REGISTRATION NO. 333-38073
As filed with the Securities and Exchange Commission on June 23, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MERRILL LYNCH MORTGAGE INVESTORS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3416059
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
WORLD FINANCIAL CENTER
NORTH TOWER - 15TH FLOOR
250 VESEY STREET
NEW YORK, NEW YORK 10281-1315
(212) 449-0336
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(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive office)
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JEFFREY W. KRONTHAL
MERRILL LYNCH MORTGAGE INVESTORS, INC.
WORLD FINANCIAL CENTER
NORTH TOWER-10TH FLOOR
250 VESEY STREET
NEW YORK, NEW YORK 10281-1315
(212) 449-0336
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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with copies to:
RICHARD D. RUDDER, ESQ.
WILLKIE FARR & GALLAGHER
787 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
(212) 728-8000
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement, determined in
light of market and other conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum Amount
Aggregate Aggregate of
Title of Each Class of Amount to be Price per Offering Registration
Securities to be Registered Registered(1)(2) Unit(3) Price(3) Fee
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Mortgage Pass-Through
Certificates, issued in
series................ $1,000,000(3) 100% $1,000,000(1) $295
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(1) $2,982,452,000 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-38073 referred to below and not previously sold are consolidated in
this Registration Statement pursuant to Rule 429. All registration fees in
connection with such unsold amount of Mortgage Pass-Through Certificates
have been previously paid by the Registrant under the foregoing
Registration Statement.
(2) There is also being registered hereunder an indeterminate amount of
Certificates that may be sold by Registrant or any affiliate of Registrant,
including Merrill Lynch, in furtherance of market-making activities in the
Certificates and in connection with which it is necessary under the federal
securities laws to deliver a market-making prospectus.
(3) Estimated solely for purposes of determining the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus and
Prospectus Supplement contained in this Registration Statement also relates to
the Registrant's Registration Statement on Form S-3 (Registration No.
333-38073). This Registration Statement, which is a new registration statement,
also constitutes a post-effective amendment to Registration Statement 333-38073.
Such post-effective amendment shall hereafter become effective concurrently with
the effectiveness of this Registration Statement in accordance with Section 8(a)
of the Securities Act of 1933.
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CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
LOCATION IN
ITEMS AND CAPTIONS IN FORM S-3 PROSPECTUSES
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus ................................. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus**
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page of
of Prospectus ............................................ Prospectus and Outside Back Cover
Page of Prospectus**
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges ......................................... Summaries of Prospectus; Risk Factors
4. Use of Proceeds........................................... Use of Proceeds**
5. Determination of Offering Price........................... *
6. Dilution.................................................. *
7. Selling Security Holders.................................. *
8. Plan of Distribution....................................... Method of Distribution**
9. Description of Securities to Be Registered................. Outside Front Cover Page; Summaries
of Prospectus; Description of the
Trust Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel..................... *
11. Material Changes........................................... Financial Information
12 Incorporation of Certain Information by Reference.......... Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ................................ See page II-2
</TABLE>
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* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
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SUBJECT TO COMPLETION, DATED JUNE 23, 1998
PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED ______, 1998)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199_ -____
$________ CLASS A CERTIFICATES
$________ CLASS B CERTIFICATES
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The Series 199___-____ Mortgage Pass-Through Certificates (the
"Certificates") will consist of four classes (each, a "Class") of Certificates,
designated as the Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class R Certificates. As and to the extent described
herein, the Class B, Class C and Class R Certificates will be subordinate to the
Class A Certificates; and the Class C and Class R Certificates will be
subordinate to the Class B Certificates. Only the Class A and Class B
Certificates (collectively, the "Offered Certificates") are offered hereby. It
is a condition of their issuance that the Class A and Class B Certificates be
rated not lower than "____" and "____", respectively, by _______________
(Continued on next page)
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PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-20 OF THIS PROSPECTUS SUPPLEMENT AND ON
PAGE 18 OF THE PROSPECTUS.
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PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS AFFILIATES. NEITHER
THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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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.
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Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Underwriter"), through one or more of its affiliates, intends to make a
secondary market in the Offered Certificates, but has no obligation to do so.
There can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. See "Risk
Factors--Limited Liquidity" herein.
The Offered Certificates will be purchased by the Underwriter from
the Depositor and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor estimated to be
approximately $_____________, will be ______% of the initial aggregate
Certificate Balance of the Offered Certificates, plus accrued interest.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, to withdrawal, cancellation or modifications of the offer without
notice, to receipt and acceptance by the Underwriter and to certain additional
conditions. It is expected that the Class A Certificates will be delivered in
book-entry form through the Same-Day Funds Settlement System of The Depository
Trust Company and that the Class B Certificates will be delivered at the offices
of the Underwriter, World Financial Center, North Tower, New York, New York
10281, on or about _____________, 199__ (the "Delivery Date"), against payment
therefor in immediately available funds.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is _______, 199_.
Information contained herein is subject to completion or
amendment. Offers to buy these securities may not be accepted
without the delivery of a final prospectus supplement and
prospectus. This prospectus supplement and the accompanying
prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of
these securities in any State in which such offer, solicitation or
sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
<PAGE>
(cover continued)
The Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Fund"), to be
established by Merrill Lynch Mortgage Investors, Inc. (the "Depositor"), that
will consist primarily of a segregated pool (the "Mortgage Pool") of ____
conventional, multifamily, balloon mortgage loans (the "Mortgage Loans"). As of
____________, 199___ (the "Cut-off Date"), the Mortgage Loans had an aggregate
principal balance (the "Initial Pool Balance") of $___________________, after
application of all payments of principal due on or before such date, whether or
not received. The initial principal balance of the Class A Certificates will be
$__________________, which represents _____% of the Initial Pool Balance; and
the initial principal balance of the Class B Certificates will be
$_____________, which represents ___% of the Initial Pool Balance.
The Mortgage Loans provide for monthly payments of principal and/or
interest ("Monthly Payments"), in all cases based on amortization schedules that
are significantly longer than their remaining terms, thereby leaving substantial
principal amounts due and payable on their respective maturity dates. As more
fully described herein, (i) ___ of the Mortgage Loans (the "ARM Loans"), which
represent ______% of the Initial Pool Balance, provide for periodic adjustments
(which may occur monthly, semi-annually or annually) to the respective
annualized rates at which they accrue interest (their "Mortgage Rates") based on
fluctuations in a base index (an "Index") and subject to the limitations
described herein, and (ii) the remaining Mortgage Loans (the "Fixed Rate Loans")
bear interest at fixed Mortgage Rates. Adjustments to the Mortgage Rates on ____
of the ARM Loans (the "COFI ARM Loans"), which represent ______% of the Initial
Pool Balance, are based upon changes in the monthly weighted average cost of
funds of member savings institutions of the Eleventh Federal Home Loan Bank
District (the "COFI Index"). __________________ of the ARM Loans, which
represent ___% of the Initial Pool Balance, provide for Monthly Payment
adjustments that occur less frequently than Mortgage Rate adjustments and/or
payment caps that limit the amount by which a Monthly Payment can change in
response to a change in the Mortgage Rate, which in either case may result in
Monthly Payments that are greater or less than the amount necessary to amortize
the loan fully over its remaining amortization term and pay interest at the then
applicable Mortgage Rate. Consequently, those ARM Loans (and, accordingly, the
Offered Certificates) may from time to time be subject to periods of
accelerated, slower or negative amortization.
All of the Mortgage Loans are currently held by _____________ (the
"Mortgage Loan Seller"), which either originated the Mortgage Loans or acquired
them from their respective originators. On or before the date of initial
issuance of the Certificates, the Depositor will acquire the Mortgage Loans from
the Mortgage Loan Seller and will transfer them to the Trustee in exchange for
the Certificates.
Distributions of interest on and principal of the Certificates will
be made, to the extent of available funds, on the 25th day of each month or, if
any such 25th day is not a business day, then on the next succeeding business
day, beginning in _____________ 199____ (each, a "Distribution Date"). As more
fully described herein, distributions allocable to interest accrued on each
Class of Offered Certificates will be made on each Distribution Date based on
the variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rates
for the Class A and Class B Certificates applicable to the first Distribution
Date will be _________% and ________% per annum, respectively. Subsequent to the
initial Distribution Date, the Pass-Through Rate for the Class A Certificates
will equal from time to time monthly LIBOR plus ______ basis points, subject to
a maximum of _____% per annum and a minimum of ______% per annum; except when
such rate exceeds a "funds-available cap rate" calculated as described herein,
at which time the Pass-Through Rate for the Class A Certificates will equal the
weighted average of, subject to certain adjustments described herein, the Net
Mortgage Rates on the Mortgage Loans. Subsequent to the initial Distribution
Date, the Pass-Through Rate for the Class B Certificates will equal from time to
time the weighted average of, subject to certain adjustments described herein,
the Net Mortgage Rates on the Mortgage Loans. The Net Mortgage Rate for any
Mortgage Loan is its Mortgage Rate less _____ basis points. Distributions
allocable to principal of each Class of Offered Certificates will be made in the
amounts and in accordance with the priorities described herein. See "Description
of the Certificates--Distributions" herein.
The yield to maturity on each Class of Offered Certificates will
depend on, among other things, fluctuations in its respective Pass-Through Rate
and the rate and timing of principal payments (including by reason of
prepayments, defaults and liquidations) on the Mortgage Loans. See "Yield and
Maturity Considerations" herein and "Yield Considerations" and "Risk
Factors--Average Life of Certificates; Prepayments; Yields" in the Prospectus.
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Offered Certificates and the Class C Certificates (collectively, the "REMIC
Regular Certificates") will constitute "regular interests", and the Class R
Certificates will constitute the sole class of "residual interests", in the
Trust Fund. See "Material Federal Income Tax Consequences" herein and in the
Prospectus.
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THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE OFFERED
CERTIFICATES. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
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UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
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TABLE OF CONTENTS
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PAGE
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SUMMARY OF PROSPECTUS SUPPLEMENT ................................................................. S-5
RISK FACTORS ..................................................................................... S-20
Certain Risk Factors Associated With the Certificates........................................... S-20
Limited Liquidity for Offered Certificates.................................................... S-20
Certain Yield and Maturity Considerations .................................................... S-20
Mortgage Loan Repayment Considerations........................................................ S-21
Certain Risk Factors Associated With the Mortgage Loans......................................... S-21
Risks of Lending on Income-Producing Properties .............................................. S-21
Limited Recourse on Mortgage Loans............................................................ S-22
Environmental Law Considerations ............................................................. S-22
Geographic Concentration of Properties Increasing Isolated Geographic Risk.................... S-22
Concentration of Mortgage Loans and Borrowers Increasing Single Borrower Risk................. S-22
Adjustable Rate Mortgage Loans; Negative Amortization May Cause Higher Default Rate........... S-23
Balloon Payments on Mortgage Loans; Heightened Risk of Borrower Default....................... S-23
DESCRIPTION OF THE MORTGAGE POOL ................................................................. S-23
General ........................................................................................ S-23
Certain Payment Characteristics ................................................................ S-24
The Eleventh District Cost of Funds Index ...................................................... S-25
Additional Mortgage Loan Information ........................................................... S-26
The Mortgage Loan Seller ....................................................................... S-32
General ...................................................................................... S-32
Delinquency and Foreclosure Experience ....................................................... S-32
Underwriting Standards ......................................................................... S-33
Assignment of the Mortgage Loans; Repurchase ................................................... S-33
Representations and Warranties; Repurchases .................................................... S-34
Changes in Mortgage Pool Characteristics ....................................................... S-35
SERVICING OF THE MORTGAGE LOANS .................................................................. S-35
General ........................................................................................ S-35
The Master Servicer ............................................................................ S-36
Servicing and Other Compensation and Payment of Expenses ....................................... S-36
Modifications, Waivers and Amendments .......................................................... S-37
Inspections; Collection of Operating Information ............................................... S-38
Additional Obligations of the Master Servicer with Respect to ARM Loans ........................ S-38
DESCRIPTION OF THE CERTIFICATES .................................................................. S-38
General ........................................................................................ S-38
Distributions .................................................................................. S-40
Method, Timing and Amount .................................................................... S-40
Priority ..................................................................................... S-40
Pass-Through Rates ........................................................................... S-42
Determination of LIBOR ....................................................................... S-42
Distributable Certificate Interest ........................................................... S-43
Scheduled Principal Distribution Amount and Unscheduled Principal Distribution Amount ........ S-44
Certain Calculations with Respect to Individual Mortgage Loans ............................... S-44
Subordination .................................................................................. S-45
P&I Advances ................................................................................... S-45
Reports to Certificateholders; Available Information ........................................... S-46
Voting Rights .................................................................................. S-47
Termination .................................................................................... S-47
Trustee ........................................................................................ S-48
S-3
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YIELD AND MATURITY CONSIDERATIONS ................................................................ S-48
Yield Considerations ........................................................................... S-48
General ...................................................................................... S-48
Pass-Through Rate ............................................................................ S-48
Rate and Timing of Principal Payments ........................................................ S-50
Losses and Shortfalls ........................................................................ S-51
Certain Relevant Factors ..................................................................... S-51
Delay in Payment of Distributions ............................................................ S-52
Unpaid Distributable Certificate Interest .................................................... S-52
Weighted Average Life .......................................................................... S-52
USE OF PROCEEDS .................................................................................. S-55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ......................................................... S-55
ERISA CONSIDERATIONS ............................................................................. S-55
LEGAL INVESTMENT ................................................................................. S-57
METHOD OF DISTRIBUTION ........................................................................... S-57
LEGAL MATTERS .................................................................................... S-58
RATING ........................................................................................... S-58
INDEX OF DEFINITIONS ............................................................................. S-59
ANNEX A........................................................................................... S-61
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S-4
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SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement and
in the accompanying Prospectus. Certain capitalized terms used in this summary
may be defined elsewhere in this Prospectus Supplement or in the Prospectus. An
"Index of Definitions" is included at the end of both this Prospectus Supplement
and the Prospectus. Terms that are used but not defined in this Prospectus
Supplement will have the meanings specified in the Prospectus.
Title of Certificates ...............Merrill Lynch Mortgage Investors, Inc.,
Mortgage Pass-Through Certificates,
Series 199__-____ (the "Certificates"),
to be issued in four Classes designated
as the Class A, Class B, Class C and
Class R Certificates. The Class A, Class
B and Class C Certificates are herein
collectively referred to from time to
time as the "REMIC Regular Certificates".
Only the Class A and Class B
Certificates (collectively, the "Offered
Certificates") are offered hereby. The
Class C and Class R Certificates are
herein collectively referred to from time
to time as the "Private Certificates".
Depositor ...........................Merrill Lynch Mortgage Investors, Inc., a
Delaware corporation. The Depositor is a
wholly-owned, limited purpose finance
subsidiary of Merrill Lynch Mortgage
Capital Inc., which is a wholly owned
indirect subsidiary of Merrill Lynch &
Co., Inc. Neither the Depositor nor any
of its affiliates has insured or
guaranteed the Offered Certificates. See
"The Depositor" in the Prospectus.
Issuer ..............................The Trust Fund established under the
Pooling and Servicing Agreement, as they
are described below under "Description of
the Certificates."
Master Servicer .....................______________________________, a
_____________________. The primary
compensation of the Master Servicer for
servicing and administering the Mortgage
Loans will be a monthly fee (the
"Servicing Fee") payable on a
loan-by-loan basis out of related
interest collections equal to the portion
of such collections accrued at a rate
equal to 0.___% per annum (the "Servicing
Fee Rate"). See "Servicing of the
Mortgage Loans--The Master Servicer" and
"--Servicing and Other Compensation and
Payment of Expenses" herein.
Trustee ............................._____________________, a
_______________________. The Master
Servicer will be responsible for the fees
of the Trustee. See "Description of the
Certificates--Trustee" herein.
Mortgage Loan Seller ................________________________, a
__________________________. On or prior
to the Delivery Date, the Depositor will
acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a
Mortgage Loan Purchase Agreement, dated
[the date hereof], between the Depositor
and the Mortgage Loan Seller (the
"Mortgage Loan Purchase Agreement"). In
the Mortgage Loan Purchase Agreement, the
Mortgage Loan Seller has made certain
representations and warranties to the
Depositor regarding the characteristics
and quality of the Mortgage Loans and, as
more particularly described herein, has
agreed to cure any material breach
thereof or repurchase the affected
Mortgage Loan. In connection with the
assignment of its interests in the
Mortgage Loans to the Trustee, the
Depositor will also assign its rights
under the Mortgage Loan Purchase
Agreement insofar as they relate to or
arise out of the Mortgage Loan Seller's
representations and
S-5
<PAGE>
warranties regarding the Mortgage Loans.
See "Description of the Mortgage
Pool--The Mortgage Loan Seller" and
"--Representations and Warranties;
Repurchases" herein.
Cut-off Date ........................___________________, 199__.
Delivery Date .......................___________________, 199__.
Registration of the
Class A Certificates ..............The Class A Certificates will be
represented by one or more global
Certificates registered in the name of
Cede & Co., as nominee of The Depository
Trust Company ("DTC"). No person
acquiring an interest in the Class A
Certificates (any such person, a "Class A
Certificate Owner") will be entitled to
receive a Class A Certificate in fully
registered, certificated form (a
"Definitive Class A Certificate"),
except under the limited circumstances
described in the Prospectus under
"Description of the Certificates--Book
Entry Registration and Definitive
Certificates". Instead, DTC will effect
payments and transfers in respect of the
Class A Certificates by means of its
electronic recordkeeping services, acting
through certain participating
organizations ("Participants"). This
may result in certain delays in receipt
of payments by an investor and may
restrict an investor's ability to pledge
its securities. Unless and until
Definitive Class A Certificates are
issued, all references herein to the
rights of holders of the Class A
Certificates are to the rights of Class A
Certificate Owners as they may be
exercised through DTC and its
Participants, except as otherwise
specified herein. See "Description of the
Certificates--General" herein and
"Description of the
Certificates--Book-Entry Registration and
Definitive Certificates" in the
Prospectus.
Denominations .......................The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of DTC and its
Participants in denominations of $1,000
and in integral multiples thereof. The
Class B Certificates will be issuable in
fully registered, certificated form in
denominations of $____________ and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to
the remainder of the initial Certificate
Balance of such Class.
The Mortgage Pool ...................The Mortgage Pool will consist of _____
conventional, balloon Mortgage Loans with
an Initial Pool Balance of
$_________________. Each Mortgage Loan is
secured by a first mortgage lien on a fee
simple estate in a multifamily rental
property (each, a "Mortgaged Property").
________ of the Mortgage Loans, which
represent _____% of the Initial Pool
Balance, are secured by liens on
Mortgaged Properties located in
_______________. The remaining Mortgaged
Properties are located throughout
___________ other states. See
"Description of the Mortgage
Pool--Additional Mortgage Loan
Information" herein. ___________ of the
Mortgage Loans, which represent ______%
of the Initial Pool Balance, provide for
scheduled payments of principal and/or
interest ("Monthly Payments") to be due
on the first day of each month; the
remainder of the Mortgage Loans provide
for Monthly Payments to be due on the
____, _____, _____ or _____ day of each
month (the date in any month on which a
Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The
annualized rate at which interest accrues
(the "Mortgage Rate") on ____ of the
Mortgage
S-6
<PAGE>
Loans (the "ARM Loans"), which represent
_____% of the Initial Pool Balance, is
subject to adjustment on specified Due
Dates (each such date of adjustment, an
"Interest Rate Adjustment Date") by
adding a fixed number of basis points (a
"Gross Margin") to the value of a base
index (an "Index"), subject, in [most]
cases, to lifetime maximum and/or minimum
Mortgage Rates, and in _____ cases, to
periodic maximum and/or minimum Mortgage
Rates, in each case as described herein;
and the remaining Mortgage Loans (the
"Fixed Rate Loans") bear interest at
fixed Mortgage Rates. ____ of the ARM
Loans, which represent ___% of the
Initial Pool Balance, provide for
Interest Rate Adjustment Dates that occur
monthly, while the remainder of the ARM
Loans provide for adjustments of the
Mortgage Rate to occur semi-annually or
annually. __________ of the ARM Loans
(the "COFI ARM Loans"), which represent
______% of the Initial Pool Balance,
provide for Mortgage Rate adjustments
based on changes in the monthly weighted
average cost of funds of member savings
institutions of the Eleventh Federal Home
Loan Bank District (the "COFI Index");
and the remaining ARM Loans, which
represent _____% of the Initial Pool
Balance, provide for Mortgage Rate
adjustments based on United States
Treasury yield indices (each, a "Treasury
Index"). See "Description of the
Mortgage Pool--Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of
the ARM Loans is subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") generally to
an amount that would amortize the
outstanding principal balance of the
Mortgage Loan over its then remaining
amortization schedule and pay interest at
the then applicable Mortgage Rate,
subject, in the case of [most] of the ARM
Loans, to payment caps ("Payment Caps"),
which limit the amount by which the
Monthly Payment may adjust on any Payment
Adjustment Date as described herein.
