement will specify the method or methods by which any such amounts will be
allocated.
Mortgage Participations
Mortgage Participations will evidence an undivided participation interest
in Underlying Mortgage Loans. To the extent available to the Depositor, the
related Prospectus Supplement will contain information in respect of the
Underlying Mortgage Loans substantially similar to the information described
above in respect of Mortgage Loans. Such Prospectus Supplement will also specify
the amount of the participation interest and describe the servicing provisions
of the participation and servicing agreements.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate. Unless the context otherwise requires,
references in this Prospectus to Mortgage Loans, Whole Loans and related terms
shall include Unsecured Home Improvement Loans and related terms to the extent
relevant (e.g., a reference to a Mortgaged Property or hazard insurance does not
relate to an Unsecured Home Improvement Loan).
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an 'MBS
Agreement'). A seller (the 'MBS Issuer') and/or servicer (the 'MBS Servicer') of
the underlying Mortgage Loans (or Underlying MBS) will have entered into 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
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original and remaining term to stated maturity of the MBS, if applicable, (iii)
whether such MBS is entitled only to interest payments, only to principal
payments or to both, (iv) the pass-through or bond rate of the MBS or formula
for determining such rates, if any, (v) the applicable payment provisions for
the MBS, including, but not limited to, any priorities, payment schedules and
subordination features, (vi) the MBS Issuer, MBS Servicer and MBS Trustee, as
applicable, (vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans, the Underlying MBS
or directly to such MBS, (viii) the terms on which the related Underlying
Mortgage Loans or Underlying MBS for such MBS or the MBS may, or are required
to, be purchased prior to their maturity, (ix) the terms on which Mortgage Loans
or Underlying MBS may be substituted for those originally underlying the MBS,
(x) the servicing fees payable under the MBS Agreement, (xi) the type of
information in respect of the Underlying Mortgage Loans described under
'--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements' above,
and the type of information in respect of the Underlying MBS described in this
paragraph, (xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the MBS and (xiii)
whether the MBS is in certificated form or held through a depository such as The
Depository Trust Company or the Participants Trust Company.
CONTRACTS
General
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other jurisdictions
in which the Manufactured Homes are located as of the related Cut-off Date. The
method of computing the 'Loan-to-Value Ratio' of a Contract will be described in
the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date of
the Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in which
most of the Manufactured Homes are located at origination, (viii) information
with respect to the prepayment provisions, if any, of the Contracts, (ix) with
respect to Contracts with adjustable Contract Rates ('ARM Contracts'), the
index, the frequency of the adjustment dates, and the maximum Contract Rate or
monthly payment variation at the time of any adjustment thereof and over the
life of the ARM Contract, and (x) information regarding the payment
characteristics of the Contracts. If specific information respecting the
Contracts is not known to the Depositor at the time Securities are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report which will be available to purchasers of the related Securities at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Securities and Exchange Commission within fifteen
days after such initial issuance.
Payment Provisions of the Contracts
Unless otherwise specified in the related Prospectus Supplement, all of the
Contracts will (i) have individual principal balances at origination of not less
than $1,000, (ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due dates that
occur monthly or at such other interval as is specified in the related
Prospectus Supplement. Each Contract may provide for no accrual of interest or
for accrual of interest thereon at an annual percentage rate (a 'Contract Rate')
that is fixed over its term or that adjusts from time to time, or as otherwise
specified in the related Prospectus Supplement. Each Contract may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Contract Rate as otherwise described in the related
Prospectus Supplement.
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GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
SBA LOANS
The SBA Loans will consist of the Unguaranteed Interests (as defined below)
in loans originated under Section 7(a) (the 'Section 7(a) Program') of the Small
Business Act of 1953 (the 'SBA Act'), which Act created the Small Business
Administration (the 'SBA'). The Section 7(a) Program was intended to encourage
lenders to provide loans to existing qualifying small businesses. Loans made
under the Section 7(a) Program can be used to construct, purchase, expand or
convert facilities or to purchase building equipment, leaseholds or materials.
Money lent under the Section 7(a) Program also can be used for working capital.
The SBA Loans are partially guaranteed by the SBA pursuant to a Small
Business Administration Loan Guaranty Agreement between the originator and the
SBA and pursuant to pertinent SBA regulations found at 13 C.F.R. parts 120 and
122. As to any SBA Loan, the right to receive the guaranteed portion of the
principal balance thereof together with interest thereon at a per annum rate in
effect from time to time plus a fee paid to the SBA's fiscal and transfer agent
is referred to herein as the 'Guaranteed Interest.' The Guaranteed Interest
varies from SBA Loan to SBA Loan, will not be included in the related Trust Fund
and Securityholders will have no right or interest therein. As to any SBA Loan,
the 'Unguaranteed Interest' will equal all payments and other recoveries on such
SBA Loan not constituting the Guaranteed Interest therein.
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the 'Guaranteed Participant
Program,' the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guarantee the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
Under the second level of lender participation, known as the 'Certified
Lender Program,' the lender (the 'Certified Lender') gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the 'Preferred
Lender Program', the lender (the 'Preferred Lender') has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. In addition, before being granted
preferred lender status under the Preferred Lender Program in a particular SBA
district, the lender must have been a Certified Lender under the Certified
Lender Program in such SBA district for at least 12 months.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA Loan).