_____________ of the ARM Loans, which
represent ________% of the Initial Pool
Balance, provide for Payment Adjustment
Dates that occur annually, while the
remainder of the ARM Loans provide for
adjustments of the Monthly Payment to
occur monthly or semi-annually.
__________ of the ARM Loans, which
represent ___% of the Initial Pool
Balance, have Payment Adjustment Dates
that occur less frequently than Interest
Rate Adjustment Dates and/or provide for
Payment Caps that limit the amount by
which a Monthly Payment can change in
response to a change in the Mortgage
Rate. As a result, the amount of a
Monthly Payment in those cases may be
greater or less than the amount necessary
to amortize the loan fully over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate, and accordingly, those ARM Loans
may be subject to periods of slower
amortization (if the Monthly Payment due
on a Due Date is sufficient to pay
interest accrued to such Due Date at the
applicable Mortgage Rate but is not
sufficient to reduce principal in
accordance with the applicable
amortization schedule), to negative
amortization (if interest accrued to a
Due Date at the applicable Mortgage Rate
is greater than the entire Monthly
Payment due on such Due Date), or to
accelerated amortization (if the Monthly
Payment due on a Due Date is
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<PAGE>
greater than the amount necessary to pay
interest accrued to such Due Date at the
applicable Mortgage Rate and to reduce
principal in accordance with the
applicable amortization schedule). All of
the Mortgage Loans that permit negative
amortization limit the amount by which
the original principal balance may be
exceeded as a result of negative
amortization. In addition, the ARM Loans
with Payment Caps provide by their terms
that the Payment Caps will not be
applicable on specified Payment
Adjustment Dates. No ARM Loan that
permits negative amortization had a
Cut-off Date Balance (that is, a
principal balance as of the Cut-off Date,
after the application of all payments due
on or before such date, whether or not
received) in excess of its original
principal balance.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly
longer than the remaining terms of such
Mortgage Loans, thereby leaving
substantial principal amounts due and
payable (each such payment, a "Balloon
Payment") on their respective maturity
dates, unless prepaid prior thereto.
Loans with Balloon Payments involve a
greater risk to a lender than
self-amortizing loans because the ability
of a borrower to make a Balloon Payment
typically will depend upon its ability to
fully refinance the loan or to sell the
related Mortgaged Property at a price
sufficient to permit the borrower to make
the Balloon Payment. The inability of a
borrower to timely make a Balloon Payment
will constitute a default from which
losses could ensue. Moreover, and whether
or not losses are ultimately sustained,
any delay in the collection of a Balloon
Payment that would otherwise be
distributable in respect of a class of
Offered Certificates will likely extend
the weighted average life of such class.
See "Risk Factors--The Mortgage
Loans--Balloon Payments" herein and "Risk
Factors--Balloon Payments; Borrower
Default" in the Prospectus.
[No Mortgage Loan currently prohibits
voluntary principal prepayments; however,
[certain] of the Mortgage Loans impose
fees or penalties ("Prepayment Premiums")
in connection with full or partial
prepayments.] [____ of the Fixed Rate
Loans, which represent ___% of the
Initial Pool Balance, prohibit voluntary
prepayments of principal for a period (a
"Lock-out Period") ending on a date (a
"Lock-out Expiration Date") specified in
the related Mortgage Note, and impose
fees or penalties ("Prepayment
Premiums") in connection with prepayments
of principal made thereafter]. Prepayment
Premiums are payable to the Master
Servicer as additional servicing
compensation, to the extent not otherwise
applied to offset Prepayment Interest
Shortfalls, and may be waived by the
Master Servicer in accordance with the
servicing standard described under
"Servicing of the Mortgage
Loans--General" herein.
As of the Cut-off Date, the Mortgage Loans
had the following additional
characteristics:
(i) Mortgage Rates ranging from ____%
per annum to ____% per annum, and
a weighted average Mortgage Rate
of _____% per annum;
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<PAGE>
(ii) in the case of the ARM Loans,
Gross Margins ranging from _____
basis points to _____ basis
points, and a weighted average
Gross Margin of _____ basis
points;
(iii) for those ___ ARM Loans as to
which such characteristic
applies, minimum lifetime
Mortgage Rates ranging from ___%
per annum to ___% per annum, and
a weighted average minimum
lifetime Mortgage Rate of ____%
per annum;
(iv) for those ___ ARM Loans as to
which such characteristic
applies, maximum lifetime
Mortgage Rates ranging from ___%
per annum to ___% per annum, and
a weighted average maximum
lifetime Mortgage Rate of ___%
per annum;
(v) Cut-off Date Balances ranging
from $____________ to
$____________, and an average
Cut-off Date Balance of
$____________;
(vi) original terms to scheduled
maturity ranging from ___ months
to ____ months, and a weighted
average original term to
scheduled maturity of ___ months;
(vii) remaining terms to scheduled
maturity ranging from ___ months
to ____ months, and a weighted
average remaining term to
scheduled maturity of ____
months;
(viii) Cut-off Date LTV Ratios (that is,
in each case, a loan-to-value
ratio based upon (a) the Cut-off
Date Balance of the Mortgage
Loan, and (b) the appraised value
of the related Mortgaged Property
determined at the time of
origination of such loan) ranging
from _____% to ____%, and a
weighted average Cut-off Date LTV
Ratio of _____%; and
(ix) Debt Service Coverage Ratios
(calculated as more particularly
described under "Description of
the Mortgage Pool--Additional
Mortgage Loan Information"), for
those ____ Mortgage Loans as to
which the ratios could be so
calculated, ranging from _______x
to ______x, and a weighted
average Debt Service Coverage
Ratio of _______x.
The Mortgage Loans were originated between
19__ and 19__.
Description of the Certificates .....The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer and the
Trustee (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in a trust fund (the "Trust
Fund") consisting of the Mortgage Pool
and certain related assets.
A. Certificate Balance ..............The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. The Class
A Certificates will have an initial
Certificate Balance of $_______________,
which represents ___% of the Initial Pool
Balance; the Class B Certificates will
have an initial Certificate Balance of
$___________, which
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<PAGE>
represents ___% of the Initial Pool
Balance; the Class C Certificates will
have an initial Certificate Balance of
$____________, which represents___% of
the Initial Pool Balance; and the Class R
Certificates will have an initial
Certificate Balance of [zero]. The
Certificate Balance of each Class of
Certificates outstanding at any time
represents the maximum amount that the
holders thereof are entitled to receive
as distributions allocable to principal
from the cash flow on the Mortgage Loans
and other assets in the Trust Fund. As
more specifically described herein, the
Certificate Balance of each Class of
REMIC Regular Certificates will be
adjusted from time to time on each
Distribution Date to reflect any
additions thereto resulting from the
allocation of Mortgage Loan negative
amortization to such Class and any
reductions therein resulting from the
distribution of principal of such Class.
The aggregate amount of monthly Mortgage
Loan negative amortization allocable to
the Certificates on any Distribution Date
is herein referred to as the "Aggregate
Mortgage Loan Negative Amortization" for
such date, and the portion thereof
allocable to any particular Class
constitutes the "Certificate Negative
Amortization" in respect of such Class
for such date. The Certificate Balance of
the Class R Certificates will at all
times equal the excess, if any, of the
aggregate Stated Principal Balance of the
Mortgage Pool, over the aggregate
Certificate Balance of the REMIC Regular
Certificates (such excess, if any, the
"Excess Pool Balance"). See "Description
of the Certificates--General" herein.
Losses experienced with respect to the
Mortgage Loans or otherwise with respect
to the Trust Fund will not be applied to
reduce either the Certificate Balance or
the absolute entitlement to interest of
any Class of REMIC Regular Certificates,
even though such losses may cause one or
more of such Classes to receive less than
the full amount of principal and interest
to which it is entitled. As a result, the
aggregate Stated Principal Balance of the
Mortgage Pool at any time subsequent to
the initial Distribution Date may be less
than the aggregate Certificate Balance of
the REMIC Regular Certificates. Such
deficit will be allocated to the
respective Classes of REMIC Regular
Certificates (in each case to the extent
of its Certificate Balance) in reverse
alphabetical order of their Class
designations (that is, C, B, A). Such
allocation will not reduce the
Certificate Balance of any such Class and
is intended solely to identify the
portion (the "Uncovered Portion") of the
Certificate Balance of each such Class
for which there is at such time no
corresponding principal amount of
Mortgage Loans. See "Description of the
Certificates--Subordination" herein.
The "Stated Principal Balance" of each
Mortgage Loan outstanding at any time
represents the principal balance of such
Mortgage Loan ultimately due and payable
to the Certificateholders and, as more
particularly described herein, will equal
the Cut-off Date Balance thereof,
increased on each Distribution Date by
any negative amortization experienced by
the Mortgage Loan that is allocated to
the Certificates on such date, and
reduced on each Distribution Date
generally by any payments or other
collections (or advances in lieu thereof)
of principal of such Mortgage Loan that
are distributed on the Certificates on
such date. See "Description of the
Certificates
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<PAGE>
--Distributions--Certain Calculations
with Respect to Individual Mortgage
Loans" herein.
B. Pass-through Rates ...............The Pass-Through Rates applicable to the
Class A and Class B Certificates for the
initial Distribution Date will equal
_____% and _____% per annum,
respectively. With respect to any
Distribution Date subsequent to the
initial Distribution Date, the
Pass-Through Rate for the Class A
Certificates will equal LIBOR for such
Distribution Date plus _____ basis
points, subject to a maximum of ____% per
annum and a minimum of ____% per annum;
unless, however, the rate so calculated
exceeds the Funds-Available Cap Rate in
respect of the Class A Certificates for
such Distribution Date, in which case the
Pass-Through Rate for the Class A
Certificates will equal the Weighted
Average Effective Net Mortgage Rate for
such Distribution Date. With respect to
any Distribution Date subsequent to the
initial Distribution Date, the
Pass-Through Rate for the Class B
Certificates will equal the Weighted
Average Effective Net Mortgage Rate for
such Distribution Date.
[The Pass-Through Rate applicable to the
Class C Certificates will equal the
Weighted Average Effective Net Mortgage
Rate for such Distribution Date. The
Class R Certificates will have no
specified Pass-Through Rate.]
"LIBOR" for each Distribution Date will be
the average of the interbank offered
rates for one month United States dollar
deposits in the London market as
determined during the preceding month in
accordance with the method described
herein. The "Weighted Average Effective
Net Mortgage Rate" for each Distribution
Date is the weighted average of the
applicable Effective Net Mortgage Rates
for the Mortgage Loans, weighted on the
basis of their respective Stated
Principal Balances immediately prior to
such Distribution Date. For purposes of
calculating the Weighted Average
Effective Net Mortgage Rate for any
Distribution Date, the "applicable
Effective Net Mortgage Rate" for each
Mortgage Loan is an annualized rate equal
to the Mortgage Rate in effect for such
Mortgage Loan as of the commencement of
the related Due Period, (a) reduced by
the Servicing Fee Rate (the Mortgage
Rate, as so reduced, the "Net Mortgage
Rate"), and (b) if the accrual of
interest on such Mortgage Loan is
computed other than on the basis of a
360-day year consisting of twelve 30-day
months (which is the basis of accrual for
interest on the REMIC Regular
Certificates), then adjusted to reflect
that difference in computation.
The "Funds-Available Cap Rate" applicable
to the determination of the Pass-Through
Rate on the Class A Certificates for each
Distribution Date will be an annualized
rate equal to the product of (a) the
Weighted Average Effective Net Mortgage
Rate for such Distribution Date,
multiplied by (b) a fraction, expressed
in decimal form, the numerator of which
is the sum of (i) the Certificate Balance
of the Class A Certificates immediately
prior to such Distribution Date, plus
(ii) any Excess Pool Balance, existing
immediately prior to such Distribution
Date, and the denominator of which is the
Certificate Balance of the Class A
Certificates immediately prior to such
Distribution Date. Accordingly, in the
absence of Excess Pool Balance, the
Funds-Available Cap Rate applicable to
the determination of the
S-11
<PAGE>
Pass-Through Rate for the Class A
Certificates for any Distribution Date
will be the Weighted Average Effective
Net Mortgage Rate for such Distribution
Date.
The "Due Period" for each Distribution Date
will be the period that begins on the
____ day of the month preceding the month
inwhich such Distribution Date occurs and
ends on the ____ day of the month in
which such Distribution Date occurs. See
"Description of the Certificates--
Distributions--Pass-Through Rates" and
"--Distributions--Determination of LIBOR"
herein.
C. Distributions ....................Distributions on the Certificates will be
made by the Master Servicer, to the
extent of available funds, on the 25th
day of each month or, if any such 25th
day is not a business day, then on the
next succeeding business day, beginning
in __________ 199__ (each, a
"Distribution Date"), to the holders of
record as of the close of business on the
last business day of the month preceding
the month of each such distribution
(each, a "Record Date"). Notwithstanding
the above, the final distribution on any
Certificate will be made after due notice
by the Master Servicer of the pendency of
such distribution and only upon
presentation and surrender of such
Certificates at the location to be
specified in such notice. The total of
all payments or other collections (or
advances in lieu thereof) on or in
respect of the Mortgage Loans that are
available for distribution to
Certificateholders on any Distribution
Date is herein referred to as the
"Available Distribution Amount" for such
date. See "Description of the
Certificates--Distributions--Method,
Timing and Amount" herein.
On each Distribution Date, for so long as
the Class A and/or Class B Certificates
remain outstanding, the Master Servicer
will (except as otherwise described under
"Description of the
Certificates--Termination" herein) apply
the Available Distribution Amount for
such date for the following purposes and
in the following order of priority, in
each case to the extent of remaining
available funds:
(1) to distributions of interest to the
holders of the Class A Certificates
in an amount equal to all
Distributable Certificate Interest
in respect of the Class A
Certificates for such Distribution
Date and, to the extent not
previously paid, for all prior
Distribution Dates;
(2) to distributions of principal to the
holders of the Class A Certificates
in an amount equal to the sum of (a)
the product of (i) the Class A
Certificates' Ownership Percentage
(as calculated immediately prior to
such Distribution Date), multiplied
by (ii) the Scheduled Principal
Distribution Amount for such
Distribution Date, plus (b) the
entire Unscheduled Principal
Distribution Amount for such
Distribution Date (but not more than
would be necessary to reduce the
Certificate Balance of the Class A
Certificates to zero);
(3) to distributions of principal to the
holders of the Class A Certificates
in an amount equal to any Uncovered
Portion of the Certificate Balance
of the Class A Certificates
immediately prior to such
Distribution Date;
S-12
<PAGE>
(4) to distributions of interest to the
holders of the Class B Certificates
in an amount equal to all
Distributable Certificate Interest
in respect of the Class B
Certificates for such Distribution
Date and, to the extent not
previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the
holders of the Class B Certificates
in an amount equal to the sum of (a)
the product of (i) the Class B
Certificates' Ownership Percentage
(as calculated immediately prior to
such Distribution Date), multiplied
by (ii) the Scheduled Principal
Distribution Amount for such
Distribution Date, plus (b) if the
Class A Certificates have been
retired, then to the extent not
distributed in retirement thereof on
such Distribution Date, the entire
Unscheduled Principal Distribution
Amount for such Distribution Date
(but not more than would be
necessary to reduce the Certificate
Balance of the Class B Certificates
to zero);
(6) to distributions of principal to the
holders of the Class A Certificates
in an amount equal to any Uncovered
Portion of the Certificate Balance
of the Class B Certificates
immediately prior to such
Distribution Date (but not more than
would be necessary to reduce the
Certificate Balance of the Class A
Certificates to zero);
(7) to distributions of principal to the
holders of the Class B Certificates
in an amount equal to any Uncovered
Portion of the Certificate Balance
of the Class B Certificates
immediately prior to such
Distribution Date, net of any
distributions of principal made on
such Distribution Date in respect of
the Class A Certificates as
described in the immediately
preceding clause (6);
(8) to distributions of interest to the
holders of the Class C Certificates
in an amount equal to all
Distributable Certificate Interest
in respect of the Class C
Certificates for such Distribution
Date and, to the extent not
previously distributed, for all
prior Distribution Dates;
(9) to distributions of principal to the
holders of the Class C Certificates
in an amount equal to the product of
(a) the Class C Certificates'
Ownership Percentage (as calculated
immediately prior to such
Distribution Date), multiplied by
(b) the Scheduled Principal
Distribution Amount for such
Distribution Date;
(10) to distributions of principal to the
holders of the respective Classes of
REMIC Regular Certificates, in
reverse alphabetical order of their
Class designations (that is, C, B,
A), in an aggregate amount equal to
the product of (a) the Class R
Certificates' Ownership Percentage
(as calculated immediately prior to
such Distribution Date), multiplied
by (b) the Scheduled Principal
Distribution Amount for such
Distribution Date (but, in each
case, not more than
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<PAGE>
would be necessary to reduce the
related Certificate Balance to
zero);
(11) to distributions of principal to the
holders of the respective Classes of
REMIC Regular Certificates, in
alphabetical order of their Class
designations (that is, A, B, C), in
an aggregate amount equal to any
Uncovered Portion ofthe Certificate
Balance of the Class C Certificates
immediately prior to such
Distribution Date (but, in each
case, not more than would be
necessary to reduce the related
Certificate Balance to zero);
(12) to distributions of principal to the
holders of the respective Classes of
REMIC Regular Certificates, in
reverse alphabetical order of their
Class designations (that is, C, B,
A,), in an aggregate amount equal to
______% of the remaining balance, if
any, of the Available Distribution
Amount (such remaining balance, if
any, herein referred to as "Excess
Funds") (but, in each case, not more
than would be necessary to reduce
the related Certificate Balance to
zero); and
(13) to distributions to the holders of
the Class R Certificates in an
amount equal to the remaining
balance of any Excess Funds. See
"Description of the Certificates--
Distributions--Priority" herein.
The "Distributable Certificate Interest" in
respect of any Class of REMIC Regular
Certificates for any Distribution Date
will equal 30 days' interest at the
applicable Pass-Through Rate accrued on
the Certificate Balance of such Class of
REMIC Regular Certificates immediately
prior to such Distribution Date, reduced
(to not less than zero) by such Class of
REMIC Regular Certificates' allocable
share (in each case, calculated as
described herein) of any Aggregate
Mortgage Loan Negative Amortization and
any Net Aggregate Prepayment Interest
Shortfall (as described below) for such
Distribution Date. See "Servicing of the
Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses" and
"Description of the Certificates--
Distributions--Distributable Certificate
Interest" herein.
The "Scheduled Principal Distribution
Amount" for any Distribution Date will
equal the aggregate of all scheduled
payments of principal (including the
principal portion of any Balloon
Payments) due on the Mortgage Loans
during or, if and to the extent not
previously received or advanced and
distributed on prior Distribution Dates,
prior to the related Due Period that were
either received from the borrowers as of
the ___ day of the month in which such
Distribution Date occurs or advanced by
the Master Servicer in respect of such
Distribution Date. The "Unscheduled
Principal Distribution Amount" for any
Distribution Date will, in general, equal
the aggregate of (i) all prepayments of
principal of the Mortgage Loans received
from the borrowers during the related Due
Period, and (ii) any other unscheduled
collections on or in respect of the
Mortgage Loans and any Mortgaged
Properties acquired in respect of
defaulted Mortgage
S-14
<PAGE>
Loans through foreclosure, deed in lieu
of foreclosure or otherwise (each, an
"REO Property"), which other unscheduled
collections were received during the
related Due Period and were identified
and applied by the Master Servicer as
recoveries of previously unadvanced
principal of the related Mortgage Loans.
The respective amounts which constitute
the Scheduled Principal Distribution
Amount and Unscheduled Principal
Distribution Amount for any Distribution
Date are herein collectively referred to
from time to time as the "Distributable
Principal Collections and Advances". The
"Ownership Percentage" evidenced by any
Class of Certificates as of any date of
determination will equal a fraction,
expressed as a percentage, the numerator
of which is the then Certificate Balance
of such Class of Certificates, net (in
the case of a Class of REMIC Regular
Certificates) of any Uncovered Portion of
such Certificate Balance, and the
denominator of which is the then
aggregate Stated Principal Balance of the
Mortgage Pool. See "Description of the
Certificates--Distributions--Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution
Amount" herein.