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the originators under
the SBA 504 Loan Program (the 'SBA 504 Loan Program'). The SBA 504 Loan Program
was established under the SBA Act to encourage lenders to provide fixed asset
financing to existing qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing. The Originators provide at least 50% of project
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costs in a conventional loan agreement with borrowers, with the SBA providing
the remainder of the financing. Each loan by the Originators must be approved by
the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are generated by issuing SBA-guaranteed
debentures on behalf of a certified development company (a 'CDC'). A CDC is a
non-profit organization sponsored by private interests or by state or local
governments. The debentures are pooled monthly and sold through a certificate
mechanism to the public market. The loans originated by the Originators under
the SBA 504 Loan Program are not guaranteed by the SBA.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA 504 Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA 504 Loan).
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the 'Subsequent Assets') from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the 'Pre-Funded Amount') for such series on
the date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See 'Description of the Agreements--
Collection Account and Related Accounts.'
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any series, 'Credit Support'). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Securities. See 'Special
Considerations--Credit Support Limitations' and 'Description of Credit Support.'
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Assets (such as
Mortgage Loans secured by Mortgaged Properties located outside the United
States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a 'Cash Flow Agreement'), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
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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 of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related Trust Fund (which may be affected by prepayments,
defaults, liquidations or repurchases). See 'Special Considerations.'
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under '--Pass-Through Rate and Interest Rate,' if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates and the stated
pass-through or pay-
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through interest rate of certain MBS may be a number of percentage points higher
or lower than certain of the Underlying Mortgage Loans. The rate of principal
payments on some or all of the classes of Securities of a series will correspond
to the rate of principal payments on the Assets in the related Trust Fund and is
likely to be affected by the existence of Lock-out Periods and Prepayment
Premium provisions of the Mortgage Loans underlying or comprising such Assets,
and by the extent to which the servicer of any such Mortgage Loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
Mortgage Loans without such provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums.
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
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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
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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.
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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;
Enforceability of 'Due-on-Sale' Clauses.'
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an 'Indenture'). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, 'Senior Securities') or
subordinate (collectively, 'Subordinate Securities') to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped Principal
Securities'); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
'Stripped Interest Securities'); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, 'Accrual Securities'); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, 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 'Special Considerations--
Book-Entry Registration' and 'Description of the Securities--Book-Entry
Registration and Definitive Securities.' Definitive Securities will be
exchangeable for other Securities of the same class and series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See 'Special Considerations--Limited
Liquidity' and '--Limited Assets.'
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the 'Record Date'), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the 'Determination Date'). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor,
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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
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Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
'Accrued Security Interest' will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans or Contracts comprising or underlying the Assets in the Trust
Fund for such series. The particular manner in which such shortfalls are to be
allocated among some or all of the classes of Securities of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans or Contracts comprising or underlying the Assets
in the related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, any reduction in the amount of Accrued Security Interest otherwise
distributable on a class of Securities by reason of the allocation to such class
of a portion of any deferred interest on the Mortgage Loans or Contracts
comprising or underlying the Assets in the related Trust Fund will result in a
corresponding increase in the Security Balance of such class. See 'Special
Considerations--Average Life of Securities; Prepayments; Yields' and 'Yield
Considerations.'
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a 'Security Balance' which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
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.
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COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under '--General' above. To such extent, the
descriptions set forth under '--Distributions of Interest on the Securities' and
'--Distributions of Principal of the Securities' above also relate to components
of such a class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such component and the Pass-Through Rate or interest
rate, if any, on any such component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Assets in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See 'Description of Credit
Support' for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans or Contracts in such Trust Fund during the related Due Period
and were delinquent on the related Determination Date, subject to the Master
Servicer's (or another entity's) good faith determination that such advances
will be reimbursable from Related Proceeds (as defined below). In the case of a
series of Securities that includes one or more classes of Subordinate Securities
and if so provided in the related Prospectus Supplement, the Master Servicer's
(or another entity's) advance obligation may be limited only to the portion of
such delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See 'Description of Credit Support.'
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans or Contracts (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan or Contract, 'Related Proceeds') 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
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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
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respect of such REO Property or the related Mortgage Loan or Contract and
(c) the amount of any loss to Securityholders in respect of the related
Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See 'Description of the Securities--
Book-Entry Registration and Definitive Securities.'
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property
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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
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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.
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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 Agreement may be referred to herein as the
'Agreement.'
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the 'Indenture') between the related Trust Fund and an indenture
trustee (the 'Indenture Trustee') named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups or Contract Groups, each corresponding to a
particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such Master Servicer will be
limited to the Whole Loans in such corresponding Mortgage Loan Group or the
Contracts in the corresponding Contract Group. In lieu of appointing a Master
Servicer, a servicer may be appointed pursuant to the Agreement for any Trust
Fund. Such servicer will service all or a significant number of Whole Loans or
Contracts directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans or Contracts directly.
A manager or administrator may be appointed pursuant to the Trust Agreement for
any Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term 'Security' refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
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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.
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Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans, Home Improvement Contracts and Unsecured Home Improvement Loans will not
be delivered to the Trustee (or a custodian), but will be retained by the Master
Servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the Trustee will not be recorded, unless otherwise provided
in the related Prospectus Supplement.
With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset Seller)
will maintain custody of the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Trustee in the Contracts, the Depositor will cause
UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Company to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See 'Certain Legal Aspects of the Contracts.'
While the Contract documents will not be reviewed by the Trustee or the
Master Servicer, if the Master Servicer finds that any such document is missing
or defective in any material respect, the Master Servicer shall immediately
notify the Depositor and the relevant Asset Seller. If the Asset Seller cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be obligated, within a specified number of
days of receipt of such notice, to repurchase the related Contract from the
Trustee at the Purchase Price or substitute for such Contract. There can be no
assurance that an Asset Seller will fulfill this repurchase or substitution
obligation, and neither the Master Servicer nor the Depositor will be obligated
to repurchase or substitute for such Contract if the Asset Seller defaults on
its obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a 'clearing corporation'
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of a financial intermediary in the name of the Trustee
for the benefit of the Certificateholders. Unless otherwise provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause any MBS and Government Securities in
certificated form not registered in the name of the Trustee to be re-registered,
with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan or Contract, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the 'Warranting Party') covering, by way of
example, the following types of matters: (i) the accuracy of the information set
forth for such Whole Loan or Contract on the schedule of Assets appearing as an
exhibit to the related Agreement; (ii) in the case of a Whole Loan, the
existence of title insurance insuring the lien priority of the Whole Loan and,
in the case of a Contract, that the Contract creates a valid first security
interest in or lien on the related Manufactured Home; (iii) the authority of the
Warranting Party to sell the Whole Loan or Contract; (iv) the payment status of
the Whole Loan or Contract; (v) in the case of a Whole Loan, the existence of
customary provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the security of the
Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property or Manufactured Home.
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Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan or Contract
may have been made as of a date prior to the applicable Cut-off Date. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the related series of Certificates evidencing an interest in
such Whole Loan or Contract. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Warranting Party will be obligated to reimburse the Trust Fund for
losses caused by any such breach or either cure such breach or repurchase or
replace the affected Whole Loan or Contract as described below. Since the
representations and warranties may not address events that may occur following
the date as of which they were made, the Warranting Party will have a
reimbursement, cure, repurchase or substitution obligation in connection with a
breach of such a representation and warranty only if the relevant event that
causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan or Contract
that materially and adversely affects the value of such Whole Loan or Contract
or the interests therein of the Certificateholders. If such Warranting Party
cannot cure such breach within a specified period following the date on which
such party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan or Contract from the Trustee within a
specified period from the date on which the Warranting Party was notified of
such breach, at the Purchase Price therefor. As to any Whole Loan or Contract,
unless otherwise specified in the related Prospectus Supplement, the 'Purchase
Price' is equal to the sum of the unpaid principal balance thereof, plus unpaid
accrued interest thereon at the Mortgage Rate or Contract Rate from the date as
to which interest was last paid to the due date in the Due Period in which the
relevant purchase is to occur, plus certain servicing expenses that are
reimbursable to the Master Servicer. If so provided in the Prospectus Supplement
for a series, a Warranting Party, rather than repurchase a Whole Loan or
Contract as to which a breach has occurred, will have the option, within a
specified period after initial issuance of such series of Certificates, to cause
the removal of such Whole Loan or Contract from the Trust Fund and substitute in
its place one or more other Whole Loans or Contracts, as applicable, in
accordance with the standards described in the related Prospectus Supplement. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan or Contract as to which a
breach has occurred, will have the option to reimburse the Trust Fund or the
Certificateholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan or Contract if a Warranting Party defaults on its obligation to do
so, and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans or Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not 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.'
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COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the 'Collection Account'), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
('FDIC') (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ('Permitted Investments'). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held therein
may be invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust
Fund (to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and Mortgage
Note) (collectively, 'Insurance Proceeds') and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans
in the Trust Fund, by foreclosure or otherwise ('Liquidation Proceeds'),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under 'Description of Credit Support';
(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';
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(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;
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(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under 'Certain Matters Regarding a Master Servicer and the
Depositor';
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under 'Certain
Matters Regarding the Trustee';
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under 'Certain Federal Income Tax Consequences--
REMICS--Prohibited Transactions Tax and Other Taxes';
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by 'Assignment of Assets; Repurchase' and
'Representations and Warranties; Repurchases' or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under '--Deposits' above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under '--Withdrawals' above, may also be
withdrawn from any such collection 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.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans or
manufactured housing contracts comparable to the Contracts and held for its own
account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under 'Description of Credit Support,' (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
'Servicing Standard'). In connection therewith, the Master Servicer will be
permitted in its discretion to waive any late payment charge or penalty interest
in respect of a late payment on a Whole Loan or Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties or Manufactured Homes under certain circumstances; and maintaining
accounting records relating to the Whole Loans or Contracts. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole Loans
or Contracts under any applicable instrument of Credit Support. See 'Description
of Credit Support.'