P&I Advances ........................Subject to a recoverability determination
as described herein, the Master Servicer
is required to make advances (each, a
"P&I Advance") with respect to each
Distribution Date in an amount that is
generally equal to the aggregate of: (i)
all delinquent payments of principal and
interest (net of related Servicing Fees)
on the Mortgage Loans, other than
delinquent Balloon Payments, scheduled to
be due during the related Due Period;
(ii) in the case of each Mortgage Loan
delinquent in respect of its Balloon
Payment, an amount equal to 30 days'
interest thereon (net of related
Servicing Fees), but only to the extent
that the related borrower has not made a
payment sufficient to cover such amount
under any forbearance arrangement or
otherwise, which payment has been
included in the Available Distribution
Amount for such Distribution Date; and
(iii) in the case of each REO Property,
an amount equal to 30 days' imputed
interest with respect thereto (net of
related Servicing Fees), but only to the
extent that such amount is not covered by
any net income from such REO Property
included in the Available Distribution
Amount for such Distribution Date.
As more fully described herein, the Master
Servicer will be entitled to interest on
any P&I Advances made, and certain
servicing expenses incurred, by it or on
its behalf. Such interest will accrue
from the date any such P&I Advance is
made or such servicing expense is
incurred at an annualized rate equal to
____% (the "Master Servicer Reimbursement
Rate") and will be paid,
contemporaneously with the reimbursement
of such P&I Advance or such servicing
expense, out of general collections on
the Mortgage Pool then on deposit in the
Certificate Account. See "Description of
the Certificates--P&I Advances" herein
and "Description of the
Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account"
in the Prospectus.
Compensating Interest
Payments ...........................To the extent of its servicing compensation
for the related Due Period, the Master
Servicer is required to make a
non-reimbursable payment (a "Compensating
Interest Payment") with respect to each
Distribution
S-15
<PAGE>
Date to cover the amount, if any, by
which Prepayment Interest Shortfalls
incurred during the related Due Period
exceed Prepayment Interest Excesses and
prepayment premiums collected during such
Due Period. A "Prepayment Interest
Shortfall" is a shortfall in the
collection of a full month's interest
(net of related Servicing Fees) on any
Mortgage Loan by reason of a full or
partial principal prepayment made prior
to its Due Date in any Due Period. A
"Prepayment Interest Excess" is a payment
of interest (net of related Servicing
Fees) made in connection with any full or
partial prepayment of a Mortgage Loan
subsequent to its Due Date in any Due
Period, which payment of interest is
intended to cover the period on and after
such Due Date. The "Net Aggregate
Prepayment Interest Shortfall" for any
Distribution Date will be the amount, if
any, by which (a) the aggregate of any
Prepayment Interest Shortfalls incurred
during the related Due Period exceeds (b)
the sum of (i) the aggregate of any
Prepayment Interest Excesses and
prepayment premiums collected during the
related Due Period and (ii) any
Compensating Interest Payment made by the
Master Servicer with respect to such
Distribution Date. See "Servicing of the
Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses" and
"Description of the Certificates--
Distributions--Distributable Certificate
Interest" herein.
Subordination .......................The rights of holders of the Class B
Certificates and each Class of the
Private Certificates (collectively, the
"Subordinate Certificates") to receive
distributions of amounts collected or
advanced on the Mortgage Loans will, in
each case, be subordinated, to the extent
described herein, to the rights of
holders of the Class A Certificates and
each other Class of Subordinate
Certificates, if any, with an earlier
alphabetical Class designation. This
subordination is intended to enhance the
likelihood of timely receipt by the
holders of the Class A Certificates of
the full amount of Distributable
Certificate Interest payable in respect
of such Certificates on each Distribution
Date, and the ultimate receipt by such
holders of principal equal to the entire
Certificate Balance of the Class A
Certificates. Similarly, but to a lesser
degree, this subordination is also
intended to enhance the likelihood of
timely receipt by the holders of the
Class B Certificates of the full amount
of Distributable Certificate Interest
payable in respect of such Certificates
on each Distribution Date, and the
ultimate receipt by such holders of
principal equal to the entire Certificate
Balance of the related Class of
Certificates. The protection afforded to
the holders of each Class of Offered
Certificates by means of the
subordination of each other Class of
Certificates with a later alphabetical
Class designation will be accomplished by
the application of the Available
Distribution Amount on each Distribution
Date in the order described above in this
Summary under "--Description of the
Certificates--Distributions". No other
form of Credit Support will be available
for the benefit of the holders of the
Offered Certificates.
Optional Termination ................At its option, the Master Servicer may
purchase all of the Mortgage Loans and
REO Properties, and thereby effect
termination of the Trust Fund and early
retirement of the then outstanding
Certificates, on any Distribution Date on
which the remaining aggregate Stated
Principal Balance of the Mortgage Pool is
less than ___% of the Initial Pool
S-16
<PAGE>
Balance. See "Description of the
Certificates--Termination" herein and in
the Prospectus.
Risk Factors ........................There are material risks associated with an
investment in the Offered Certificates.
See "Risk Factors" herein and in the
Prospectus.
Certain Investment
Considerations ....................The yield to maturity of an Offered
Certificate purchased at a discount or
premium will be affected by the rate of
prepayments and other unscheduled
collections of principal on or in respect
of the Mortgage Loans and the allocation
thereof to reduce the principal balance
of such Certificate. An investor should
consider, in the case of any Offered
Certificate purchased at a discount, the
risk that a slower than anticipated rate
of prepayments could result in a lower
than anticipated yield and, in the case
of any Offered Certificate purchased at a
premium, the risk that a faster than
anticipated rate of prepayments could
result in a lower than anticipated yield.
See "Risk Factors", "Description of the
Mortgage Pool", "Description of the
Certificates" and "Yield and Maturity
Considerations" herein and "Yield and
Maturity Considerations" in the
Prospectus.
In addition, insofar as an investor's
initial investment in any Offered
Certificate is returned in the form of
payments of principal thereon, there can
be no assurance that such amounts can be
reinvested in comparable alternative
investments with comparable yields.
Investors in the Offered Certificates
(particularly the Class A Certificates,
to which the entire Unscheduled Principal
Distribution Amount will be allocated for
so long as they are outstanding) should
consider that the Mortgage Loans may be
prepaid at any time, [generally without
the payment of a premium, penalty or fee]
[subject, in certain cases, to the
payment of a penalty or premium]. See
"Description of the Mortgage Pool"
herein. Accordingly, the rate of
prepayments on the Mortgage Loans is
likely to be inversely related to the
level of prevailing market interest rates
(and, presumably, to the yields on
comparable alternative investments).
Material Federal Income Tax
Consequences ......................An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit (a "REMIC") for Federal income
tax purposes. For Federal income tax
purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the
Class R Certificates will be the sole
class of "residual interests" in the
Trust Fund.
The Offered Certificates generally will be
treated as debt obligations of the Trust
Fund for Federal income tax purposes.
Holders of Offered Certificates must
report income with respect thereto on the
accrual method, regardless of their
method of tax accounting generally. In
addition, the Offered Certificates will
be treated as qualifying assets and
income under Sections 856(c)(5)(A),
856(c)(3)(B) and 7701(a)(19)(C) of the
Code.
The ____________ Certificates [will] [will
not] [may] be treated as having been
issued with original issue discount for
Federal income tax purposes. The
prepayment assumption that will be used
for purposes of computing the accrual of
[original issue discount,] market
discount and
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<PAGE>
premium, if any, for Federal income tax
purposes will be equal to [a CPR of
___%]. However, no representation is made
that the Mortgage Loans will prepay at
that rate or at any other rate.
For further information regarding the
Federal income tax consequences of
investing in the Offered Certificates,
see "Material Federal Income Tax
Consequences" herein and in the
Prospectus.
ERISA Considerations ................A fiduciary of any employee benefit plan or
other retirement arrangement subject to
the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (a "Plan")
should review carefully with its legal
advisors whether the purchase or holding
of Offered Certificates could give rise
to a transaction that is prohibited or is
not otherwise permitted either under
ERISA or Section 4975 of the Code or
whether there exists any statutory or
administrative exemption applicable to an
investment therein.
[The U.S. Department of Labor has issued to
the Underwriter an individual exemption,
Prohibited Transaction Exemption 90-29,
that generally exempts from the
application of certain of the prohibited
transaction provisions of Section 406 of
ERISA and the excise taxes imposed on
such prohibited transactions by Section
4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates underwritten by
the Underwriter and the servicing and
operation of related asset pools,
provided that certain conditions are
satisfied.]
[The Depositor expects that Prohibited
Transaction Exemption 90-29 will
generally apply to the Class A
Certificates, but it will not apply to
the Class B Certificates. As a result,]
no transfer of a [Class B] Certificate or
any interest therein may be made to a
Plan or to any person who is directly or
indirectly purchasing such [Class B]
Certificate or interest therein on behalf
of, as named fiduciary of, as trustee of,
or with assets of a Plan, unless the
prospective transferee (at its own
expense) provides the Certificate
Registrar (as identified herein) with a
certification and an opinion of counsel
which establish to the Certificate
Registrar's satisfaction that such
transfer will not result in a violation
of Section 406 of ERISA or Section 4975
of the Code or cause the Master Servicer
or the Trustee to be deemed a fiduciary
of such Plan or result in the imposition
of an excise tax under Section 4975 of
the Code. See "ERISA Considerations"
herein and in the Prospectus.
Rating ..............................It is a condition of their issuance that
the Class A and Class B Certificates be
rated not lower than "___" and "___ ",
respectively, by _______________________
(together, the "Rating Agencies"). A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the assigning rating
organization. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding
effect on yield to investors. See
"Rating" herein and "Risk Factors--
Limited Nature of Ratings" in the
Prospectus.
Legal Investment ....................[The Class A Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for
so long as they are rated in one of the
two highest ratings categories by one or
more nationally recognized
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<PAGE>
statistical rating organizations and, as
such, are legal investments for certain
entities to the extent provided in SMMEA.
Such investments, however, will be
subject to general regulatory
considerations governing investment
practices under state and federal law. In
addition, institutions whose investment
activities are subject to review by
federal or state regulatory authorities
may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities,
on the investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states
have recently enacted legislation
overriding the legal investment
provisions of SMMEA.]
The [Class B] Certificates will NOT be
"mortgage related securities" within the
meaning of the Secondary Mortgage Market
Enhancement Act of 1984. As a result, the
appropriate characterization of the
[Class B] Certificates under various
legal investment restrictions, and thus
the ability of investors subject to these
restrictions to purchase the [Class B]
Certificates, may be subject to
significant interpretative uncertainties.
Investors should consult their own legal
advisors to determine whether and to what
extent the Offered Certificates
constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
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<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following factors (as well as the factors set forth under
"Risk Factors" in the Prospectus) in connection with an investment therein.
Additional risk factors are set forth elsewhere in this Prospectus Supplement
under separate headings in connection with discussions regarding particular
aspects of Trust Fund Assets or the Certificates.
CERTAIN RISK FACTORS ASSOCIATED WITH THE CERTIFICATES
Limited Liquidity for Offered Certificates. There is currently no
secondary market for the Offered Certificates. While the Underwriter currently
intends to make a secondary market in the Offered Certificates, it is under no
obligation to do so. There can be no assurance that a secondary market for the
Offered Certificates will develop or, if it does develop, that it will provide
holders of Offered Certificates with liquidity of investment or that it will
continue for the life of the Offered Certificates. The Offered Certificates will
not be listed on any securities exchange.
Certain Yield and Maturity Considerations. The yield on any Offered
Certificate will depend on, among other things, the Pass-Through Rate in effect
from time to time for such Certificate. The Pass-Through Rate applicable to the
Class A Certificates for any Distribution Date will equal LIBOR for such
Distribution Date, plus ____ basis points, subject to a maximum of ___% per
annum and a minimum of _____% per annum. However, if the rate so calculated
exceeds the Funds-Available Cap Rate applicable to the Class A Certificates for
such Distribution Date, the Pass-Through Rate for the Class A Certificates for
such Distribution Date will equal the Weighted Average Effective Net Mortgage
Rate for such date. Accordingly, the yield on the Class A Certificates will, in
general, be highly sensitive to monthly changes in LIBOR. The Pass-Through Rate
applicable to the Class B Certificates for any Distribution Date will equal the
Weighted Average Effective Net Mortgage Rate for such date. Accordingly, the
yield on the Class B Certificates will be sensitive to adjustments to the
Mortgage Rates on the ARM Loans and to changes in the relative composition of
the Mortgage Pool as a result of scheduled amortization, voluntary prepayments
and involuntary liquidations of Mortgage Loans. See "Description of the
Certificates--Distributions--Pass-Through Rate" herein.
The yield on any Offered Certificate that is purchased at a discount or
premium will also be affected by the rate and timing of principal payments on
such Certificate, which in turn will be affected by (i) the rate and timing of
principal payments (including principal prepayments) and other principal
collections on the Mortgage Loans, (ii) the availability from time to time of
amounts other than Distributable Principal Collections and Advances to amortize
the Certificate Balances of the respective Classes of Certificates, and (iii)
the extent to which the items described in subclauses (i) and (ii) are applied
on any Distribution Date in reduction of the Certificate Balance of the Class to
which such Certificate belongs. As and to the extent described herein, the
holders of each Class of Offered Certificates will be entitled to receive on
each Distribution Date their allocable share (calculated on the basis of the
Ownership Percentage evidenced by such Class of Certificates immediately prior
to such date) of the Scheduled Principal Distribution Amount for such
Distribution Date; however, the Unscheduled Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class A
Certificates, until the Certificate Balance thereof is reduced to zero, and will
thereafter be distributable entirely in respect of the Class B Certificates. In
addition, as and to the extent described herein, distributions of the Class R
Certificates' allocable share of the Scheduled Principal Distribution Amount for
each Distribution Date, together with ________% of all Excess Funds, if any, for
such Distribution Date, will be applied in reduction of the Certificate Balances
of the respective Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations; while any distributions in respect of an
Uncovered Portion of the Certificate Balance of any Class of REMIC Regular
Certificates will be applied, to the extent of such Uncovered Portion, in
reduction of the Certificate Balance(s) of such Class of REMIC Regular
Certificates and each other Class of REMIC Regular Certificates, if any, with an
earlier alphabetical Class designation, in alphabetical order of such Class
designations. See "Description of the Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Because it is impossible to predict
accurately the timing and amount of principal prepayments and other unscheduled
recoveries of principal, if any, that will be received, or the availability from
time to time of any amounts other than Distributable Principal Collections and
Advances to amortize the Certificate Balances of the respective Classes of
Certificates, investors may find it difficult to analyze the effect that such
items might have on the yield and weighted average lives of the Offered
Certificates.
Furthermore, the yield on any Offered Certificate also will be affected
by the rate and timing of delinquencies and defaults on the Mortgage Loans and
the severity of ensuing losses. As and to the extent described herein, the
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<PAGE>
Private Certificates are subordinate in right and time of payment to the Offered
Certificates and will bear shortfalls in collections and losses incurred in
respect of the Mortgage Loans prior to the Offered Certificates; and the Class B
Certificates are subordinate in right and time of payment to the Class A
Certificates and will bear shortfalls in collections and losses incurred in
respect of the Mortgage Loans prior to the Class A Certificates. See
"Description of the Mortgage Pool", "Description of the
Certificates--Distributions" and "--Subordination" and "Yield and Maturity
Considerations" herein and "Yield Considerations" in the Prospectus.
Mortgage Loan Prepayment Considerations. As discussed above in
"--Certain Yield and Maturity Considerations", the yield on any Offered
Certificate purchased at a discount or premium will be affected by the rate and
timing of principal payments on such Certificate, which in turn will be affected
by, among other things, the rate and timing of principal prepayments on the
Mortgage Loans. The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans, the Mortgage Loans are likely to prepay at a higher
rate than if prevailing rates remain at or above those Mortgage Rates,
[especially since the Mortgage Loans may be prepaid at any time without
penalty]. [Nonetheless, the rate of principal payments on the Mortgage Loans is
likely to be affected by the provisions of the Mortgage Loans imposing Lock-out
Periods and Prepayment Premiums which, in general, would be expected to lower
the rate of principal prepayments from the rate that would occur absent such
provisions.]
CERTAIN RISK FACTORS ASSOCIATED WITH THE MORTGAGE LOANS
Risks of Lending on Income-Producing Properties. The Mortgaged
Properties consist entirely of income-producing real estate. Lending on the
security of income-producing real estate is generally viewed as exposing the
lender to a greater risk of loss than lending on the security of single-family
residences. Furthermore, the repayment of loans secured by income producing
properties is typically dependent upon the successful operation of the related
real estate project (i) to generate rental income sufficient to pay operating
expenses, to make necessary repairs, tenant improvements and capital
improvements and to pay debt service and (ii) in the case of loans that do not
fully amortize over their terms, to retain sufficient value to permit the
borrower to pay off the loan at maturity by sale or refinancing. A number of
factors, many beyond the control of the property owner, can affect the ability
of an income-producing real estate project to generate sufficient net operating
income to pay debt service and/or to maintain its value. Among these factors are
economic conditions generally and in the area of the project, the age, quality
and design of the project and the degree to which it competes with other
projects in the area, changes or continued weakness in specific industry
segments, increases in operating costs, the willingness and ability of the owner
to provide capable property management and maintenance and the degree to which
the project's revenue is dependent upon a single tenant or user, a small group
of tenants, or tenants concentrated in a particular business or industry. If
leases are not renewed or replaced, if tenants default and/or if rental rates
fall and/or if operating expenses increase, the borrower's ability to repay the
loan may be impaired and the resale value of the property, which is
substantially dependent upon the property's ability to generate income, may
decline. In addition, there are other factors, including changes in zoning or
tax laws, the availability of credit for refinancing, and changes in interest
rate levels that may adversely affect the value of a project (and thus the
borrower's ability to sell or refinance) without necessarily affecting the
ability to generate current income.
In addition, particular types of income properties are exposed to
particular risks. For instance, office properties generally require their owners
to expend significant amounts of cash to pay for general capital improvements,
tenant improvements and costs of re-leasing space. Also, office properties that
are not equipped to accommodate the needs of modern business may become
functionally obsolete and thus non-competitive. Multifamily projects are part of
a market that, in general, is characterized by low barriers to entry. Thus, a
particular apartment market with historically low vacancies could experience
substantial new construction, and a resultant oversupply of units, in a
relatively short period of time. Since multifamily apartment units are typically
leased on a short-term basis, the tenants who reside in a particular project
within such a market may easily move to newer projects with better amenities.
Shopping centers in general are affected by the health of the retail industry,
which is currently undergoing a consolidation and is experiencing changes due to
the growing market share of "off-price" retailing, and a particular shopping
center may be adversely affected by the bankruptcy or decline in drawing power
of an anchor tenant, a shift in consumer demand due to demographic changes (for
example, population decreases or changes in average age or income) and/or
changes in consumer preference (for example, to discount retailers). Industrial
properties may be adversely affected by
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<PAGE>
reduced demand for industrial space occasioned by a decline in a particular
industry segment (for example, a decline in defense spending), and a particular
industrial property that suited the needs of its original tenant may be
difficult to relet to another tenant or may become functionally obsolete
relative to newer properties. The successful operation of a hotel property with
a franchise affiliation may depend in part upon the strength of the franchisor,
the public perception of the franchise service mark and the continued existence
of the franchise license agreement. The transferability of a franchise license
agreement may be restricted, and a lender or other person that acquires title to
a hotel property as a result of foreclosure may be unable to succeed to the
borrower's rights under the franchise license agreement. Moreover, the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase of foreclosure, is subject to
local law requirements. See "Risk Factors--Risks Associated with Certain
Mortgage Loans and Mortgaged Properties" in the Prospectus.
Limited Recourse on Mortgage Loans. The Mortgage Loans are not insured
or guaranteed by any governmental entity or private mortgage insurer. The
Depositor has not undertaken any evaluation of the significance of the recourse
provisions of any of a number of the Mortgage Loans that provide for recourse
against the related borrower or another person in the event of a default.
Accordingly, investors should consider all of the Mortgage Loans to be
non-recourse loans as to which recourse in the case of default will be limited
to the specific property and such other assets, if any, as were pledged to
secure a Mortgage Loan.
Environmental Law Considerations. [The Mortgage Loan Seller has
represented and warranted in the Mortgage Loan Purchase Agreement that as of
[the Delivery Date] [specify any representation and warranty as to environmental
matters]. Furthermore, the Mortgage Loan Seller has agreed that, in the event of
a material breach of such representation and warranty, it will either cure the
breach or repurchase the affected Mortgage Loan. The Mortgage Loan Seller's
representations and warranties regarding the Mortgage Loans set forth in the
Mortgage Loan Purchase Agreement will be assigned, together with the related
cure and repurchase obligations, by the Depositor to the Trustee in connection
with the Depositor's assignment of its interests in the Mortgage Loans.
Notwithstanding the foregoing, however, no environmental site assessments have
been conducted with respect to any of the Mortgaged Properties, and thus, the
Mortgage Loan Seller's representation and warranty as to environmental matters
should be regarded as an absence of knowledge on the part of the Mortgage Loan
Seller of the inaccuracy of such representation and warranty and as an
allocation of risk in the event any breach thereof is subsequently discovered.
See "Description of the Mortgage Pool--Representations and Warranties;
Repurchases" herein.]
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto or assuming its operation. Such prohibition effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental site assessment is obtained (or until any required
remedial action is thereafter taken), but will decrease the likelihood that the
Trust Fund will become liable for a material adverse environmental condition at
the Mortgaged Property. However, there can be no assurance that the requirements
of the Pooling and Servicing Agreement will effectively insulate the Trust Fund
from potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements--Realization Upon
Defaulted Mortgage Loans", "Risk Factors--Environmental Risks" and "Certain
Legal Aspects of Mortgage Loans--Environmental Legislation" in the Prospectus.
Geographic Concentration of Properties Increasing Isolated Geographic
Risk. ______ Mortgage Loans, which represent ____% of the Initial Pool Balance,
are secured by liens on Mortgaged Properties located in _____________. In
general, that concentration increases the exposure of the Mortgage Pool to any
adverse economic or other developments that may occur in _________. In recent
periods, _____________ (along with other regions of the United States) has
experienced a significant downturn in the market value of real estate.
Concentration of Mortgage Loans and Borrowers Increasing Single
Borrower Risk. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. The [two] largest
Mortgage Loans have Cut-off Date Balances that represent approximately ____% and
___%, respectively, of the Initial Pool Balance, and the _________ largest
Mortgage Loans have Cut-off Date Balances that represent in the aggregate
approximately _____% of the Initial Pool Balance. There are also several pairs
of Mortgage Loans that have the same borrower. The [three] largest of those
pairs, by aggregate Cut-off Date Balance of the Mortgage Loans, represent ____%,
____% and ____%, respectively, of the Initial Pool Balance.
In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe, relative
to the size of the pool, than would be the case if the aggregate balance of the
pool were more
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<PAGE>
evenly distributed. Concentration of borrower representation in a mortgage pool
also poses increased risks. For instance, if a borrower that owns several
Mortgaged Properties experiences financial difficulty at one Mortgaged Property,
or at another income-producing property that it owns, it could attempt to avert
foreclosure by filing a bankruptcy petition that might have the effect of
interrupting Monthly Payments for an indefinite period on all of the related
Mortgage Loans.
Adjustable Rate Mortgage Loans; Negative Amortization May Cause Higher
Default Rate. ________ of the Mortgage Loans, which represent ____% of the
Initial Pool Balance, are ARM Loans. In addition, ___ of the ARM Loans, which
represent ____% of the Initial Pool Balance, allow negative amortization to
occur. Increases in the required Monthly Payments on ARM Loans in excess of
those assumed in the original underwriting of such loans may result in a default
rate higher than that on mortgage loans with fixed mortgage rates. Moreover,
increases in the principal balances of ARM Loans due to the deferral and
capitalization of interest payments may result in a default rate that is higher
than that of adjustable rate mortgage loans that do not provide for negative
amortization.
Balloon Payments on Mortgage Loans; Heightened Risk of Borrower
Default. None of the Mortgage Loans is fully amortizing over its term to
maturity. Thus, each Mortgage Loan will have a substantial payment (that is, a
Balloon Payment) due at its stated maturity unless prepaid prior thereto. In
addition, ARM Loans that permit negative amortization could require, under
certain interest rate scenarios, Balloon Payments substantially larger than
expected. Loans with Balloon Payments involve a greater risk to a lender than
self-amortizing loans because the ability of a borrower to make a Balloon
Payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the borrower to make the Balloon Payment. See "Risk Factors--Balloon Payments;
Borrower Default" in the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement permits the Master Servicer to extend and modify
Mortgage Loans that are in material default or as to which a payment default
(including the failure to make a Balloon Payment) is imminent; subject, however,
to the limitations described under "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein. There can be no assurance,
however, that any such extension or modification will increase the present value
of recoveries in a given case. Any delay in collection of a Balloon Payment that
would otherwise be distributable in respect of a Class of Offered Certificates,
whether such delay is due to borrower default or to modification of the related
Mortgage Loan by the Master Servicer, will likely extend the weighted average
life of such Class of Offered Certificates. See "Yield and Maturity
Considerations" herein and "Yield Considerations" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of ___ conventional, balloon
Mortgage Loans with an Initial Pool Balance of $_______________. Each Mortgage
Loan is evidenced by a promissory note (a "Mortgage Note") and secured by a
mortgage, deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in a multifamily rental
property (a "Mortgaged Property"). All percentages of the Mortgage Loans, or of
any specified group of Mortgage Loans, referred to herein without further
description are approximate percentages by Aggregate Cut-off Date Balance.
The Mortgage Loans will be acquired by the Depositor on or before the
Delivery Date from __________________ (the "Mortgage Loan Seller"), which either
originated the Mortgage Loans or acquired them from their respective
originators. See "--The Mortgage Loan Seller" herein.
The Mortgage Loans were originated between 19__ and 19__. [While the
Depositor has caused to be undertaken a limited review of the records and files
related to the Mortgage Loans in connection with the issuance of the
Certificates, none of the Mortgage Loans was "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly originated
mortgage loan. All of the Mortgaged Properties were inspected by or on behalf of
the Depositor within the ____ month period preceding the Cut-off Date to assess
their general condition[, which in virtually all cases was determined to be
average or better]. However, no Mortgaged Property was re-appraised by or on
behalf of the Depositor to assess its current value [and no evaluation was made
of the existence or extent of deferred maintenance at any Mortgaged Property].
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<PAGE>
CERTAIN PAYMENT CHARACTERISTICS
___ of the Mortgage Loans, which represent ___% of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ______ (____% of the Mortgage
Loans), _____ (____% of the Mortgage Loans), _____ (____% of the Mortgage
Loans), and _______ (____% of the Mortgage Loans) day of each month.
____________ of the Mortgage Loans (the "ARM Loans"), which represent
____% of the Initial Pool Balance, bear interest at Mortgage Rates that are
subject to adjustment on periodically occurring Interest Rate Adjustment Dates
by adding the related Gross Margin to the value of a base index (an "Index"),
subject in [most] cases to rounding conventions and lifetime minimum and/or
maximum Mortgage Rates and, in the case of ________ Mortgage Loans, which
represent ____% of the Initial Pool Balance, to periodic minimum and/or maximum
Mortgage Rates. The remaining Mortgage Loans (the "Fixed Rate Loans") bear
interest at fixed Mortgage Rates. None of the ARM Loans is convertible into a
Fixed Rate Loan.
Adjustments to the Mortgage Rates on ___ of the ARM Loans (the "COFI
ARM Loans"), which represent ___% of the Initial Pool Balance, are based upon
the COFI Index (See "--The Eleventh District Cost of Funds Index" herein).
Adjustments to the Mortgage Rates on the remaining ARM Loans are based upon
Treasury Indices. The adjustments to the Mortgage Rates on the ARM Loans may in
each case be based on the value of the related Index as available a specified
number of days prior to an Interest Rate Adjustment Date, or may be based on the
value of the related Index as most recently published as of an Interest Rate
Adjustment Date or as of a designated date preceding an Interest Rate Adjustment
Date. ____ of the ARM Loans, which represent ___% of the Initial Pool Balance,
provide for Interest Rate Adjustment Dates that occur monthly; ____ of the ARM
Loans, which represent ___% of the Initial Pool Balance, provide for Interest
Rate Adjustment Date that occur semi-annually; and the remaining ARM Loans
provide for Interest Rate Adjustment Dates that occur annually.
Subject, in the case of [most] of the ARM Loans, to the Payment Caps
described below, the Monthly Payments on each ARM Loan are subject to adjustment
on each Payment Adjustment Date to an amount that would amortize fully the
principal balance of the Mortgage Loan over its then remaining amortization
schedule and pay interest at the Mortgage Rate in effect during the one month
period preceding such Payment Adjustment Date. __________ of the ARM Loans,
which represent ___% of the Initial Pool Balance, provide for Payment Adjustment
Dates that occur annually; ___ of the ARM Loans, which represent ___% of the
Initial Pool Balance, provide for Payment Adjustment Dates that occur
semi-annually; and the remaining ARM Loans provide for Payment Adjustment Dates
that occur monthly. _________ of the ARM Loans, which represent ____% of the
Initial Pool Balance, provide that an adjustment of the amount of the Monthly
Payment on a Payment Adjustment Date may not result in a Monthly Payment that is
more than _______% greater or, in the case of [some] of those Mortgage Loans,
less than the amount of the Monthly Payment in effect immediately prior to such
Payment Adjustment Date (each such provision, a "Payment Cap"); however, those
Mortgage Loans also provide that the Payment Cap will not apply on certain
Payment Adjustment Dates.
____________ of the ARM Loans, which represent ____% of the Initial
Pool Balance, provide for Payment Adjustment Dates that occur less frequently
than Interest Rate Adjustment Dates and/or provide for Payment Caps that limit
the amount by which a Monthly Payment can increase (or, in [some] cases,
decrease) in response to a change in the Mortgage Rate. As a result, the amount
of a Monthly Payment in those cases may be greater or less than the amount
necessary to amortize the loan fully over its then remaining amortization
schedule and pay interest at the applicable Mortgage Rate, and accordingly,
those ARM Loans may be subject to slower amortization (if the Monthly Payment
due on a Due Date is sufficient to pay interest accrued to such Due Date at the
applicable Mortgage Rate but is not sufficient to reduce principal in accordance
with the applicable amortization schedule), to negative amortization (if
interest accrued to a Due Date at the applicable Mortgage Rate is greater than
the entire Monthly Payment due on such Due Date) or to accelerated amortization
(if the Monthly Payment due on a Due Date is greater than the amount necessary
to pay interest accrued to such Due Date at the applicable Mortgage Rate and to
reduce principal in accordance with the applicable amortization schedule). All
of the Mortgage Loans that permit negative amortization provide that if, as a
result of negative amortization, the respective principal balance of the
Mortgage Loan reaches an amount specified therein (which in no case is greater
than [125%] of the original principal balance thereof), the amount of the
Monthly Payments due thereunder will be increased (irrespective of any Payment
Cap and whether or not such increase will occur on a Payment Adjustment Date) as
necessary to prevent negative amortization in excess of such amount.
S-24
<PAGE>
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans, thereby leaving substantial principal amounts due and
payable (each such payment, a "Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto.
[No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment Premiums")
in connection with full or partial prepayments.] [____ of the Fixed Rate Loans,
which represent ___% of the Initial Pool Balance, prohibit voluntary prepayments
of principal for a period (a "Lock-out Period") ending on a date (a "Lock-out
Expiration Date") specified in the related Mortgage Note, and impose fees or
penalties ("Prepayment Premiums") in connection with prepayments of principal
made thereafter.] Prepayment Premiums are payable to the Master Servicer as
additional servicing compensation, to the extent not otherwise applied to offset
Prepayment Interest Shortfalls, and may be waived by the Master Servicer in
accordance with the servicing standard described under "Servicing of the
Mortgage Loans--General" herein.
THE ELEVENTH DISTRICT COST OF FUNDS INDEX
The COFI Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks, the home offices of which are
located in Arizona, California and Nevada, that are member institutions of the
Eleventh District of the Federal Home Loan Bank System. The COFI Index is
computed from statistics tabulated and published by the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco"), which normally announces the
COFI Index on the last working day of the month following the month as to which
the weighted average cost of funds was computed. The FHLB of San Francisco
publishes the COFI Index in its monthly Information Bulletin, copies of which
may be obtained from the FHLB of San Francisco's Office of Public Information.
The COFI Index reflects the interest costs paid on all types of funds
held by Eleventh District member institutions. The COFI Index is weighted to
reflect the relative amount of each type of funds held at the end of the
relevant month. There are three major components of funds of Eleventh District
member institutions: (1) savings deposits, (2) FHLB of San Francisco advances
and (3) all other borrowings, such as reverse repurchase agreements and
mortgage-backed bonds. Unlike most other interest rate measures, the COFI Index
does not necessarily reflect current market rates, since the component funds
represent a variety of maturities the costs of which may react in different ways
to changing conditions.
A number of factors affect the performance of the COFI Index and may
cause the COFI Index to move in a manner different from indices based upon
specific interest rates, such as the United States Treasury rates and LIBOR.
Because the COFI Index is based on, among other things, the various maturities
of the liabilities of member institutions of the Eleventh District of the
Federal Home Loan Bank System for the month prior to the month in which the COFI
Index is published, the COFI Index may not reflect the average prevailing market
interest rates on new liabilities of similar maturities and, in general, the
COFI Index tends to respond more slowly to interest rate movements than do other
interest rate indices. Moreover, there can be no assurance that the COFI Index
will necessarily move in the same direction as prevailing interest rates since,
as longer term deposits or borrowings mature and are renewed at market interest
rates, the COFI Index will rise or fall depending upon the differential between
the prior and the new rates on such deposits and borrowings. Furthermore, any
movement in the COFI Index, as compared to other indices based upon specific
interest rates, may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the COFI Index. Because _____% of the
Mortgage Loans are COFI ARM Loans, the performance of the COFI Index, to the
extent that it moves within a range that affects the Mortgage Rates on the COFI
ARM Loans, will have a substantial effect on the Weighted Average Effective Net
Mortgage Rate in effect from time to time. The Pass-Through Rate from time to
time of the Class B Certificates is the Weighted Average Effective Net Mortgage
Rate, and thus, the yield on the Class B Certificates will be extremely
sensitive to movements in the COFI Index that result in adjustments to the
Mortgage Rates of the COFI ARM Loans. The Pass-Through Rate from time to time of
the Class A Certificates, under certain circumstances described herein, will
equal the Weighted Average Effective Net Mortgage Rate, and thus, the yield on
the Class A Certificates may in those circumstances also be affected by
movements in the COFI Index. See "Yield and Maturity Considerations" herein.
Listed below are some historical values of the COFI Index since January
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of past or future values of the COFI Index.
S-25
<PAGE>
<TABLE>
<CAPTION>
MONTH 1988 1989 1990 1991 1992 1993 1994 1995
----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January ............... 7.615% 8.125% 8.369% 7.858% 6.002% 4.360% 3.710% 4.747%
February .............. 7.647 8.346 8.403 7.848 5.800 4.333 3.687 4.925
March ................. 7.509 8.423 8.258 7.654 5.611 4.245 3.629 5.007
April ................. 7.519 8.648 8.211 7.501 5.427 4.171 3.672 5.064
May ................... 7.497 8.797 8.171 7.329 5.290 4.103 3.726 5.141
June .................. 7.618 8.923 8.086 7.155 5.258 4.050 3.804 5.179
July .................. 7.593 8.844 8.109 6.998 5.069 3.998 3.860 5.144
August ................ 7.659 8.763 8.075 6.845 4.874 3.958 3.945 5.133
September ............. 7.847 8.807 8.091 6.714 4.805 3.881 4.039 5.111
October ............... 7.828 8.643 8.050 6.566 4.597 3.823 4.187 5.116
November .............. 7.914 8.595 8.044 6.414 4.508 3.822 4.367 5.119
December .............. 8.022 8.476 7.963 6.245 4.432 3.879 4.589 5.059
</TABLE>
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in
each case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE ARM LOANS AS OF THE CUT-OFF DATE
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- --------- ----------------- ---------- ------------------
<S> <C> <C> <C> <C>
</TABLE>
The following tables set forth the range of Mortgage Rates on the ARM
Loans, the Fixed Rate Loans and all the Mortgage Loans, respectively, as of the
Cut-off Date:
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE ARM LOANS AS OF THE CUT-OFF DATE
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
------------------------- --------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
---------- ----------------- ---------- -----------------
Total .................................
========== ================= ========== =================
Weighted Average
Mortgage Rate (ARM Loans): ____% per annum
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE FIXED RATE LOANS AS OF THE CUT-OFF DATE
NUMBER OF PERCENT BY
FIXED RATE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
---------- ----------------- ---------- -----------------
Total..................................
========== ================= ========== =================
Weighted Average
Mortgage Rate (Fixed Rate Loans): _____% per annum
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON ALL MORTGAGE LOANS AS OF THE CUT-OFF DATE
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- --------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
---------- ----------------- ---------- -----------------
Total..................................
========== ================= ========== =================
Weighted Average
Mortgage Rate (All Loans): ______% per annum
</TABLE>
The following table sets forth the range of Gross Margins for the ARM
Loans:
<TABLE>
<CAPTION>
GROSS MARGINS FOR THE ARM LOANS
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF GROSS MARGINS(%) LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- --------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
---------- ----------------- ---------- -----------------
Total .................................
========== ================= ========== =================
Weighted Average
Gross Margin: ____%
</TABLE>
The following table sets forth for the ARM Loans the Indices upon which
Mortgage Rate adjustments are based, and the frequency of adjustments to the
Mortgage Rates and Monthly Payments of the ARM Loans.
<TABLE>
<CAPTION>
INDICES AND FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES
AND MONTHLY PAYMENTS FOR THE ARM LOANS
MORTGAGE MONTHLY
RATE PAYMENT NUMBER OF PERCENT BY
ADJUSTMENT ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
INDEX FREQUENCY FREQUENCY LOANS DATE BALANCE NUMBER DATE BALANCE
----- ---------- ---------- --------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
---------- ---------- --------- ----------------- ---------- -----------------
Total.................
========== ========== ========= ================= ========== =================
</TABLE>
The following table sets forth the range of maximum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
<TABLE>
<CAPTION>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- --------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
None....................................
Total...................................
========= ================= ========== =================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- ----------
(A) This calculation does not include the __________ ARM Loans without maximum
lifetime Mortgage Rates.
S-27
<PAGE>
The following table sets forth the range of minimum lifetime Mortgage
Rates for the ARM Loans to which such characteristic applies:
<TABLE>
<CAPTION>
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE NUMBER DATE BALANCE
-------------------------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total................................
========= ================= =========== =================
Weighted Average Minimum
Lifetime Mortgage Rate (ARM Loans): _____% per annum (A)
</TABLE>
- ----------
(A) This calculation does not include the _____ ARM Loans without minimum
lifetime Mortgage Rates.
The following table sets forth the range of Cut-off Date Balances of
the Mortgage Loans:
<TABLE>
<CAPTION>
CUT-OFF DATE BALANCES
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
CUT-OFF DATE BALANCE RANGE($) LOANS DATE BALANCE NUMBER DATE BALANCE
----------------------------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Total....................
Average Cut-off Date
Balance (ARM Loans): $____________
Average Cut-off Date
Balance (Fixed Rate Loans): $____________
Average Cut-off Date
Balance (All Loans): $____________
</TABLE>
The following tables set forth the original and remaining terms to
stated maturity (in months) of the Mortgage Loans:
<TABLE>
<CAPTION>
ORIGINAL TERMS TO STATED MATURITY (IN MONTHS)
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF ORIGINAL TERMS (IN MONTHS) LOANS DATE BALANCE NUMBER DATE BALANCE
---------------------------------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Total.............................
Weighted Average Original
Term to Stated Maturity
(ARM Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): ____ months
Weighted Average Original
Term to Stated Maturity
(All Loans): ____ months
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
REMAINING TERMS TO STATED MATURITY (IN MONTHS) AS OF THE CUT-OFF DATE
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
RANGE OF REMAINING TERMS (IN MONTHS) LOANS DATE BALANCE NUMBER DATE BALANCE
- ------------------------------------ --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total.............................
========= ================= =========== =================
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(All Loans): ___ months
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans were originated:
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
YEAR LOANS DATE BALANCE NUMBER DATE BALANCE
---- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total.............................
========= ================= =========== =================
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The tables provide an indication (which
does not account for any scheduled amortization, prepayments or negative
amortization) of the concentration of Balloon Payments that will be due in those
years with respect to such groups of Mortgage Loans. See "Risk Factors--Balloon
Payments" herein.
<TABLE>
<CAPTION>
YEAR OF SCHEDULED MATURITY
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
YEAR LOANS DATE BALANCE NUMBER DATE BALANCE
---- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total.............................
========= ================= =========== =================
</TABLE>
___% of the Mortgage Loans prohibit voluntary prepayments of principal
until a Lock-out Expiration Date specified in the related Mortgage Note. The
following table sets forth the calendar quarters in which Lock-out Expiration
Dates for such Mortgage Loans occur.
S-29
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN LOCK-OUT EXPIRATION DATES
NUMBER OF PERCENT BY
CALENDAR QUARTER IN WHICH MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
LOCK-OUT EXPIRATION DATE OCCURS LOANS DATE BALANCE NUMBER DATE BALANCE
------------------------------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total.............................