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan or Contract in a manner consistent with the Servicing Standard so
long as the modification, waiver or amendment will not (i) affect the amount or
timing of any scheduled payments of principal or interest on the Whole Loan or
Contract or (ii) in its judgment, materially impair the security for the Whole
Loan or Contract or reduce the likelihood of timely payment of amounts due
thereon. The Master Servicer also may agree to any modification, waiver or
amendment that would so affect or impair the payments on, or the security for, a
Whole Loan or Contract if, unless otherwise provided in the related Prospectus
Supplement, (i) in its judgment, a material default on the Whole Loan or
Contract has occurred or a payment default is imminent and (ii) in its judgment,
such modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Whole Loan or Contract on a present value basis
than would liquidation. The Master Servicer is required to notify the Trustee in
the event of any modification, waiver or amendment of any Whole Loan or
Contract.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a Mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Multifamily Property and take such other actions as are consistent
with the related Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Loan, the Multifamily Property, the Mortgagor, the presence of an acceptable to
party to assume the Multifamily Loan and the laws of the jurisdiction in which
the Multifamily Property is located.
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SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans or Contracts to third-party servicers (each, a 'Sub-Servicer'), but
such Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
'Sub-Servicing Agreement') must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans or Contracts. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See 'Retained Interest; Servicing Compensation
and Payment of Expenses.'
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan or Contract which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if cure
is likely, inspect the Mortgaged Property or Manufactured Home and take such
other actions as are consistent with the Servicing Standard. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans or
Contracts may grant to the Master Servicer and/or the holder or holders of
certain classes of Securities a right of first refusal to purchase from the
Trust Fund at a predetermined purchase price any such Whole Loan or Contract as
to which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under 'Representations and
Warranties; Repurchases.'
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Whole Loan
or Contract. In the absence of any bid determined in accordance with the related
Agreement to be fair, the Master Servicer shall proceed with respect to such
defaulted Mortgage Loan or Contract as described below. Any bid in an amount at
least equal to the Purchase Price described under 'Representations and
Warranties; Repurchases' will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise and may at any
time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Whole Loan or
Contract has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to two
years after
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its acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Certificate is outstanding. Subject to the foregoing, the Master
Servicer will be required to (i) solicit bids for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See 'Certain Legal Aspects of Mortgage
Loans--Foreclosure.'
If recovery on a defaulted Whole Loan or Contract under any related
instrument of Credit Support is not available, the Master Servicer nevertheless
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan or Contract. If the proceeds of any liquidation of the property
securing the defaulted Whole Loan or Contract are less than the outstanding
principal balance of the defaulted Whole Loan or Contract plus interest accrued
thereon at the Mortgage Rate or Contract Rate, as applicable, plus the aggregate
amount of expenses incurred by the Master Servicer in connection with such
proceedings and which are reimbursable under the Agreement, the Trust Fund will
realize a loss in the amount of such difference. The Master Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
the Liquidation Proceeds recovered on any defaulted Whole Loan or Contract,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts representing its normal servicing compensation on the Whole Loan or
Contract, unreimbursed servicing expenses incurred with respect to the Whole
Loan or Contract and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan or Contract.
If any property securing a defaulted Whole Loan or Contract is damaged the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Whole Loan or Contract
after reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans or Contracts, a Master Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Whole Loans or Contracts.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan or Contract, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan or Contract, unreimbursed servicing expenses incurred with
respect to the Whole Loan or Contract and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan or Contract. See 'Hazard
Insurance Policies' and 'Description of Credit Support.'
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
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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
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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.
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Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Certificates will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Certificates
evidencing interests in a Trust Fund that includes Whole Loans or Contracts may
provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification fees,
late payment charges or Prepayment Premiums collected from mortgagors and any
interest or other income which may be earned on funds held in the Collection
Account or any account established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Certificateholders, and payment of any other expenses described in
the related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans or Contracts
and, to the extent so provided in the related Prospectus Supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans or
Contracts in the related Trust Fund during such period prior to their respective
due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for the Federal
Home Loan Mortgage Corporation ('FHLMC') or such other program used by the
Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other program, requires it to report. In rendering its
statement such firm may rely, as to matters relating to the direct servicing of
mortgage loans by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC or such other program used by such Sub-Servicer (rendered within one year
of such statement) of firms of independent public accountants with respect to
the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans or Contracts under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the
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Depositor or the Depositor's affiliates. Reference herein to the Master Servicer
shall be deemed to be to the servicer of substantially all of the Whole Loans or
Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided, however, that neither
a Master Servicer, the Depositor nor any such person will be protected against
any breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans or Contract or Contracts (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the related
Agreement. In addition, each Agreement will provide that neither any Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a Trust
Fund that includes Whole Loans or Contracts, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to Securityholders, any
required payment that continues after a grace period, if any; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for 30 days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the
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Depositor and the Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights; (iii) any breach of a representation or warranty made
by the Master Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues unremedied for 30
days after written notice of such breach has been given to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights; and (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by or on behalf of the Master Servicer indicating its insolvency or inability to
pay its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the later
of 60 days after the occurrence of any event which constitutes or, with notice
or lapse of time or both, would constitute an Event of Default and five days
after certain officers of the Trustee become aware of the occurrence of such an
event, transmit by mail to the Depositor and all Securityholders of the
applicable series notice of such occurrence, unless such default shall have been
cured or waived.