========= ================= =========== =================
</TABLE>
The following table sets forth the range of Cut-off Date LTV Ratios of
the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Cut-off Date Balance of a Mortgage
Loan, and the denominator of which is the appraised value of the related
Mortgaged Property as determined by an appraisal thereof obtained in connection
with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio, because it
is based on the value of a Mortgaged Property determined as of loan origination,
is not necessarily a reliable measure of the borrower's current equity in that
Mortgaged Property. In a declining real estate market, the fair market value of
the Mortgaged Property could have decreased from the value determined at
origination, and the actual loan-to-value ratio of a Mortgage Loan may be higher
than its Cut-off Date LTV Ratio.
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
NUMBER OF PERCENT BY
RANGE OF CUT-OFF MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
DATE LTV RATIOS(%) LOANS DATE BALANCE NUMBER DATE BALANCE
------------------ --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total.............................
========= ================= =========== =================
Weighted Average Cut-off
Date LTV Ratio (ARM
Loans): _____%
Weighted Average Cut-off
Date LTV Ratio (Fixed
Rate Loans): _____%
Weighted Average Cut-off
Date LTV Ratio (All
Loans): _____%
</TABLE>
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans. The "Debt Service Coverage Ratio" for any
Mortgage Loan is the ratio of Net Operating Income produced by the related
Mortgaged Property for the period (annualized if the period was less than one
year) covered by an operating statement to the amount of the Monthly Payment in
effect as of the Cut-off Date multiplied by 12. "Net Operating Income" is the
revenue derived from the use and operation of a Mortgaged Property (consisting
primarily of rental income and deposit forfeitures) less operating expenses
(such as utilities, general administrative expenses, management fees,
advertising, repairs and maintenance) and less fixed expenses (such as insurance
and real estate taxes). Net Operating Income generally does not reflect capital
expenditures. The following table was prepared using operating statements
obtained from the respective borrowers. In each case, the information contained
in such operating statements was unaudited, and the Depositor has made no
attempt to verify its accuracy. In the case of ___ Mortgage Loans (___ ARM Loans
and ___ Fixed Rate Loans), the related Mortgaged Property has an operating
history of less than ________. Performance over such a relatively short period
may be less predictive of future performance than would be a stable operating
history over an extended period of time. In the case of _____ Mortgage Loans
(____ ARM Loans and ____ Fixed Rate Loans), operating statements for years
following 19__ could not be obtained. Accordingly, Debt Service Coverage Ratios
for those Mortgage Loans were not calculated and no conclusion should be drawn
as to the Debt Service Ratios of such Mortgage Loans based on the information
set forth below. The last day of the period (which
S-30
<PAGE>
may not correspond to the end of the calendar year most recent to the Cut-off
Date) covered by each operating statement from which a Debt Service Coverage
Ratio was calculated is set forth in Annex A with respect to the related
Mortgage Loan.
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE RATIOS AS OF THE CUT-OFF DATE
RANGE OF NUMBER OF PERCENT BY
DEBT SERVICE MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
COVERAGE RATIOS LOANS DATE BALANCE NUMBER DATE BALANCE
------------------ --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Not calculated (A)............................
--------- ----------------- ----------- -----------------
Total.........................................
========= ================= =========== =================
Weighted Average
Debt Service Coverage
Ratio (ARM Loans):
_____x(B)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans):
_____x(C)
Weighted Average
Debt Service Coverage
Ratio (All Loans): _____x(D)
</TABLE>
- ----------
(A) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements for years
following 19__.
(B) This calculation does not include the ________ ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(C) This calculation does not include the ________ Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ________ Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
S-31
<PAGE>
The Mortgage Loans are secured by liens on Mortgaged Properties located
in _____ different states. The following table sets forth the states in which
the Mortgaged Properties are located:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE CUT-OFF
STATE LOANS DATE BALANCE NUMBER DATE BALANCE
----- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
--------- ----------------- ----------- -----------------
Total...................................
========= ================= =========== =================
</TABLE>
Specified in Annex A to this Prospectus Supplement are the foregoing
and certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage Loans
is contained herein under ["--Underwriting Standards",] "--Assignment of the
Mortgage Loans; Repurchases" and "--Representations and Warranties; Repurchases"
and in the Prospectus under "Description of the Trust Funds" and "Certain Legal
Aspects of Mortgage Loans".
THE MORTGAGE LOAN SELLER
General. On or prior to the Delivery Date, the Depositor will acquire
the Mortgage Loans from ____________ (the "Mortgage Loan Seller") pursuant to a
Mortgage Loan Purchase Agreement, dated [the date hereof], between the Depositor
and the Mortgage Loan Seller (the "Mortgage Loan Purchase Agreement"). The
Mortgage Loan Seller originated ___ of the Mortgage Loans, which represent ___%
of the Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof.
[The Mortgage Loans Seller [, a wholly-owned subsidiary of __________,]
is a _________________ organized in ____ under the laws of __________________.
As of December 31, 199_, the Mortgage Loan Seller had a net worth of
approximately $_________________, and currently holds and services for its own
account a total multifamily and commercial mortgage loan portfolio of
approximately $__________________, of which approximately $__________________
constitutes multifamily mortgage loans].
The information set forth herein concerning the Mortgage Loan Seller,
the delinquency, foreclosure and loss experience of its mortgage loan portfolio
and its underwriting standards has been provided by the Mortgage Loan Seller,
and neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
[Delinquency And Foreclosure Experience. The following table sets forth
certain information concerning the delinquency experience (including pending
foreclosures) on the Mortgage Loan Seller's portfolio of multifamily mortgage
loans held and serviced for its own account. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until 30 days past due
on a contractual basis.
S-32
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 199_ AS OF DECEMBER 31, 199_ AS OF ___________, 199_
--------------------------- -------------------------- ---------------------------
BY DOLLAR BY DOLLAR BY DOLLAR
BY NUMBER OF AMOUNT OF BY NUMBER OF AMOUNT OF BY NUMBER OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
------------ --------- ------------ --------- ------------ ---------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C>
Total Multifamily
Mortgage Loans ......................... $ $ $
--- --- -
Period of Delinquency
30 to 59 days ..........................
60 to 89 days ..........................
90 days or more ........................
Total Delinquent Loans ...................
Foreclosures pending(1) ..................
Real Estate Owned ........................
</TABLE>
- ----------
(1) Includes bankruptcies which stay foreclosure.
The following table presents, for the Mortgage Loan Seller's portfolio
of multifamily mortgage loans held and serviced for its own account, the net
gains (losses) resulting from foreclosures and the disposition of properties
acquired in foreclosure or by deed in lieu of foreclosure during the periods
indicated.
YEAR ENDED DECEMBER 31, MONTHS ENDED
----------------------- -----------------------
199_ 199_ 199_ 199_
------ ------ ------ ------
Net gains (losses)(1)......
- ----------
(1) Gains (losses) are defined as proceeds from sale less outstanding principal
balance less certain capitalized costs related to the foreclosure and/or
disposition of the related property (exclusive of accrued interest).
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans comprising the Mortgage Pool will correspond to
the delinquency, foreclosure and loss experience of the Mortgage Loan Seller's
total multifamily mortgage loan portfolio set forth in the foregoing tables. The
aggregate delinquency, foreclosure and loss experience on the Mortgage Loans
comprising the Mortgage Pool will depend on the results obtained over the life
of the Mortgage Pool.]
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
Description of underwriting standards.]
[The Mortgage Loans were not originated by the Mortgage Loan Seller to
conform to any particular underwriting standards or criteria; however, the
Mortgage Loans were originated in the manner described herein and generally with
a view to obtaining the rating assigned to the Offered Certificates.]
The Depositor believes that the Mortgage Loans selected for inclusion
in the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis that would have a material adverse effect on the
Certificateholders.
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
On or prior to the Delivery Date, the Depositor will assign its
interests in the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. In connection with such assignment, the
Depositor will require the Mortgage Loan Seller to deliver to the Trustee or to
a document custodian appointed by the Trustee (a
S-33
<PAGE>
"Custodian"), among other things, the following documents with respect to each
Mortgage Loan (collectively, as to such Mortgage Loan, the "Mortgage File"): (i)
the original Mortgage Note, endorsed (without recourse) to the order of Trustee;
(ii) the original Mortgage or a certified copy thereof, together with originals
or certified copies of any intervening assignments of such document, in each
case with evidence of recording thereon; (iii) the original or a certified copy
of any related assignment of leases, rents and profits (if such item is a
document separate from the Mortgage), together with originals or certified
copies of any intervening assignments of such document, in each case with
evidence of recording thereon; (iv) the original or a certified copy of any
related security agreement (if such item is a document separate from the
Mortgage), together with originals or certified copies of any intervening
assignments of such document; (v) an assignment of the Mortgage in favor of the
Trustee, in recordable form; (vi) an assignment of any related assignment of
leases, rents and profits (if such item is a document separate from the
Mortgage) in favor of the Trustee, in recordable form; (vii) an assignment of
any related security agreement (if such item is a document separate from the
Mortgage) in favor of the Trustee; (viii) originals or certified copies of all
assumption, modification and substitution agreements in those instances where
the terms or provisions of the Mortgage or Mortgage Note have been modified or
the Mortgage or Mortgage Note has been assumed; (ix) the original lender's title
insurance policy issued on the date of the origination of such Mortgage Loan or,
with respect to each Mortgage Loan as to which a lender's title insurance policy
has not yet been issued, a preliminary title report or a title insurance
commitment or binder or, with respect to each Mortgage Loan not covered by a
lender's title insurance policy, an attorney's opinion of title given by an
attorney licensed to practice law in the jurisdiction where the Mortgaged
Property is located; and (x) the original of any guaranty of the borrower's
obligations under the related Mortgage Note.
The Trustee or a Custodian on its behalf will be required to review
each Mortgage File within a period of ___ days of the receipt thereof, and the
Trustee or a Custodian on its behalf will hold such documents in trust for the
benefit of the Certificateholders. If any of the above-described documents is
found during the course of such review to be missing from any Mortgage File or
defective, and in either case such omission or defect materially and adversely
affects the value of any Mortgage Loan or the interests of Certificateholders
therein, the Trustee will be required to notify the Master Servicer, the
Depositor and the Mortgage Loan Seller. In any such case, and if the Mortgage
Loan Seller cannot deliver the document or cure the defect within a period of
___ days following its receipt of such notice, then the Mortgage Loan Seller
will be obligated pursuant to the Mortgage Loan Purchase Agreement (the relevant
rights under which will be assigned, together with its interests in the Mortgage
Loans, by the Depositor to the Trustee) to repurchase the affected Mortgage Loan
within such ___-day period at a price (the "Purchase Price") equal to the sum of
(i) the unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued
interest on such Mortgage Loan at the Mortgage Rate from the date to which
interest was last paid to the Due Date in the Due Period in which the purchase
is to occur (exclusive of any portion of such interest representing negative
amortization previously added to the principal balance of such Mortgage Loan),
(iii) certain servicing expenses that are reimbursable to the Master Servicer,
and (iv) any unpaid accrued interest at the Master Servicer Reimbursement Rate
that may be payable to the Master Servicer in respect of related unreimbursed
P&I Advances and servicing expenses as described under "Description of the
Certificates--P&I Advances" herein. This repurchase obligation will constitute
the sole remedy available to the Certificateholders and the Trustee for any
defect in or omission from a Mortgage File, and neither the Depositor nor any of
its affiliates will be obligated to repurchase the affected Mortgage Loan if the
Mortgage Loan Seller defaults on its obligation to do so.
The Pooling and Servicing Agreement will require the Master Servicer
promptly (and in any event within ___ days of the Delivery Date) to cause each
assignment of a Mortgage described in clause (v) of the second preceding
paragraph and each assignment of an assignment of leases, rents and profits
described in clause (vi) of the second preceding paragraph to be submitted for
recording in the real property records of the jurisdiction in which the related
Mortgaged Property is located. See "Description of the Pooling
Agreements--Assignment of Mortgage Loans; Repurchases" in the Prospectus.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller has
represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, that:
[Specify significant representations and warranties.]
If the Master Servicer, the Trustee or the Depositor discovers a breach
of any of the foregoing representations and warranties, and such breach
materially and adversely affects the value of any Mortgage Loan or the interests
of
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Certificateholders therein, the party making such discovery will be required
to so notify each of the other parties and the Mortgage Loan Seller. In any such
case, and if the Mortgage Loan Seller cannot cure such breach within a period of
____ days following its receipt of such notice, then the Mortgage Loan Seller
will be obligated pursuant to the Mortgage Loan Purchase Agreement (the relevant
rights under which will be assigned, together with its interests in the Mortgage
Loans, by the Depositor to the Trustee) to repurchase the affected Mortgage Loan
within such ___-day period at the applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. [Thus, for example, if the Mortgage Loan Seller were found to have
breached its representation set forth in clause __ above regarding environmental
matters, it would have no obligation to indemnify the Trust Fund for any
resulting liability that the Trust Fund might have incurred for clean-up costs
at the affected Mortgaged Property. However, because of the restrictions imposed
by the Pooling and Servicing Agreement upon the ability of the Master Servicer
to acquire title to a Mortgaged Property or to assume control of its operations,
the Depositor believes that it is unlikely that the Trust Fund will incur any
such liability. See "Risk Factors--Environmental Law Considerations" herein and
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans", "Risk Factors--Environmental Risks" and "Certain Legal Aspects of
Mortgage Loans--Environmental Legislation" in the Prospectus.]
The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and neither the Depositor nor any of its affiliates will
be obligated to repurchase any affected Mortgage Loan in connection with a
breach of the Mortgage Loan Seller's representations and warranties if the
Mortgage Loan Seller defaults on its obligation to do so. However, the Depositor
will not include any Mortgage Loan in the Mortgage Pool if anything has come to
the Depositor's attention that would cause it to believe that the
representations and warranties made by the Mortgage Loan Seller regarding such
Mortgage Loan will not be correct in all material respects. See "Description of
the Pooling Agreements--Representations and Warranties; Repurchases" in the
Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for the
scheduled principal payments due on or before the Cut-off Date. Prior to the
issuance of the Offered Certificates, a Mortgage Loan may be removed from the
Mortgage Pool if the Depositor deems such removal necessary or appropriate or if
it is prepaid. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Depositor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date and
will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph, such
removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be required to service and administer the
Mortgage Loans, either directly or through sub-servicers, on behalf of the
Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its good faith and
reasonable judgment), in accordance with applicable law, the terms of the
Pooling and Servicing Agreement, the terms of the respective Mortgage Loans and,
to the extent consistent with the foregoing, in the same manner as would prudent
institutional mortgage lenders and loan servicers servicing mortgage loans
comparable to the Mortgage Loans in the jurisdictions where the Mortgaged
Properties are
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located, and with a view to the maximization of timely recovery of principal and
interest, but without regard to: (i) any relationship that the Master Servicer
or any affiliate of the Master Servicer may have with the related borrower; (ii)
the ownership of any Certificate by the Master Servicer or any affiliate of the
Master Servicer; (iii) the Master Servicer's obligation to make P&I Advances and
advances to cover certain servicing expenses; and (iv) the Master Servicer's
right to receive compensation for its services under the Pooling and Servicing
Agreement or with respect to any particular transaction.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling and
Servicing Agreement relating to the servicing of the Mortgage Loans. Reference
is also made to the Prospectus, in particular to the section captioned
"Description of the Pooling Agreements", for important information in addition
to that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement as they relate to the rights and obligations of the Master
Servicer thereunder.
THE MASTER SERVICER
[__________________________________, a ___________________, will act as
Master Servicer with respect to the Mortgage Pool. Founded in ____ as a
____________, the Master Servicer today furnishes a variety of wholesale banking
services. As of December 31, 19__, the Master Servicer had a net worth of
approximately $__________, and currently has a multifamily mortgage loan
servicing portfolio of approximately $___________.
The offices of the Master Servicer that will be primarily responsible
for servicing and administering the Mortgage Pool are located at
____________________________.
For so long as the long-term unsecured debt obligations of the Master
Servicer are rated ___ or better by _____________________, the Master Servicer
will not be required to maintain the errors and omissions policy described in
the Prospectus under ["Description of the Pooling Agreements--Hazard Insurance
Policies"].]
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities will be the Servicing Fee. The "Servicing
Fee" will be payable monthly on a loan-by-loan basis from amounts received in
respect of interest on each Mortgage Loan, will accrue in accordance with the
terms of the related Mortgage Note at a rate equal to ________% per annum (the
"Servicing Fee Rate") and will be computed on the basis of the same principal
amount and for the same period respecting which any related interest payment on
the related Mortgage Loan is computed. As additional servicing compensation, the
Master Servicer will be entitled to retain all assumption and modification fees
and, as and to the extent described below, Prepayment Premiums, Prepayment
Interest Excesses and Penalty Charges collected from borrowers. In addition, the
Master Servicer is authorized but not required to invest or direct the
investment of funds held in the Certificate Account in certain short-term United
States government securities and other investment grade obligations ("Permitted
Investments"), and the Master Servicer will be entitled to retain any interest
or other income earned on such funds. Although the Master Servicer is required
to service and administer the Mortgage Pool in accordance with the general
servicing standard described under "--General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums, Prepayment Interest Excesses and Penalty
Charges may under certain circumstances provide the Master Servicer with an
economic disincentive to comply with such standard.
If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period on a date that is prior to its Due Date in such Due
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accruing on the Certificates. If such a principal prepayment occurs during any
Due Period after the Due Date for such Mortgage Loan in such Due Period, the
amount of interest (net of related Servicing Fees) that accrues on the amount of
such principal prepayment will exceed (such excess, a "Prepayment Interest
Excess") the corresponding amount of interest accruing on the Certificates. As
to any Due Period, to the extent Prepayment Interest Excesses and Prepayment
Premiums collected for all Mortgage Loans are greater than
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Prepayment Interest Shortfalls incurred, such excess will be paid to the Master
Servicer as additional servicing compensation. To the extent Prepayment Interest
Shortfalls incurred during any Due Period are greater than Prepayment Interest
Excesses and Prepayment Premiums collected in such Due Period, the Master
Servicer will be required to deposit into the Certificate Account (such deposit,
a "Compensating Interest Payment"), without any right of reimbursement therefor,
an amount equal to the lesser of (i) its servicing compensation for such Due
Period, and (ii) an amount sufficient to eliminate such net shortfall.
Compensating Interest Payments will not cover shortfalls in Mortgage Loan
interest accruals that result from any liquidation of a defaulted Mortgage Loan,
or of any REO Property acquired in respect thereof, that occurs during a Due
Period prior to the related Due Date therein.
As and to the extent described herein under "Description of the
Certificates--P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances and reimbursable servicing expenses, such interest to
be paid, contemporaneously with the reimbursement of the related P&I Advance or
servicing expense, in the first instance out of late charges and penalty
interest ("Penalty Charges") received on the Mortgage Pool as a whole during the
Due Period of reimbursement, and thereafter out of any other collections on the
Mortgage Loans. As to any Due Period, to the extent that Penalty Charges
collected for all Mortgage Loans are greater than the amount of interest paid to
the Master Servicer in respect of P&I Advances and reimbursable servicing
expenses, such excess will be paid to the Master Servicer as additional
servicing compensation.
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling and
Servicing Agreement, and will not be entitled to reimbursement therefor except
as expressly provided in the Pooling and Servicing Agreement. However, the
Master Servicer will be permitted to pay certain such expenses directly out of
the Certificate Account and at times without regard to the relationship between
the expense and the funds from which it is being paid. In connection therewith,
the Master Servicer will be responsible for all fees of any sub-servicers, other
than management fees earned in connection with the operation of an REO Property,
which management fees the Master Servicer will be authorized to pay out of
revenues received from such property (thereby reducing the portion of such
revenues that would otherwise be available for distribution to
Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and "Description
of the Pooling Agreements--Certificate Account" and "--Servicing Compensation
and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer may agree to modify, waive or amend any term of any
Mortgage Loan in a manner consistent with the servicing standard described
herein, provided that such modification, waiver or amendment will not (i) affect
the amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due thereon.
The Master Servicer also may agree to any other modification, waiver or
amendment of the terms of a Mortgage Loan, but only if, in its judgment, a
material default on the Mortgage Loan has occurred or a payment default is
imminent, and such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan on a present value
basis than would liquidation.
To the extent consistent with the foregoing, the Master Servicer will
be permitted: (1) to reduce scheduled monthly payments of principal and interest
on any Mortgage Loan, provided that [(a) no such payment may be reduced to an
amount less than [1/12 of 5]% of the unpaid principal balance of such Mortgage
Loan and (b) no single modification or amendment may provide for a reduction of
more than 12 consecutive monthly payments]; and (2) to extend the date on which
any Balloon Payment is scheduled to be due for a period of not more than [36]
months, but only if:
[(x) the related borrower is required to continue to make
monthly payments of principal and/or interest thereon in an amount at
least equal to the greater of (i) the amount of the Monthly Payment due
on the Due Date immediately preceding the scheduled maturity date and
(ii) an amount equal to thirty days' interest at the related Mortgage
Rate;
(y) no Monthly Payment due during the preceding 12 months has
been more than 30 days delinquent (without regard to any grace period
provided for in the related Mortgage Note); and
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(z) the Master Servicer has previously determined in its good
faith judgment that:
(i) such extension is reasonably likely to produce a
greater recovery than liquidation of the related Mortgage
Loan;
(ii) on the basis of an inspection report, no
deferred maintenance, material damage or waste exists at the
related Mortgaged Property; and
(iii) on the basis of a review of the most recent
annual operating statement for the related Mortgaged Property,
and calculated with respect to the amount described in clause
(x) above, the debt service coverage ratio for the Mortgage
Loan is not less than_____x.]
The Master Servicer is required to notify the Trustee of any
modification, waiver or amendment of any term of any Mortgage Loan, and must
deliver to the Trustee or the related Custodian, for deposit in the related
Mortgage File, an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement whereby
any such modification, waiver or amendment of any term of any Mortgage Loan is
effected are required to be available for review during normal business hours at
the offices of the Master Servicer. See "Description of the
Certificates--Reports to Certificateholders; Available Information" herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Master Servicer is required to perform a physical inspection of
each Mortgaged Property at such times and in such manner as are consistent with
the servicing standard set forth herein, but in any event (i) at least once per
calendar year and (ii), if any scheduled payment becomes more than 60 days
delinquent on the related Mortgage Loan, as soon as practicable thereafter. The
Master Servicer will be required to prepare a written report of each such
inspection describing the condition of the Mortgaged Property and specifying the
existence of any material vacancies in the Mortgaged Property, of any sale,
transfer or abandonment of the Mortgaged Property, of any material change in the
condition or value of the Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to
deliver such statements, the Master Servicer is also required to collect and
review the annual operating statements of the related Mortgaged Property. Most
of the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the Master
Servicer likely to have any practical means of compelling such delivery in the
case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are required to be available for review by Certificateholders during
normal business hours at the offices of the Master Servicer. See "Description of
the Certificates--Reports to Certificateholders; Available Information" herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is not
published or is otherwise unavailable, then the Master Servicer is required to
select a comparable alternative index over which it has no direct control, that
is readily verifiable and that is acceptable under the terms of the related
Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect to any
ARM Loan is not properly adjusted by the Master Servicer pursuant to the terms
of such Mortgage Loan and applicable law, the Master Servicer is required to
deposit in the Certificate Account on or prior to the Due Date of the affected
Monthly Payment, an amount equal to the excess, if any, of (i) the amount that
would have been received from the borrower if the Mortgage Rate or Monthly
Payment had been properly adjusted, over (ii) the amount of such improperly
adjusted Monthly Payment, subject to reimbursement only out of such amounts as
are recovered from the borrower in respect of such excess.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and Servicing Agreement"), and will
repre-
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sent in the aggregate the entire beneficial ownership interest in a Trust Fund
consisting of: (i) the Mortgage Loans and all payments under and proceeds of the
Mortgage Loans received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date); (ii) any Mortgaged
Property acquired on behalf of the Trust Fund through foreclosure, deed in lieu
of foreclosure or otherwise (upon acquisition, an "REO Property"); (iii) such
funds or assets as from time to time are deposited in the Certificate Account;
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; and (v) certain rights of the Depositor under the Mortgage
Loan Purchase Agreement relating to Mortgage Loan document delivery requirements
and the representations and warranties of the Mortgage Loan Seller regarding the
Mortgage Loans.
The Certificates will consist of four classes to be designated as the
Class A Certificates, the Class B Certificates, the Class C Certificates and the
Class R Certificates. The Class A Certificates will have an initial Certificate
Balance of $____________, which represents ____% of the Initial Pool Balance;
the Class B Certificates will have an initial Certificate Balance of
$____________, which represents ____% of the Initial Pool Balance; the Class C
Certificates will have an initial Certificate Balance of $____________, which
represents ___% of the Initial Pool Balance; and the Class R Certificates will
have an initial Certificate Balance of [zero]. The Certificate Balance of any
Class of Certificates outstanding at any time represents the maximum amount
which the holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust Fund. On each Distribution Date, the respective Certificate Balances of
the Class A, Class B and Class C Certificates (the "REMIC Regular Certificates")
will in each case be (a) increased by any amounts allocated to such Class of
Certificates on such Distribution Date in respect of negative amortization on
the Mortgage Loans, and (b) reduced by any amounts actually distributed on such
Class of Certificates on such Distribution Date that are allocable to principal.
The Certificate Balance of the Class R Certificates will at all times equal the
amount, if any, by which the aggregate Stated Principal Balance of the Mortgage
Pool exceeds the aggregate Certificate Balance of the REMIC Regular Certificates
(the "Excess Pool Balance").
Only the Class A and Class B Certificates (the "Offered Certificates")
are offered hereby. The Class C and Class R Certificates (the "Private
Certificates") have not been registered under the Securities Act of 1933 and are
not offered hereby. [___________________________________ has agreed with the
Depositor to purchase the Class C and, except for a nominal interest therein,
the Class R Certificates.]
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants in denominations of $1,000
and in integral multiples thereof. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $____________ and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The Depositor
has been informed by DTC that DTC's nominee will be Cede & Co. No Class A
Certificate Owner will be entitled to receive a Definitive Class A Certificate
representing its interest in such Class, except under the limited circumstances
described in the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates". Unless and until Definitive Class A
Certificates are issued, all references to actions by holders of the Class A
Certificates will refer to actions taken by DTC upon instructions received from
Class A Certificate Owners through its Participants, and all references herein
to payments, notices, reports and statements to holders of the Class A
Certificates will refer to payments notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Class A Certificates, for
distribution to Class A Certificate Owners through its Participants in
accordance with DTC procedures. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
Until Definitive Class A Certificates are issued, interests in such
Class will be transferred on the book-entry records of DTC and its Participants.
The Class B Certificates may be transferred or exchanged, subject to certain
restrictions on the transfer of such Certificates to Plans (see "ERISA
Considerations" herein), at the offices of ___________________________ located
at ______________________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________________ will initially serve as registrar
(in such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Class A
Certificates.
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DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be
made by the Master Servicer, to the extent of available funds, on the 25th day
of each month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in _________ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in immediately
available funds to the account specified by the Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
will have provided the Master Servicer with wiring instructions [no less than
five business days prior to the related Record Date (which wiring instructions
may be in the form of a standing order applicable to all subsequent
distributions) and is the registered owner of Certificates with an aggregate
initial principal amount of at least $5,000,000], or otherwise by check mailed
to such Certificateholder. The final distribution on any Certificate will be
made in like manner, but only upon presentation and surrender of such
Certificate at the location that will be specified in a notice of the pendency
of such final distribution. All distributions made with respect to a Class of
Certificates willbe allocated pro rata among the outstanding Certificates of
such Class based on their respective Percentage Interests. The "Percentage
Interest" evidenced by any Offered Certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial Certificate
Balance of the Class to which it belongs.
The aggregate amount available for distribution to Certificateholders
on each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage
Loans and any REO Properties that is on deposit in the Certificate
Account as of the related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due
Date subsequent to the related Due Period,
(ii) all principal prepayments (together with related
payments of the interest thereon and related Prepayment
Premiums), Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Due
Period, and
(iii) all amounts in the Certificate Account that are
due or reimbursable to any person other than the
Certificateholders;
(b) all P&I Advances made by the Master Servicer with respect
to such Distribution Date; and
(c) any Compensating Interest Payment made by the Master
Servicer to cover or reduce the amount, if any, by which Prepayment
Interest Shortfalls incurred during the related Due Period exceed
Prepayment Interest Excesses and Prepayment Premiums collected during
the related Due Period. See "Description of the Pooling
Agreements--Certificate Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that
begins on the ______ day of the month preceding the month in which such
Distribution Date occurs and ends on the _____ day of the month in which such
Distribution Date occurs. The "Determination Date" for each Distribution Date is
the _______ day of the month in which such Distribution Date occurs or, if any
such ________ day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Class A and/or
Class B Certificates are outstanding, the Master Servicer will (except as
otherwise described under "--Termination" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in the
following order of priority:
(1) to distributions of interest to the holders of the Class A
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A Certificates for such Distribution
Date and, to the extent not previously paid, for all prior Distribution
Dates;
(2) to distributions of principal to the holders of the Class
A Certificates in an amount equal to the sum of (a) the product of (i)
the Class A Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
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plus (b) the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to reduce the
Certificate Balance of the Class A Certificates to zero);
(3) to distributions of principal to the holders of the Class
A Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class A Certificates immediately prior to
such Distribution Date;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for all prior Distribution
Dates;
(5) to distributions of principal to the holders of the Class
B Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Class A Certificates have been retired, then to the
extent not distributed in retirement thereof on such Distribution Date,
the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to reduce the
Certificate Balance of the Class B Certificates to zero);
(6) to distributions of principal to the holders of the Class
A Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior to
such Distribution Date (but not more than would be necessary to reduce
the Certificate Balance of the Class A Certificates to zero);
(7) to distributions of principal to the holders of the Class
B Certificates in an amount equal to any Uncovered Portion of the
Certificate Balance of the Class B Certificates immediately prior to
such Distribution Date, net of any distributions of principal made on
such Distribution Date in respect of the Class A Certificates as
described in the immediately preceding clause (6);
(8) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution
Date and, to the extent not previously distributed, for all prior
Distribution Dates;
(9) to distributions of principal to the holders of the Class
C Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(10) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in reverse
alphabetical order of their Class designations (that is, C, B, A), in
an aggregate amount equal to the product of (a) the Class R
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date (but, in each case, not
more than would be necessary to reduce the related Certificate Balance
to zero);
(11) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in alphabetical order
of their Class designations (that is, A, B, C), in an aggregate amount
equal to any Uncovered Portion of the Certificate Balance of the Class
C Certificates immediately prior to such Distribution Date (but, in
each case, not more than would be necessary to reduce the related
Certificate Balance to zero);
(12) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in reverse
alphabetical order of their Class designations (that is, C, B, A,), in
an aggregate amount equal to _____% of the balance, if any, of the
Available Distribution Amount remaining after the distributions to be
made as described in clauses (1) through (11) above (such remaining
balance, if any, herein referred to as "Excess Funds") (but, in each
case, not more than would be necessary to reduce the related
Certificate Balance to zero); and
(13) to distributions to the holders of the Class R
Certificates in an amount equal to the remaining balance of any Excess
Funds.
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Pass-Through Rates. The Pass-Through Rates applicable to the Class A
and Class B Certificates for the initial Distribution Date will equal _______%
and ______% per annum, respectively. With respect to any Distribution Date
subsequent to the initial Distribution Date, the Pass-Through Rate for the Class
A Certificates will equal LIBOR for such Distribution Date, plus _____ basis
points, subject to a maximum of ____% per annum and a minimum of ______% per
annum; unless, however, the rate so calculated exceeds the Funds-Available Cap
Rate in respect of the Class A Certificates for such Distribution Date, in which
case the Pass-Through Rate for the Class A Certificates will equal the Weighted
Average Effective Net Mortgage Rate for such Distribution Date. With respect to
any Distribution Date subsequent to the initial Distribution Date, the
Pass-Through Rate for the Class B and Class C Certificates will equal the
Weighted Average Effective Net Mortgage Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such Distribution Date. The Class R Certificates will have no specified
Pass-Through Rate.]
"LIBOR" for each Distribution Date will be the average of the interbank
offered rates for one month United States dollar deposits in the London market
as determined during the preceding month in accordance with the method described
below. The "Weighted Average Effective Net Mortgage Rate" for each Distribution
Date is the weighted average of the applicable Effective Net Mortgage Rates for
the Mortgage Loans, weighted on the basis of their respective Stated Principal
Balances immediately prior to such Distribution Date. For purposes of
calculating the Weighted Average Effective Net Mortgage Rate for any
Distribution Date, the "applicable Effective Net Mortgage Rate" for each
Mortgage Loan is: (a) if such Mortgage Loan accrues interest on the basis of a
360-day year consisting of twelve 30-day months (a "360/360 basis", which is the
basis of accrual for interest on the REMIC Regular Certificates), the Net
Mortgage Rate in effect for such Mortgage Loan as of the commencement of the
related Due Period; and (b) if such Mortgage Loan does not accrue interest on a
360/360 basis, the annualized rate at which interest would have to accrue during
the one month period preceding the Due Date for such Mortgage Loan during the
related Due Period on a 360/360 basis in order to produce the aggregate amount
of interest (adjusted to the actual Net Mortgage Rate) accrued during such
period. The "Net Mortgage Rate" for each Mortgage Loan is equal to the related
Mortgage Rate in effect from time to time less the Servicing Fee Rate.
The "Funds-Available Cap Rate" applicable to the determination of the
Pass-Through Rate on the Class A Certificates for each Distribution Date will be
an annualized rate equal to the product of (a) the Weighted Average Effective
Net Mortgage Rate for such Distribution Date, multiplied by (b) a fraction,
expressed in decimal form, the numerator of which is the sum of (i) the
Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date and (ii) the Excess Pool Balance immediately prior to such
Distribution Date, and the denominator of which is the Certificate Balance of
the Class A Certificates immediately prior to such Distribution Date.
Accordingly, if the Excess Pool Balance is zero (that is, the aggregate Stated
Principal Balance of the Mortgage Pool is less than or equal to the aggregate
Certificate Balance of the REMIC Regular Certificates), the Funds-Available Cap
Rate applicable to the determination of the Pass-Through Rate for the Class A
Certificates for any Distribution Date will be the Weighted Average Effective
Net Mortgage Rate for such Distribution Date.
Determination of LIBOR. LIBOR for the initial Distribution Date will
equal ____% per annum. LIBOR for each subsequent Distribution Date will be
determined as described below on the second LIBOR business day preceding the
Distribution Date in the prior month (each, a "LIBOR Adjustment Date"). A "LIBOR
business day" is any day on which banking institutions in London, New York City
and _______________, are open for dealing in foreign currency and exchange.
On each LIBOR Adjustment Date, the Master Servicer will determine LIBOR
on the basis of the LIBOR quotations of the Reference Banks (as defined below),
as such quotations are available to the Master Servicer as of 11:00 a.m. (London
time) on such LIBOR Adjustment Date. As used herein with respect to a LIBOR
Adjustment Date, "Reference Banks" means four leading banks engaged in
transactions in one-month Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) whose
quotations appear on the Reuters Screen LIBO Page on the LIBOR Adjustment Date
in question and (iii) which have been designated as such by the Master Servicer
and are able and willing to provide such quotations to the Master Servicer on
each LIBOR Adjustment Date; and "Reuters Screen LIBO Page" means the display
designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such
other page as may replace the LIBO page on that service for the purpose of
displaying London interbank offered rate quotations of major banks). The initial
Reference Banks will be
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_______________, ____________________, ______________________ and
______________________. If any Reference Bank designated by the Master Servicer
should be removed from the Reuters Screen LIBO Page or in any other way fails to
meet the qualifications of a Reference Bank, the Master Servicer will be
required to designate an alternative Reference Bank.
On each LIBOR Adjustment Date, LIBOR will be established by the Master
Servicer as follows:
(i) if on any LIBOR Adjustment Date two or more of the
Reference Banks provide such offered rate quotations, LIBOR will be the
arithmetic mean of such offered rate quotations (rounding such
arithmetic mean upwards if necessary to the nearest whole multiple of
1/16%);
(ii) if on any LIBOR Adjustment Date only one of the Reference
Banks provides such offered rate quotations, LIBOR will be whichever is
the higher of (A) LIBOR as determined on the previous LIBOR Adjustment
Date and (B) a rate per annum (the "Reserve Interest Rate") determined
by the Master Servicer to be either (1) the arithmetic mean (rounding
such arithmetic mean upwards if necessary to the nearest whole multiple
of 1/16%) of the one-month Eurodollar lending rates that the New York
City banks selected by the Master Servicer are quoting, on the relevant
LIBOR Adjustment Date, to the principal London offices of leading banks
in the London interbank market or (2) if the Master Servicer can
determine no such arithmetic mean, the lowest one-month Eurodollar
lending rate that the New York City banks selected by the Master
Servicer are quoting on such LIBOR Adjustment Date to leading European
banks; and
(iii) if on any LIBOR Adjustment Date the Master Servicer is
required but is unable to determine the Reserve Interest Rate in the
manner provided in the immediately preceding clause (ii), LIBOR will be
LIBOR as determined on the previous LIBOR Adjustment Date, or, in the
case of the first LIBOR Adjustment Date, _____% per annum.
The establishment of LIBOR by the Master Servicer on any LIBOR
Adjustment Date, in the absence of manifest error, will be final and binding.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of REMIC Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest in
respect of such Class of Certificates for such Distribution Date that is net of
such Class's allocable share (calculated as described below) of (i) the
aggregate of any Prepayment Interest Shortfalls resulting from voluntary
principal prepayments made on the Mortgage Loans during the related Due Period
that are not offset by Prepayment Interest Excesses and Prepayment Premiums
collected during the related Due Period or covered by the Master Servicer's
Compensating Interest Payment for such Distribution Date (the aggregate of such
Prepayment Interest Shortfalls that are not so offset or covered, as to such
Distribution Date, the "Net Aggregate Prepayment Interest Shortfall"), and (ii)
the aggregate of any negative amortization in respect of the Mortgage Loans for
their respective Due Dates during the related Due Period (the aggregate of such
negative amortization, as to such Distribution Date, the "Aggregate Mortgage
Loan Negative Amortization").
The "Accrued Certificate Interest" in respect of each Class of REMIC
Regular Certificates for each Distribution Date is equal to 30 days' interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of REMIC Regular Certificates
will equal the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to 30 days'
interest at the Pass-Through Rate applicable to such Class of REMIC Regular
Certificates for such Distribution Date accrued on the related Certificate
Balance (net of any Uncovered Portion thereof) outstanding immediately prior to
such Distribution Date, and the denominator of which is equal to 30 days'
interest at the Weighted Average Effective Net Mortgage Rate for such
Distribution Date accrued on the aggregate Stated Principal Balance of the
Mortgage Pool outstanding immediately prior to such Distribution Date. Any
portion of the Net Aggregate Prepayment Interest Shortfall for any Distribution
Date that is not otherwise allocated to the REMIC Regular Certificates will be
deemed to be allocated to the Class R Certificates.
The Aggregate Mortgage Loan Negative Amortization, if any, for each
Distribution Date will be allocated among the respective Classes of Certificates
in an manner identical to that described in the preceding paragraph for
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the allocation of any Net Aggregate Prepayment Interest Shortfall. That portion
of the Aggregate Mortgage Loan Negative Amortization for any Distribution Date
that is allocable to a Class of REMIC Regular Certificates will be added to the
Certificate Balance of such Class of REMIC Regular Certificates and,
accordingly, will constitute the "Certificate Negative Amortization" in respect
thereof for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments, due during or, if and to the
extent not previously received or advanced and distributed to Certificateholders
on a preceding Distribution Date, prior to the related Due Period, in each case
to the extent paid by the related borrower or advanced by the Master Servicer
and included in the Available Distribution Amount for such Distribution Date.
The Scheduled Principal Distribution Amount from time to time will include all
late payments of principal made by a borrower, including late payments in
respect of a delinquent Balloon Payment, regardless of the timing of such late
payments, except to the extent such late payments are otherwise reimbursable to
the Master Servicer for prior P&I Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution
Date will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period; and (b) any other
collections (exclusive of payments by borrowers) received on the Mortgage Loans
and any REO Properties during the related Due Period, whether in the form of
Liquidation Proceeds, Insurance Proceeds, net income from REO Property or
otherwise, that were identified and applied by the Master Servicer as recoveries
of previously unadvanced principal of the related Mortgage Loan.
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal Collections and Advances".
The "Ownership Percentage" evidenced by any Class of Certificates as of
any date of determination will equal a fraction, expressed as a percentage, the
numerator of which is the then Certificate Balance of such Class of
Certificates, net (in the case of a Class of REMIC Regular Certificates) of any
Uncovered Portion of such Certificate Balance, and the denominator of which is
the then aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations With Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders. The Stated Principal Balance of each Mortgage
Loan will initially equal the Cut-off Date Balance thereof and, on each
Distribution Date, will be increased by the portion of the Aggregate Mortgage
Loan Negative Amortization for such date, and reduced by the portion of the
Distributable Principal Collections and Advances for such date, which in either
case is attributable to such Mortgage Loan. The Stated Principal Balance of a
Mortgage Loan may also be reduced in connection with any forced reduction of the
actual unpaid principal balance thereof imposed by a court presiding over a
bankruptcy proceeding wherein the related borrower is the debtor. See "Certain
Legal Aspects of Mortgage Loans--Foreclosure--Bankruptcy Laws" in the
Prospectus.