The manner of determining the 'Voting Rights' of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans or Contracts, or if
the related Prospectus Supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus Supplement,
in the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under 'Events of Default under the Agreement' may be
waived only by all of the Securityholders. Upon any such waiver of an Event of
Default, such Event of Default shall cease to exist and shall be deemed to have
been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 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
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covered by such Agreement, unless such Securityholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of Securities covered by the Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related Prospectus Supplement, (iii) to make any other provisions with respect
to matters or questions arising under the Agreement which are not materially
inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not (as evidenced by an opinion of counsel to such effect)
adversely affect in any material respect the interests of any holder of
Securities covered by the Agreement. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer, if any, and the Trustee, with the consent of the holders of
Securities affected thereby evidencing not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
for any purpose; provided, however, that unless otherwise specified in the
related Prospectus Supplement, no such amendment may (i) reduce in any manner
the amount of or delay the timing of, payments received or advanced on Mortgage
Loans or Contracts which are required to be distributed on any Security without
the consent of the holder of such Security or (ii) reduce the consent
percentages described in this paragraph without the consent of the holders of
all Securities covered by such Agreement then outstanding. However, with respect
to any series of Certificates as to which a REMIC election is to be made, the
Trustee will not consent to any amendment of the Agreement unless it shall first
have received an opinion of counsel to the effect that such amendment will not
result in the imposition of a tax on the related Trust Fund or cause the related
Trust Fund to fail to qualify as a REMIC at any time that the related
Certificates are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not
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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
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distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes of a series following an Event of Default, other than a default in the
payment of any principal or interest on any Note of such series for thirty (30)
days or more, unless (a) the holders of 100% (or such other percentage specified
in the related Prospectus Supplement) of the then aggregate outstanding amount
of the Notes of such series consent to such sale, (b) the proceeds of such sale
or liquidation are sufficient to pay in full the principal of and accrued
interest, due and unpaid, on the outstanding Notes of such series at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
(or such other percentage specified in the related Prospectus Supplement) of the
then aggregate outstanding amount of the Notes of such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders would be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge Indenture. The Indenture will be discharged with respect to a
series of Notes (except with respect to certain continuing rights specified in
the Indenture) upon the delivery to the Indenture Trustee for cancellation of
all the Notes of such series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
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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.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities Credit Support will not provide protection against all risks of
loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
'Covered Trust'), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See 'Special Considerations--Credit Support Limitations.'
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Assets prior
to distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Assets within the Trust Fund. The Prospectus Supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans or Contracts in the related Trust Fund will be covered for various
default risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a
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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.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See 'Description
of the Trust Funds--Assets.'
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as 'mortgages.' Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, 'mortgagor' includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
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
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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
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collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See 'Foreclosure--Cooperative
Loans' below.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state 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,
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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
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foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than two years. Unless otherwise
provided in the related Prospectus Supplement, with respect to a series of
Securities for which an election is made to qualify the Trust Fund or a part
thereof as a REMIC, the Agreement will permit foreclosed property to be held for
more than two years if the Internal Revenue Service grants an extension of time
within which to sell such property or independent counsel renders an opinion to
the effect that holding such property for such additional period is permissible
under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative 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
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conducted in a 'commercially reasonable' manner will depend on the facts in each
case. In determining commercial reasonableness, a court will look to the notice
given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See '--Foreclosure' herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or 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
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obtaining a large deficiency judgment against the former mortgagor as a result
of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
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
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a Mortgaged Property securing a Mortgage Loan in a Trust Fund was acquired by
the Trust Fund and cleanup costs were incurred in respect of the Mortgaged
Property, the holders of the related series of Certificates might realize a loss
if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, 'due-on-sale' clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a 'due-on-sale' clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a 'due-on-sale' clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-occupied,
it is anticipated that prepayment charges may not be imposed with respect to
many of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirement of
such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
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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.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (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.
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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
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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.
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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.
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TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF 'DUE-ON-SALE' CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer expects that it will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the 'due-on-sale' clause. The Garn-St Germain Depositary Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of 'due-on-sale' clauses applicable to the Manufactured
Homes. Consequently, in some states the Master Servicer may be prohibited from
enforcing a 'due-on-sale' clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ('Title V'), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP, counsel to the Depositor. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department (the 'REMIC Regulations'), rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change either prospectively or retroactively. This summary does
not address the federal income tax consequences of an investment in Securities
applicable to all categories of investors, some of which (for example, banks and
insurance companies) may be subject to special rules. Prospective investors
should consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Securities.