For purposes of calculating distributions on the Certificates, as well
as the amount of Servicing Fees payable each month, each REO Property will be
treated as if there exists with respect thereto an outstanding mortgage loan (an
"REO Loan"), and all references to "Mortgage Loan", "Mortgage Loans" and
"Mortgage Pool" herein and in the Prospectus, when used in such context, will be
deemed to also be references to or to also include, as the case may be, any "REO
Loans". Each REO Loan will generally be deemed to have the same characteristics
as its actual predecessor Mortgage Loan, including the same adjustable or fixed
Mortgage Rate (and, accordingly, the same Net Mortgage Rate and Effective Net
Mortgage Rate) and the same unpaid principal balance and Stated Principal
Balance. Amounts due on such predecessor Mortgage Loan, including any portion
thereof payable or reimbursable to the Master Servicer, will continue to be
"due" in respect of the REO Loan; and amounts received in respect of the related
REO Property, net of payments to be made, or reimbursement to the Master
Servicer for payments previously advanced, in connection with the operation and
management of such property, generally will be applied by the Master Servicer as
if received on the predecessor Mortgage Loan. However, notwithstanding the terms
of the predecessor Mortgage Loan, the Monthly Payment "due" on an REO Loan will
in all cases, for so long as the related Mortgaged Property is part of the Trust
Fund, equal one month's interest thereon at the applicable Mortgage Rate.
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SUBORDINATION
The rights of holders of the Class B Certificates and each Class of the
Private Certificates (collectively, the "Subordinate Certificates") to receive
distributions of amounts collected or advanced on the Mortgage Loans will be
subordinated, to the extent described herein, to the rights of holders of the
Class A Certificates and each other Class of Subordinate Certificates with an
earlier alphabetical Class designation. This subordination is intended to
enhance the likelihood of timely receipt by the holders of the Class A
Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
Certificate Balance of the Class A Certificates. Similarly, but to a lesser
degree, this subordination is also intended to enhance the likelihood of timely
receipt by the holders of the Class B Certificates of the full amount of all
Distributable Certificate Interest payable in respect of such Certificates on
each Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire Certificate Balance of the Class B Certificates.
The protection afforded to the holders of each Class of Offered Certificates by
means of the subordination of each other Class of Certificates with a later
alphabetical Class designation, will be accomplished by the application of the
Available Distribution Amount on each Distribution Date in accordance with the
order of priority described under "--Distributions--Priority" above. No other
form of Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Class A Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Class A Certificates are amortized faster than the Mortgage
Loans, the percentage interest evidenced by the Class A Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the subordination afforded
the Class A Certificates by the Subordinate Certificates. Following retirement
of the Class A Certificates, allocation to the Class B Certificates, for so long
as they are outstanding, of the entire Unscheduled Principal Distribution Amount
for each Distribution Date will provide a similar benefit to such Class of
Certificates as regards the relative amount of subordination afforded thereto by
the Private Certificates.
Losses and other shortfalls experienced with respect to the Mortgage
Loans will not, with the exception of any Net Aggregate Prepayment Interest
Shortfalls, be applied to reduce either the Certificate Balance or the absolute
entitlement to interest of any Class of REMIC Regular Certificates, even though
such losses and shortfalls may cause one or more of such Classes to receive less
than the full amount of principal and interest to which it is entitled. As a
result, the aggregate Stated Principal Balance of the Mortgage Pool at any time
may be less than the aggregate Certificate Balance of the REMIC Regular
Certificates. Such deficit will be allocated to the respective Classes of REMIC
Regular Certificates (in each case to the extent of its Certificate Balance) in
reverse alphabetical order of their Class designations (that is, C, B, A). Such
allocation will not reduce the Certificate Balance of any such Class and is
intended solely to identify the portion (the "Uncovered Portion") of the
Certificate Balance of each such Class for which there is at such time no
corresponding principal amount of Mortgage Loans.
P&I ADVANCES
On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability determination
described in the next paragraph, to make advances (each, a "P&I Advance") out of
its own funds or, subject to the replacement thereof as provided in the Pooling
and Servicing Agreement, funds held in the Certificate Account that are not
required to be part of the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of: (i) all Monthly Payments (net of
the related Servicing Fee), other than Balloon Payments, which were due on the
Mortgage Loans during the related Due Period and delinquent as of the related
Determination Date; (ii) in the case of each Mortgage Loan delinquent in respect
of its Balloon Payment as of the related Determination Date, an amount equal to
30 days' interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee), but
only to the extent that the related borrower has not made a payment sufficient
to cover such amount under any forbearance arrangement or otherwise that has
been included in the Available Distribution Amount for such Distribution Date;
and (iii) in the case of each REO Property, an amount equal to thirty days'
imputed interest with respect thereto at the related Mortgage Rate in effect as
of the commencement of the related Due Period (net of the related Servicing
Fee), but only to the
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extent that such amount is not covered by any net income from such REO Property
included in the Available Distribution Amount for such Distribution Date. The
Master Servicer's obligations to make P&I Advances in respect of any Mortgage
Loan or REO Property will continue through liquidation of such Mortgage Loan or
disposition of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any P&I Advance made
out of its own funds from any amounts collected in respect of the Mortgage Loan
as to which such P&I Advance was made, whether in the form of late payments,
Insurance Proceeds, Liquidation Proceeds or otherwise ("Related Proceeds").
Notwithstanding the foregoing, the Master Servicer will not be obligated to make
any P&I Advance that it determines in its reasonable good faith judgment would,
if made, not be recoverable out of Related Proceeds (a "Nonrecoverable P&I
Advance"), and the Master Servicer will be entitled to recover any P&I Advance
that it so determines to be a Nonrecoverable P&I Advance out of general funds on
deposit in the Certificate Account. The determination by the Master Servicer
that any prior P&I Advance constitutes a Nonrecoverable P&I Advance or that any
P&I Advance, if made, would constitute a Nonrecoverable P&I Advance, will be
evidenced by an officer's certificate to that effect, accompanied by, among
other things, an appraisal of the related Mortgaged Property or REO Property, as
the case may be, performed during the preceding 12 month period by an
independent MAI-designated appraiser. See "Description of the
Certificates--Advances in Respect of Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in the Prospectus.
In connection with its recovery of any P&I Advance or reimbursable
servicing expense (each, an "Advance"), the Master Servicer will be entitled to
retain, out of any amounts then on deposit in the Certificate Account, interest
at a per annum rate equal to ________________ (the "Master Servicer
Reimbursement Rate"), accrued on the amount of such Advance from the date made
to but not including the date of reimbursement. The Master Servicer is entitled
to receive as additional servicing compensation the aggregate amount of Penalty
Charges received during each Due Period, but only to the extent that such
Penalty Charges exceed the aggregate amount of interest paid to the Master
Servicer during such Due Period in respect of unreimbursed Advances.
Accordingly, Penalty Charges are deemed to be the first source of funds for
paying the Master Servicer interest on Advances. However, if the aggregate
amount of interest paid to the Master Servicer in respect of unreimbursed
Advances during any Due Period exceeds the aggregate amount of Penalty Charges
collected during such Due Period, such excess will likely be paid out of amounts
received on the Mortgage Loans representing previously unadvanced interest (at
the related Net Mortgage Rate) and principal. If such is the case, shortfalls on
the Certificates will result.
To the extent not offset or covered by Penalty Charges or amounts
otherwise payable on the Private Certificates, interest accrued on outstanding
Advances will result in a reduction in amounts payable on the Class B
Certificates; and to the extent not offset or covered by Penalty Charges or
amounts otherwise payable on the Class B and the Private Certificates, interest
accrued on outstanding Advances will result in a reduction in amounts payable on
the Class A Certificates. To the extent that any holder of an Offered
Certificate must bear the cost of the Master Servicer's Advances, the benefits
of such Advances to such holder will be contingent on the ability of such holder
to reinvest the amounts received as a result of such Advances at a rate of
return equal to or greater than the Master Servicer Reimbursement Rate.
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
On each Distribution Date, the Master Servicer will be required to
forward by mail to each holder of an Offered Certificate a statement (a
"Distribution Date Statement") providing various items of information relating
to distributions made on such date with respect to the relevant Class and the
recent status of the Mortgage Pool. For a more detailed discussion of the
particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the Master Servicer to persons who at any time during the prior
calendar year were holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the Master Servicer
make available at its offices primarily responsible for servicing the Mortgage
Loans, during normal business hours, for review by any holder of an Offered
Certificate or any person identified to the Trustee as a prospective transferee
of an Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the
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Delivery Date, (c) all officer's certificates delivered to the Trustee since the
Delivery Date as described under "Description of the Pooling
Agreements--Evidence as to Compliance" in the Prospectus, (d) all accountants'
reports delivered to the Trustee since the Delivery Date as described under
"Description of the Pooling Agreements--Evidence as to Compliance" in the
Prospectus, (e) the most recent property inspection report prepared by or on
behalf of the Master Servicer in respect of each Mortgaged Property, (f) the
most recent Mortgaged Property annual operating statements, if any, collected by
or on behalf of the Master Servicer, (g) any and all modifications, waivers and
amendments of the terms of a Mortgage Loan entered into by the Master Servicer,
and (h) any and all officers' certificates and other evidence delivered to the
Trustee to support the Master Servicer's determination that any P&I Advance or
servicing expense was or, if made, would be a Nonrecoverable P&I Advance. Copies
of any and all of the foregoing items will be available from the Master Servicer
upon request; however, the Master Servicer will be permitted to require payment
of a sum sufficient to cover the reasonable costs and expenses of providing such
copies.
Upon written request of any Certificateholder of record made for
purposes of communicating with other Certificateholders with respect to their
rights under the Pooling and Servicing Agreement, the Certificate Registrar will
afford such Certificateholder access during business hours to the most recent
list of Certificateholders held thereby.
Until such time as Definitive Class A Certificates are issued, the
foregoing information and access will be available to Class A Certificate Owners
only to the extent it is forwarded by or otherwise available through DTC and its
Participants. The manner in which notices and other communications are conveyed
by DTC to Participants, and by Participants to Class A Certificate Owners, will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The Master Servicer, the
Trustee, the Depositor and the Certificate Registrar are required to recognize
as Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee for
DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement,
the Voting Rights shall be allocated among the respective Classes of
Certificateholders in proportion to the Certificate Balances of their
Certificates (net, in the case of a Class of REMIC Regular Certificates, of any
Uncovered Portion of the related Certificate Balance). Voting Rights allocated
to a Class of Certificateholders will be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates. See "Description of the Certificates--Voting Rights" in the
Prospectus.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in respect
thereof) or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the assets of the Trust Fund by the
Master Servicer. Written notice of termination of the Pooling and Servicing
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at the
office of the Certificate Registrar or other location specified in such notice
of termination.
Any such purchase by the Master Servicer of all the Mortgage Loans and
other assets in the Trust Fund is required to be made at a price equal to the
greater of (1) the aggregate fair market value of all the Mortgage Loans and REO
Properties then included in the Trust Fund, as mutually determined by the Master
Servicer and the Trustee, and (2) the excess of (a) the sum of (i) the aggregate
Purchase Price of all the Mortgage Loans then included in the Trust Fund and
(ii) the fair market value of all REO Properties then included in the Trust
Fund, as determined by an appraiser mutually agreed upon by the Master Servicer
and the Trustee, over (b) the aggregate of amounts payable or reimbursable to
the Master Servicer under the Pooling and Servicing Agreement. Such purchase
will effect early retirement of the then outstanding Offered Certificates, but
the right of the Master Servicer to effect such termination is subject to the
requirement that the then aggregate Stated Principal Balance of the Mortgage
Pool be less than [10]% of the Initial Pool Balance.
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On the final Distribution Date, the aggregate amount paid by the Master
Servicer for the Mortgage Loans and other assets in the Trust Fund (if the Trust
Fund is to be terminated as a result of the purchase described in the preceding
paragraph), together with all other amounts on deposit in the Certificate
Account and not otherwise payable to a person other than the Certificateholders
(see "Description of the Pooling Agreements--Certificate Account" in the
Prospectus), will be applied: FIRST, to distributions of interest to holders of
the Class A Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class A Certificates for such Distribution Date and,
to the extent not previously paid, for all prior Distribution Dates; SECOND, to
distributions of principal to holders of the Class A Certificates in an amount
equal to the sum of the Certificate Balance of the Class A Certificates
outstanding immediately prior to such Distribution Date, plus any Certificate
Negative Amortization in respect of the Class A Certificates for such
Distribution Date; THIRD, to distributions of interest to holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest in
respect of the Class B Certificates for such Distribution Date and, to the
extent not previously paid, for all prior Distribution Dates; FOURTH, to
distributions of principal to holders of the Class B Certificates in an amount
equal to the sum of the Certificate Balance of the Class B Certificates
outstanding immediately prior to such Distribution Date, plus any Certificate
Negative Amortization in respect of the Class B Certificates for such
Distribution Date; and THEREAFTER, to distributions to holders of the Private
Certificates.
TRUSTEE
____________, a _____________________, will act as Trustee on behalf of
the Certificateholders. The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee. The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at
_____________________________. See "Description of the Pooling Agreements--the
Trustee", "--Duties of the Trustee", "--Certain Matters Regarding the Trustee"
and "--Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the aggregate
amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to the Class A
Certificates for any Distribution Date will equal LIBOR for such Distribution
Date, plus ______ basis points, subject to a maximum of ____% per annum and a
minimum of _______% per annum; unless, however, the rate so calculated exceeds
the Funds-Available Cap Rate applicable to the Class A Certificates for such
Distribution Date, in which case the Pass-Through Rate for the Class A
Certificates for such Distribution Date will equal the Weighted Average
Effective Net Mortgage Rate for such date. See "Description of the
Certificates--Distributions--Pass-Through Rates" herein. Accordingly, the yield
on the Class A Certificates, in general, will be highly sensitive to monthly
changes in LIBOR.
S-48
<PAGE>
Listed below are some historical values of LIBOR since January 1988.
LIBOR values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of LIBOR, and no assurance can be
given as to the value of LIBOR on any LIBOR Adjustment Date.
<TABLE>
<CAPTION>
MONTH 1988 1989 1990 1991 1992 1993 1994 1995
- ----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January ............................ 7.04% 9.26% 8.32% 7.25% 4.21% 3.19% 3.25% 5.93%
February ........................... 6.78 9.55 8.32 6.60 4.18 3.15 3.38 6.09
March .............................. 6.82 10.12 8.43 6.60 4.36 3.20 3.63 6.11
April .............................. 7.07 10.01 8.44 6.15 4.12 3.17 3.83 6.10
May ................................ 7.31 9.79 8.35 5.99 3.94 3.12 4.31 6.07
June ............................... 7.67 9.53 8.31 6.12 4.06 3.18 4.38 6.04
July ............................... 7.99 9.13 8.21 6.02 3.48 3.16 4.54 5.91
August ............................. 8.32 8.93 8.12 5.76 3.40 3.18 4.71 5.91
September .......................... 8.33 9.02 8.22 5.62 3.25 3.15 4.86 5.86
October ............................ 8.35 8.82 8.13 5.34 3.20 3.17 5.07 5.85
November ........................... 8.71 8.59 8.05 4.97 3.31 3.18 5.48 5.81
December ........................... 9.59 8.77 8.27 4.96 3.71 3.35 6.08 5.85
</TABLE>
Whether the Pass-Through Rate for the Class A Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
rather than the LIBOR-based rate described above will depend on whether and to
what extent LIBOR for that Distribution Date plus ____ basis points (subject to
the maximum and minimum rates per annum described above) exceeds the then
Weighted Average Effective Net Mortgage Rate and, if so, whether and to what
extent there then exists an Excess Pool Balance.
Although ____ of the Mortgage Loans, which represent _____% of the
Initial Pool Balance, are ARM Loans, future fluctuations in LIBOR will not
necessarily be accompanied by corresponding proportionate changes in the then
Weighted Average Effective Net Mortgage Rate because the Indices upon which
adjustments to the Mortgage Rates for the ARM Loans are based may not rise and
fall in a manner consistent with LIBOR. In particular, the COFI Index, which
serves as the Index for ARM Loans that represent _____% of the Initial Pool
Balance, is generally referred to as a lagging index because it tends to rise
and fall more slowly than LIBOR, which is generally referred to as a market
index. See "Description of the Mortgage Pool--Certain Payment Characteristics"
and "--The Eleventh District Cost of Funds Index" herein. Furthermore, the
Mortgage Rates on the ARM Loans may not fully and promptly reflect changes in
the corresponding Indices due to the effect of periodic and lifetime floors and
caps on changes to such Mortgage Rates and the periodicity of Interest Rate
Adjustment Dates for the ARM Loans. [For example, although the initial Weighted
Average Effective Net Mortgage Rate exceeds by _______ percentage points the
initial Pass-Through Rate for the Class A Certificates, most of the Mortgage
Rates in effect for the ARM Loans that provide for minimum lifetime Mortgage
Rates are at their minimum permitted lifetime levels. Consequently, an increase
of _____ percentage points in each of the Indices applicable to the ARM Loans
would result, even if the Mortgage Rates thereon could be contemporaneously
adjusted, in an increase of only _______ percentage points in the Weighted
Average Effective Net Mortgage Rate. A simultaneous increase of _____ percentage
points in LIBOR would therefore narrow, to ______ percentage points, the gap
between the Pass-Through Rate for the Class A Certificates and the Weighted
Average Effective Net Mortgage Rate. In addition, changes in the Weighted
Average Effective Net Mortgage Rate from time to time will depend on changes in
the relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments and involuntary liquidations of the Mortgage
Loans. See "Description of the Mortgage Pool" herein and "--Yield
Considerations--Rate and Timing of Principal Payments" below.
As described above, whether the Pass-Through Rate on the Class A
Certificates at any time is based on LIBOR or is equal to the then applicable
Weighted Average Effective Net Mortgage Rate may depend in part upon the
presence of Excess Pool Balance, that is, an excess of the aggregate Stated
Principal Balance of the Mortgage Pool over the aggregate Certificate Balance of
all of the Classes of REMIC Regular Certificates. If the sum of monthly LIBOR
for any Distribution Date plus ________ basis points exceeds the Weighted
Average Effective Net Mortgage Rate for such Distribution Date, then the
Pass-Through Rate for the Class A Certificates will equal (subject to a maximum
rate of __% per annum) the higher LIBOR-based rate rather than the lower
Weighted Average Effective Net Mortgage Rate only if the LIBOR-based rate does
not exceed the applicable Funds-Available Cap Rate. The Funds-Available
S-49
<PAGE>
Cap Rate applicable to the calculation of the Pass-Through Rate in respect of
the Class A Certificates for any Distribution Date is an annualized rate equal
to the product of the Weighted Average Effective Net Mortgage Rate and a
fraction, expressed as a decimal, the numerator of which is the sum of the
Certificate Balance of the Class A Certificates and the Excess Pool Balance
immediately prior to such Distribution Date, and the denominator of which is the
Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date. Accordingly, the Funds-Available Cap Rate rises with the
expansion of the Excess Pool Balance; and, for any Distribution Date, 30 days'
interest at the Weighted Average Effective Net Mortgage Rate for such
Distribution Date accrued on the Excess Pool Balance, if any, immediately prior
thereto represents the maximum amount by which interest accrued on the Class A
Certificates at a LIBOR-based Pass-Through Rate can exceed interest accrued on
such Certificates at the Weighted Average Effective Net Mortgage Rate. See
"Description of the Certificates--Distributions--Pass-Through Rates" herein. The
amount of Excess Pool Balance outstanding from time to time will depend on the
aggregate amount of Excess Funds, and on the aggregate amount of the Class R
Certificates' allocable share (based on the Ownership Percentage evidenced
thereby from time to time) of Distributable Principal Collections and Advances,
in each case applied to amortize the Certificate Balances of the respective
Classes of REMIC Regular Certificates. As discussed under "Description of the
Certificates--Distributions Priority" herein, _____% of Excess Funds, and 100%
of the Class R Certificates' allocable share of Distributable Principal
Collections and Advances, will be so applied on each Distribution Date. Excess
Funds for any Distribution Date will generally equal the amount, if any, by
which (a) the portion of the Available Distribution Amount that represents
interest on the Mortgage Loans, exceeds (b) the sum of (i) the aggregate amount
of Distributable Certificate Interest to be paid in respect of the REMIC Regular
Certificates on such Distribution Date, and (ii) the aggregate Uncovered Portion
of the Certificate Balances of the REMIC Regular Certificates immediately prior
to such Distribution Date.