Unless otherwise stated or unless the context otherwise requires, in the
following discussion a reference to the term 'Mortgage Loan' or 'Mortgage Asset'
will also be deemed to include a reference to a 'Contract'.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If 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
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to the Master Servicer are deemed to exceed reasonable servicing compensation,
the amount of such excess could be considered as an ownership interest retained
by the Master Servicer (or any person to whom the Master Servicer assigned for
value all or a portion of the servicing fees) in a portion of the interest
payments on the Mortgage Assets. The Mortgage Assets would then be subject to
the 'coupon stripping' rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans (not including Contracts, Unsecured Home Improvement Loans, SBA
Loans or SBA 504 Loans), Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a 'domestic building and
loan association' within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Assets will be
considered to represent 'loans ... secured by an interest in real property
which is ... residential property' within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code
section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent 'real estate assets' within the meaning of Code Section
856(c)(5)(A), and interest income on the Mortgage Assets will be considered
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(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
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advisors with respect to the characterization of investments in Grantor Trust
Certificates representing an interest in a Trust Fund that includes Buydown
Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ('OID') (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the 'OID Regulations'), will be applicable to a Grantor
Trust Certificateholder's interest in those Mortgage Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges by the originator of the mortgages in an amount greater than a
statutory de minimis exception to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided by
the lender. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See '--Multiple Classes of Grantor
Trust Certificates--Accrual of Original Issue Discount' below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a 'market discount.'
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such 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.
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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
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Certificates'), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
'Stripped Coupon Certificates').
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See '--Non-REMIC Certificates' and 'Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons' herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an interest in Mortgage Assets issued on the day such Certificate
is purchased for purposes of calculating any OID. Generally, if the discount on
a Mortgage Asset is larger than a de minimis amount (as calculated for purposes
of the OID rules) a purchaser of such a Certificate will be required to accrue
the discount under the OID rules of the Code. See '--Non-REMIC Certificates' and
'--Single Class of Grantor Trust Certificates--Original Issue Discount' herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the Mortgage Assets as market discount rather than OID if
either (i) the amount of OID with respect to the Mortgage Assets is treated as
zero under the OID de minimis rule when the Certificate was stripped or (ii) no
more than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
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)(5)(A)
and 'loans ... secured by, an interest in real property which is ... residential
real property' within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Grantor Trust Certificates should be considered
to represent 'interest on obligations secured by mortgages on
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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.
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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.
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C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a 'capital asset' within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Grantor Trust Certificates will be 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Grantor Trust Certificate evidences ownership
in Mortgage Assets issued after July 18, 1984, by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to Mortgage
Assets 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.
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REMICS
THE DISCUSSION UNDER THIS HEADING 'REMICS' DOES NOT APPLY TO ANY TRUST FUND
CONTAINING UNSECURED HOME IMPROVEMENT LOANS, SBA LOANS OR SBA 504 LOANS.
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however '--Taxation of Owners of REMIC Residual Certificates' and
'--Prohibited Transactions' below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under 'Taxation of Owners of REMIC
Residual Certificates,' the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the 'REMIC
Certificates') may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ('REMIC Regular Certificates') or a sole class of residual
interests ('REMIC Residual Certificates') in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) 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)(5)(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)(5)(A), and REMIC Certificates held by a regulated investment
company will not constitute 'Government Securities' within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1).
A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC
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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)(5)(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
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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
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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
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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
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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
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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.
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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
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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.
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.
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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
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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,
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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 of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, 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
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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.
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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.
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TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization.' The amount of the tax equals the product of (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
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taxes accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A transferor is
presumed not to have such knowledge if (i) the transferor conducted a reasonable
investigation of the transferee and (ii) the transferee acknowledges to the
transferor that the residual interest may generate tax liabilities in excess of
the cash flow and the transferee represents that it intends to pay such taxes
associated with the residual interest as they become due. If a transfer of a
Noneconomic REMIC Residual Certificate is disregarded, the transferor would
continue to be treated as the owner of the REMIC Residual Certificate and would
continue to be subject to tax on its allocable portion of the net income of the
REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a 'tax avoidance potential' to a 'foreign
person' will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and the
foreign transferor will continue to be treated as the owner, if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions.
The provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed 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
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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,
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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
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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. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a
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constructive termination occurs. As a result, the Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust Fund might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, 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.
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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 entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
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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 and
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 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 taken 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 the 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
Old 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 includable 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 from
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
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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 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 States 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.
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The Small Business Job Protection Act of 1996 changed the definition of a
'foreign' trust. Under prior law, the definition was based on whether a trust's
foreign source income would be subject to U.S. tax. The new definition contains
two objective requirements which, if satisfied, will cause a trust to be treated
as a U.S. trust. It looks first to whether the trust's administration is subject
to a U.S. court's 'primary supervision' and second to whether U.S. fiduciaries
control all substantial decisions of the trust. If both these requirements are
met, the trust is a U.S. trust. All other trusts are 'foreign' trust.
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 Trust of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trust 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
non-resident aliens who provide certification as to their status as non-
residents). 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 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.
RECENT LEGISLATION
During 1996, President Clinton signed into law the 'Small Business Job
Protection Act of 1996' (the 'Act'). The Act creates a new type of entity for
federal income tax purposes called a 'financial asset securitization investment
trust' or 'FASIT.' Beginning in September of 1997, the Act generally enables
certain arrangements similar to a Trust Fund that is treated as a partnership to
elect to be treated as a FASIT. Under the Act, a FASIT generally would avoid
federal income taxation and could issue securities substantially similar to the
Certificates and Notes, and those securities would be treated as debt for
federal income tax purposes. If so provided in the related Prospectus
Supplement, the Agreement, the Trust Agreement and/or the Indenture will set
forth certain conditions which, if satisfied, will permit the Depositor to amend
such Agreement, Trust Agreement and/or Indenture in order to enable all or a
portion of the Trust Fund to qualify as a FASIT and to permit a FASIT election
to be made with respect thereto, and to make such modifications to such
Agreement, Trust Agreement and/or Indenture as may be permitted by reason of the
making of such an election. However, the Depositor may, but is not obligated to,
cause a FASIT election and there can be no assurance that the Depositor will or
will not cause any permissible FASIT election to be made with respect to a Trust
Fund or amend the related Agreement, Trust Agreement and/or the Indenture in
connection with any election. Furthermore, any such election will be made only
if an opinion of federal tax counsel or special federal tax counsel is rendered
that such election will not have material adverse federal income consequences to
any holder of a Note or Certificate.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans') and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 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.
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One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interest' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21,459 (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. The Exemption does not
apply to Certificates evidencing an interest in a Trust Fund containing
Unsecured Home Improvement Loans, SBA Loans or SBA 504 Loans. With respect to a
series of Notes, the related Prospectus Supplement will discuss whether the
Exemption may be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Inc., Fitch Investors Service
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.
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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 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
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this connection, federal credit unions should review the National Credit Union
Administration ('NCUA') Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which includes guidelines to assist federal credit unions
in making investment decisions for mortgage related securities, and the NCUA's
regulation 'Investment and Deposit Activities' (12 C.F.R. Part 703), which sets
forth certain restrictions on investment by federal credit unions in mortgage
related securities.
Institutions where investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ('FDIC'), the Office of Thrift Supervision
('OTS'), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the 'Policy Statement') setting forth
guidelines for and significant restrictions on investments in 'high-risk
mortgage securities.' The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, 'Mortgage
Derivative Products and Mortgage Swaps,' which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain 'high-risk' mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise 'troubled' institutions. According to the
bulletin, such 'high-risk' mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the 'Model Law') which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute 'mortgage
related securities' under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
Except as to the status of SMMEA Securities identified in the Prospectus
Supplement for a series as 'mortgage related securities' under SMMEA, the
Depositor will make no representations as to the proper characterization of the
Offered Certificates for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase any Offered
Certificates under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Offered
Securities) may adversely affect the liquidity of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying.'
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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. In such event, the Prospectus Supplement
may also specify that the underwriters will not be obligated to pay for any
Offered Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or from
purchasers of Offered Securities in the form of discounts, concessions or
commissions. The Prospectus Supplement will describe any such compensation paid
by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch acting as agent or in some cases
as principal with respect to Offered Securities that it has previously purchased
or agreed to purchase. If Merrill Lynch acts as agent in the sale of Offered
Securities, Merrill Lynch will receive a selling commission with respect to such
Offered Securities, depending on market conditions, expressed as a percentage of
the aggregate Certificate Balance or notional amount of such Offered Securities
as of the Cut-off Date. The exact percentage for each series of Securities will
be disclosed in the related Prospectus Supplement. To the extent that Merrill
Lynch elects to purchase Offered Securities as principal, Merrill Lynch may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
Offered Securities will often be sold primarily to institutional investors.
Purchasers of Offered Securities, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be 'underwriters' within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Offered Securities. Securityholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time in private
transactions.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will
109
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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 mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
---------------------------------------- -----------------
Accrual Securities...................... 11, 35
Accrued Security Interest............... 38
Agreement............................... 44
ARM Loans............................... 20, 89
Asset Seller............................ 23
Assets.................................. 1, 22
Available Distribution Amount........... 36
Balloon Mortgage Loans.................. 18
Book-Entry Securities................... 36
Buydown Mortgage Loans.................. 33
Buydown Period.......................... 33
Cash Flow Agreement..................... 10, 29
Cede.................................... 3, 43
Certificate............................. 45
Certificate Account..................... 49
Certificateholders...................... 3
Code.................................... 13
Collection Account...................... 49
Commission.............................. 3
Contract Group.......................... 11
Contracts............................... 1
Contributions Tax....................... 106
Cooperatives............................ 23
Covered Trust........................... 21, 65
CPR..................................... 32
Credit Support.......................... 1, 9, 29
Cut-off Date............................ 12
Deferred Interest....................... 90
Definitive Securities................... 36, 43
Depositor............................... 23
Determination Date...................... 36
Distribution Date....................... 11
DTC..................................... 3, 42
Due Period.............................. 36
ERISA................................... 15, 119
Exchange Act............................ 4
Exemption............................... 120
FDIC.................................... 49, 122
Government Securities................... 1, 8, 22
Grantor Trust Certificates.............. 13
Home Equity Loan........................ 7, 24
Home Improvement Contract............... 24
Indenture............................... 35
Indenture Trustee....................... 44
Indirect Participants................... 43
Insurance Proceeds...................... 49
L/C Bank................................ 66
Legislative History..................... 89
Liquidation Proceeds.................... 49, 50
Loan-to-Value Ratio..................... 23
111
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
---------------------------------------- -----------------
Lock-out Date........................... 25
Lock-out Period......................... 25
Manufactured housing contracts.......... 19
Master Servicer......................... 6
MBS..................................... 1, 6, 22
MBS Agreement........................... 25
MBS Issuer.............................. 25
MBS Servicer............................ 25
MBS Trustee............................. 25
Merrill Lynch........................... 124
Mortgage Assets......................... 1
Mortgage Loan Group..................... 11
Mortgage Loans.......................... 1, 6, 22
Mortgage Notes.......................... 23
Mortgage Participations................. 1
Mortgage Rate........................... 7, 24
Mortgages............................... 23
Multifamily Mortgage Loan............... 23
Multifamily Property.................... 23
Nonrecoverable Advance.................. 40
Notes................................... 1, 6
Offered Securities...................... 1
OID..................................... 84
OID Regulations......................... 86
Originator.............................. 23
Participants............................ 43
Pass-Through Rate....................... 10, 37
Permitted Investments................... 49
Plans................................... 119
Pooling and Servicing Agreement......... 44
Pre-Funded Amount....................... 10
Pre-Funding Account..................... 10
Prepayment Assumption................... 89
Prepayment Premium...................... 25
Purchase Price.......................... 48
Rating Agency........................... 15
Record Date............................. 36
Refinance Loans......................... 23
Related Proceeds........................ 39
Relief Act.............................. 78
REMIC Certificates...................... 92
REMIC Regular Certificates.............. 13, 92
REMIC Regulations....................... 83
REMIC Residual Certificates............. 13, 92
Restricted Group........................ 121
Restained Interest...................... 58
SBA..................................... 8, 27
SBA 504 Loan............................ 8
SBA 504 Loan Program.................... 8
SBA 504 Loans........................... 8
SBA Act................................. 8, 27
112
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
---------------------------------------- -----------------
SBA Loan................................ 8, 27
SBA Loans............................... 8
Section 7(a) Program.................... 8, 27
Securities.............................. 1, 6
Security Balance........................ 10, 38
Security Owners......................... 42
Securityholders......................... 22
Senior Securities....................... 11, 35
Servicing Agreement..................... 44
Servicing Standard...................... 52
Single Family Mortgage Loan............. 23
Single Family Property.................. 23
SMMEA................................... 15, 122
SMMEA Securities........................ 122
SPA..................................... 32
Stripped ARM Obligations................ 90
Stripped Interest Certificates.......... 11, 35
Stripped Principal Securities........... 11, 35
Sub-Servicer............................ 53
Sub-Servicing Agreement................. 53
Subordinate Securities.................. 11, 35
Subsequent Assets....................... 10
Title V................................. 77
Trust Agreement......................... 44, 45
Trust Assets............................ 3
Trust Fund.............................. 1
Trustee................................. 6
UCC..................................... 78
Underlying MBS.......................... 23
Underlying Mortgage Loans............... 23
Unsecured Home Improvement Loans........ 1, 7, 23
Value................................... 23
Voting Rights........................... 60
Warranting Party........................ 47
Whole Loans............................. 23
113
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE SINCE THE DATE HEREOF. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION.
------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement..................... S-4
Risk Factors......................................... S-17
The Master Servicer and the Mortgage Loan Seller..... S-19
The Mortgage Pool.................................... S-20
Yield on the Certificates............................ S-27
Description of the Certificates...................... S-38
Pooling and Servicing Agreement...................... S-50
Certain Federal Income Tax Consequences.............. S-55
Use of Proceeds...................................... S-56
Underwriting......................................... S-56
Legal Matters........................................ S-57
Ratings.............................................. S-58
Legal Investment..................................... S-58
ERISA Considerations................................. S-59
Appendix A........................................... S-61
PROSPECTUS
Prospectus Supplement................................ 2
Available Information................................ 3
Incorporation of Certain Information by Reference.... 3
Summary of Prospectus................................ 5
Special Considerations............................... 13
Description of the Trust Funds....................... 19
Use of Proceeds...................................... 25
Yield Considerations................................. 25
The Depositor........................................ 29
Description of the Securities........................ 30
Description of the Agreements........................ 38
Description of Credit Support........................ 57
Certain Legal Aspects of Mortgage Loans.............. 59
Certain Legal Aspects of the Contracts............... 69
Certain Federal Income Tax Consequences.............. 73
State Tax Considerations............................. 105
ERISA Considerations................................. 105
Legal Investment..................................... 107
Plan of Distribution................................. 109
Legal Matters........................................ 110
Financial Information................................ 110
Rating............................................... 110
Index of Principal Definitions....................... 111
------------------------
UNTIL THE EXPIRATION OF 90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN WHICH IT RELATES. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTON.
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$300,096,000
FIRST FRANKLIN
MORTGAGE LOAN ASSET BACKED
CERTIFICATES, SERIES 1997-FF3
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
[LOGO OF FIRST FRANKLIN FINANCIAL CORPORATION]
FIRST FRANKLIN FINANCIAL CORPORATION
MORTGAGE LOAN SELLER
AND MASTER SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
DATED NOVEMBER 24, 1997
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