The Pass-Through Rate applicable to the Class B Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
for such date. Accordingly, the yield on the Class B Certificates will be
sensitive to (x) adjustments to the Mortgage Rates on the ARM Loans and (y)
changes in the relative composition of the Mortgage Pool as a result of
scheduled amortization, voluntary prepayments and involuntary liquidations of
the Mortgage Loans. See "Description of the Mortgage Pool" herein and "--Yield
Considerations--Rate and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by the
rate and timing of principal payments on such Certificates. As and to the extent
described herein, the holders of each Class of Offered Certificates will be
entitled to receive on each Distribution Date their allocable share (calculated
on the basis of the Ownership Percentage evidenced by such Class of Certificates
immediately prior to such date) of the Scheduled Principal Distribution Amount
for such Distribution Date; however, the Unscheduled Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class A Certificates, until the Certificate Balance thereof is reduced to
zero, and will thereafter be distributable entirely in respect of the Class B
Certificates. In addition, as and to the extent described herein, distributions
of the Class R Certificates' allocable share of the Scheduled Principal
Distribution Amount for each Distribution Date will be applied in reduction of
the Certificate Balances of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of their Class designations. See
"Description of the Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein. Consequently, the rate and timing of
principal payments on the Offered Certificates will be directly related to the
rate and timing of principal payments on or in respect of the Mortgage Loans
(including principal prepayments on the Mortgage Loans resulting from both
voluntary prepayments by the borrowers and involuntary liquidations). The rate
and timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due and the rate and timing of principal prepayments and other unscheduled
collections thereon (including for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, casualties or condemnations
affecting the Mortgaged Properties, or purchases of Mortgage Loans out of the
Trust Fund). Prepayments and, assuming the respective stated maturity dates
therefor have not occurred, liquidations and purchases of the Mortgage Loans,
will result in distributions on the Offered Certificates of amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Defaults on the Mortgage Loans, particularly at or near their stated maturity
dates, may result in significant delays in payments of principal on the Mortgage
Loans (and, accordingly, on the Offered Certificates) while work-outs are
negotiated or foreclosures are completed. See "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements--
S-50
<PAGE>
Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects of
Mortgage Loans--Foreclosure" in the Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed on such
Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual yield
to such investor that is lower than the anticipated yield and, in the case of
any Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
payment of principal on the Mortgage Loans is distributed on an Offered
Certificate purchased at a discount or premium, the greater will be the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments (to the extent distributable on such investor's
Offered Certificates) occurring at a rate higher (or lower) than the rate
anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments. Because the rate of principal payments on the Mortgage Loans will
depend on future events and a variety of factors (as described more fully
below), no assurance can be given as to such rate or the rate of principal
prepayments in particular. The Depositor is not aware of any relevant publicly
available or authoritative statistics with respect to the historical prepayment
experience of a large group of mortgage loans comparable to the Mortgage Loans.
The yield to maturity of Offered Certificates that are purchased at a
discount or premium will be similarly affected by payments of principal thereon
made with funds in excess of the Distributable Principal Collections and
Advances to which the holders of such Certificates may be then entitled. As
described herein under "Description of the Certificates--Distributions--
Priority", if there exists an Uncovered Portion of the Certificate Balance of
any Class of REMIC Regular Certificates outstanding immediately prior to a
Distribution Date, distributions will be made, to the extent of the lesser of
available funds and such Uncovered Portion, in reduction of the Certificate
Balance(s) of such Class of REMIC Regular Certificates and each other Class of
REMIC Regular Certificates, if any, with an earlier alphabetical Class
designation, in alphabetical order of such Class designations. Accordingly,
losses incurred in respect of the Mortgage Pool, to the extent creating an
Uncovered Portion of the Certificate Balance of [the Class C] Certificates,
could speed amortization of the Offered Certificates, to the extent described
above, beyond any positive effect on such amortization that would generally
result from liquidations of Mortgage Loans prior to their maturity.
In addition, ____% of the Excess Funds, if any, for each Distribution
Date will be applied in reduction of the Certificate Balances of the respective
Classes of REMIC Regular Certificates, in reverse alphabetical order of their
Class designations. See "Description of the
Certificates--Distributions--Priority" herein. The aggregate amount of Excess
Funds on each Distribution Date will largely be a function of (i) whether the
Class A Certificates are outstanding as of such Distribution Date and, if so,
the extent to which the Pass-Through Rate on the Class A Certificates for such
Distribution Date is higher or lower than the Weighted Average Effective Net
Mortgage Rate for such date, and (ii) the size of the Excess Pool Balance or,
conversely, of the aggregate Uncovered Portion of the Certificate Balances of
the REMIC Regular Certificates immediately prior to such Distribution Date.
Because such variables are in turn dependent on a variety of factors, including,
among other things, monthly fluctuations in LIBOR, adjustments of the Mortgage
Rates on the ARM Loans, the relative composition of the Mortgage Pool from time
to time, and the rate and timing of principal payments and the severity of
losses on the Mortgage Loans, no assurance can be given as to the amount of
Excess Funds that will be available on any Distribution Date.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net Aggregate
Prepayment Interest Shortfalls, generally be borne: FIRST, by the holders of the
Private Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; SECOND, by the holders of the Class B
Certificates, to the extent of amounts otherwise distributable in respect of
their Certificates; and LAST, by the holders of the Class A Certificates. As
more fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective Classes
of Certificateholders on a PRO RATA basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by a
number of factors, including, without limitation, prevailing interest rates,
S-51
<PAGE>
the terms of the Mortgage Loans (for example, adjustable Mortgage Rates,
Lock-out Periods, provisions requiring the payment of Prepayment Premiums,
amortization terms that require balloon payments and provisions that permit
negative amortization), the demographics and relative economic vitality of the
areas in which the Mortgaged Properties are located and the general supply and
demand for rental units in such areas, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. See "Risk Factors--The Mortgage
Loans" and "Description of the Mortgage Pool" herein and "Yield
Considerations--Principal Prepayments" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Although most of the Mortgage Loans are ARM Loans, adjustments to the
Mortgage Rates thereon will generally be limited by lifetime and/or periodic
caps and floors and, in each case, will be based on the related Index (which may
not rise and fall consistently with mortgage interest rates then available) plus
the related Gross Margin (which may be different from margins then offered on
adjustable rate mortgage loans). See "Description of the Mortgage Pool--Certain
Payment Characteristics" and "--The Eleventh District Cost of Funds Index"
herein. As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage Rates
on the ARM Loans decline in a manner consistent therewith, related borrowers may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate, or (ii) taking
advantage of an initial "teaser rate" (a mortgage interest rate below what it
would otherwise be if the applicable index and gross margin were applied) on
another adjustable rate mortgage loan. The Mortgage Loans may be prepaid at any
time and, in [most] cases (approximately _____% of the Initial Pool Balance),
may be prepaid in whole or in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by Federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to which
a default will have occurred as of any date or as to the overall rate of
prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will
not be made to Certificateholders until a date that is scheduled to be at least
_____ days and as many as ______ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming such
prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under
"Description of the Certificates--Distributions--Priority" herein, if the
portion of the Available Distribution Amount distributable in respect of
interest on either Class of Offered Certificates on any Distribution Date is
less than the Distributable Certificate Interest then payable for such Class,
the shortfall will be distributable to holders of such Class of Certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest, however, and will therefore negatively affect
the yield to maturity of such Class of Certificates for so long as it is
outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be influenced
by, among other things, the rate at which principal on the Mortgage Loans is
paid or otherwise collected or advanced and by the availability of any amounts
other than Distributable Principal Collections and Advances to amortize the
Certificate Balance of its Class. As and to the extent described herein, the
holders of each Class of Offered Certificates will be entitled to receive on
each Distribution Date their allocable share (calculated on the basis of the
Ownership Percentage evidenced by such Class of Certificates
S-52
<PAGE>
immediately prior to such date) of the Scheduled Principal Distribution Amount
for such Distribution Date; however, the Unscheduled Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class A Certificates, until the Certificate Balance thereof is reduced to
zero, and will thereafter be distributable entirely in respect of the Class B
Certificates. In addition, as and to the extent described herein, distributions
of the Class R Certificates' allocable share of the Scheduled Principal
Distribution Amount for each Distribution Date, together with _____% of all
Excess Funds, if any, for such Distribution Date, will be applied in reduction
of the Certificate Balances of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of their Class designations; while
any distributions in respect of an Uncovered Portion of the Certificate Balance
of any Class of REMIC Regular Certificates will be applied, to the extent of
such Uncovered Portion, in reduction of the Certificate Balance(s) of such Class
of REMIC Regular Certificates and each other Class of REMIC Regular
Certificates, if any, with an earlier alphabetical Class designation, in
alphabetical order of such Class designations. See "Description of the
Certificates--Distributions--Priority" and "--Distributions--Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount" herein. As a
consequence of the foregoing, the weighted average life of the Class A
Certificates will be shorter, and the weighted average life of the Class B
Certificates may be longer, than would otherwise be the case if Distributable
Principal Collections and Advances and any other amounts being applied in
reduction of the Certificate Balances of the REMIC Regular Certificates were
being distributed on a PRO RATA basis among the respective Classes thereof.
______ Mortgage Loans, which represent ____% of the Initial Pool
Balance, permit negative amortization. Although it is impossible to predict the
degree of Mortgage Loan negative amortization that will actually be experienced
with respect to the Mortgage Pool following the Cut-off Date, the allocation of
negative amortization to any Class of Offered Certificates (and the
corresponding increase in the Certificate Balance of such Class) will have the
effect of extending the weighted average life of such Certificates. As more
fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", any negative
amortization experienced by the Mortgage Loans during a particular Due Period
will be allocated among the respective Classes of Certificates generally on a
PRO RATA basis on the related Distribution Date.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then scheduled principal balance of the pool of mortgage loans. As used in each
of the following tables, the column headed "0%" assumes that none of the
Mortgage Loans is prepaid before maturity. The columns headed "___%", "___%",
"___%" and "___%" assume that prepayments on the Mortgage Loans are made at
those CPRs. There is no assurance, however, that prepayments of the Mortgage
Loans will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the CPRs shown or at any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each Class of Offered Certificates that would be outstanding after
each of the dates shown at various CPRs and the corresponding weighted average
life of each such Class of Offered Certificates. The tables have been prepared
on the basis of the following assumptions, among others: [(i) scheduled monthly
payments of principal and interest on the Mortgage Loans will be timely received
(with no defaults) and will be distributed on the 25th day of each month
commencing in ________ 199___; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan, until
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of ________, 199__, subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 360/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the Cut-off
Date will continue to be due (a) in the case of each Fixed Rate Loan, on each
Due Date until maturity and, (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due Date
until maturity will be calculated reflecting the appropriate Mortgage Rate and
remaining amortization term, subject to such Mortgage Loan's periodic payment
cap or negative amortization limits, if any; (v) principal prepayments on the
Mortgage Loans will be received on their respective Due Dates at the respective
CPRs set forth in the tables, and there will be no Net Aggregate Prepayment
Interest Shortfalls in connection therewith; (vi) the Mortgage Loan Seller will
not be required to repurchase any Mortgage Loan, and the Master Servicer will
not exercise its option to purchase all the Mortgage Loans and thereby cause an
early termination of the Trust Fund; and (vii) the Pass-Through Rate for the
Class A Certificates will remain at _____% per annum.] To the extent that the
Mortgage Loans have characteristics
S-53
<PAGE>
that differ from those assumed in preparing the tables set forth below, each
Class of the Offered Certificates may mature earlier or later than indicated by
the tables. It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all the Mortgage Loans will prepay at the
same rate. In addition, variations in the actual prepayment experience and the
balance of the Mortgage Loans that prepay may increase or decrease the
percentages of initial Certificate Balances (and weighted average lives) shown
in the following tables. Such variations may occur even if the average
prepayment experience of the Mortgage Loans were to equal any of the specified
CPR percentages.
Investors are urged to conduct their own analyses of the rates at which
the Mortgage Loans may be expected to prepay.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class A Certificates and sets forth the
percentage of the initial Certificate Balance of the Class A Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
<CAPTION>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
DATE 0% % % % %
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Delivery Date ............................... 100.0 100.0 100.0 100.0 100.0
_________ 25, 1996 ..........................
_________ 25, 1997 ..........................
_________ 25, 1998 ..........................
_________ 25, 1999 ..........................
_________ 25, 2000 ..........................
_________ 25, 2001 ..........................
_________ 25, 2002 ..........................
Weighted Average Life (years)(A) ............
</TABLE>
- ----------
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth the
percentage of the initial Certificate Balance of the Class B Certificates that
would be outstanding after each of the dates shown at the indicated CPRs.
<TABLE>
<CAPTION>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
DATE 0% % % % %
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Delivery Date ............................... 100.0 100.0 100.0 100.0 100.0
_________ 25, 1996 ..........................
_________ 25, 1997 ..........................
_________ 25, 1998 ..........................
_________ 25, 1999 ..........................
_________ 25, 2000 ..........................
_________ 25, 2001 ..........................
_________ 25, 2002 ..........................
Weighted Average Life (years)(A) ............
</TABLE>
- ----------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
S-54
<PAGE>
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Offered
Certificates will be used by the Depositor to purchase the Mortgage Loans and to
pay certain expenses in connection with the issuance of the Certificates.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates,
________________________________________, counsel to the Depositor, will deliver
and file with the Commission its opinion generally to the effect that, assuming
compliance with all provisions of the Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust Fund will qualify as a REMIC under the
Internal Revenue Code of 1986 (the "Code"). For Federal income tax purposes, the
Class R Certificates will be the sole class of "residual interests" in the
REMIC, and the Class A, Class B and Class C Certificates will be the "regular
interests" in the REMIC and generally will be treated as debt instruments of the
REMIC. See "Material Federal Income Tax Consequences--REMICs" in the Prospectus.
The __________ Certificates [may] [will] [will not] be treated as
having been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of __%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ___________________ Certificates may be treated for Federal income
tax purposes as having been issued at a premium. Whether any holder of [either]
such Class of Certificates will be treated as holding a Certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and interest (including original issue discount, if any) on the Offered
Certificates will be interest described in Section 856(c)(3)(B) of the Code.
Moreover, the Offered Certificates will be "obligation[s] . . . which . . .
[are] principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code. See "Material Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
For further information regarding the Federal income tax consequences
of investing in the Offered Certificates, see "Material Federal Income Tax
Consequences--REMICs" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code (each, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted either under ERISA
or Section 4975 of the Code or whether there exists any statutory or
administrative exemption applicable thereto.
[The U.S. Department of Labor issued to Merrill Lynch, Pierce, Fenner &
Smith Incorporated an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code and Section 501(i) of ERISA, certain
transactions, among others, relating to the servicing and operation of mortgage
pools, such as the
S-55
<PAGE>
Mortgage Pool, and the purchase, sale and holding of mortgage pass-through
certificates, such as the Class A Certificates, underwritten by an Underwriter
(as hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this discussion, the term "Underwriter"
shall include (a) Merrill Lynch, Pierce, Fenner & Smith Incorporated, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with Merrill Lynch, Pierce, Fenner & Smith
Incorporated and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. FIRST, the
acquisition of the Class A Certificates by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm'slength transaction
with an unrelated party. SECOND, the rights and interests evidenced by the Class
A Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. THIRD, the Class A Certificates at the
time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.
FOURTH, the Trustee cannot be an affiliate of any other member of the
"Restricted Group", which consists of any Underwriter, the Depositor, the Master
Servicer, the Trustee, any sub-servicer, and any borrower with respect to
Mortgage Loans constituting more than 5% of the aggregate unamortized principal
balance of the Mortgage Loans as of the date of initial issuance of the Class A
Certificates. FIFTH, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the Master
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. SIXTH, the investing Plan must be an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other
Class of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than "__" by each Rating
Agency; thus, the third general condition set forth above is satisfied with
respect to such Certificates as of the Delivery Date. In addition, the fourth
general condition set forth above is also satisfied as of the Delivery Date. A
fiduciary of a Plan contemplating purchasing a Class A Certificate in the
secondary market must make its own determination that, at the time of such
purchase, the Class A Certificates continue to satisfy the third and fourth
general conditions set forth above. A fiduciary of a Plan contemplating
purchasing any purchase of a Class A Certificate must make its own determination
that the first, fifth and sixth general conditions set forth above will be
satisfied with respect to such Class A Certificate as of the date of such
purchase.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that the specific and general conditions of the Exemption and the
other requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider the availability
of any other prohibited transaction exemptions. See "ERISA Considerations" in
the Prospectus.]
[Because the characteristics of the Class B Certificates do not meet
the requirements of the Exemption, the purchase or holding of such Certificates
by a Plan may result in prohibited transactions or the imposition of excise
taxes or civil penalties. As a result,] no transfer of a [Class B] Certificate
or any interest therein may be made to a Plan or to any person who is directly
or indirectly purchasing such [Class B] Certificate or interest therein on
behalf of, as named fiduciary of, as trustee of, or with assets of a Plan,
unless the prospective transferee provides the Certificate Registrar with a
certification of facts and an opinion of counsel which establish to the
satisfaction of the Certificate Registrar that such transfer will not result in
a violation of Section 406 of ERISA or Section 4975 of the Code or cause the
Master Servicer or the Trustee to be deemed a fiduciary of such Plan or result
in the imposition of an excise tax under Section 4975 of the Code. See "ERISA
Considerations" in the Prospectus.
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<PAGE>
LEGAL INVESTMENT
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), and as such will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
State whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, however, if
a State enacted legislation on or prior to October 3, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities," such securities will constitute legal investments for
entities subject to such legislation only to the extent provided therein.
Certain States have enacted legislation which overrides the preemption
provisions of SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage related securities"
for purposes of SMMEA. As a result, the appropriate characterization of the
[Class B] Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal investment
or other restrictions. All institutions whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for them or are subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Offered Certificates
will be purchased from the Depositor by the Underwriter, an affiliate of the
Depositor, upon issuance. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor estimated to be
approximately $_______, will be _______% of the initial aggregate Certificate
Balance thereof, plus accrued interest.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling the Offered Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the purchase
and sale of the Offered Certificates, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting discounts.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act").
Purchasers of the Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
S-57
<PAGE>
The Depositor also has been advised by the Underwriter that it, through
one or more of its affiliates, currently intends to make a market in the Offered
Certificates; however, it has no obligation to do so, any market making may be
discontinued at any time and there can be no assurance that an active public
market for the Offered Certificates will develop. See "Risk Factors--Limited
Liquidity" herein and in the Prospectus.
THE DEPOSITOR HAS AGREED TO INDEMNIFY THE UNDERWRITER AND EACH PERSON,
IF ANY, WHO CONTROLS THE UNDERWRITER WITHIN THE MEANING OF SECTION 15 OF THE
SECURITIES ACT AGAINST, OR MAKE CONTRIBUTIONS TO THE UNDERWRITER AND EACH SUCH
CONTROLLING PERSON WITH RESPECT TO, CERTAIN LIABILITIES, INCLUDING LIABILITIES
UNDER THE SECURITIES ACT.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the
Underwriter by ____________________.
RATING
It is a condition to issuance that the Class A Certificates be rated
not lower than "__", and the Class B Certificates be rated not lower than "__",
by ____________________________________.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the mortgage
pool, structural and legal aspects associated with the certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding frequency of
prepayments on the Mortgage Loans.
There can be no assurance as to whether any rating agency not requested
to rate the Offered Certificates will nonetheless issue a rating to either or
both Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to either Class of Offered Certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
thereto by ___________________________.
The ratings on the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors--Limited Nature of Ratings" in the Prospectus.
S-58
<PAGE>
INDEX OF DEFINITIONS
PAGE
----
360/360 basis .............................................. S-42
Accrued Certificate Interest ............................... S-43
Advance .................................................... S-46
Aggregate Mortgage Loan Negative Amortization .............. S-10, S-43
ARM Loans .................................................. S-2, S-7, S-24
Available Distribution Amount .............................. S-12, S-40
Balloon Payment ............................................ S-8, S-25
Certificate Balance ........................................ S-2
Certificate Negative Amortization .......................... S-10, S-44
Certificate Registrar ...................................... S-39
Certificates ............................................... S-1, S-5
Class ...................................................... S-1
Class A Certificate Owner .................................. S-6
Code ....................................................... S-55
COFI ARM Loans ............................................. S-2, S-7, S-24
COFI Index ................................................. S-2, S-7
Compensating Interest Payment .............................. S-15, S-37
Constant Prepayment Rate ................................... S-53
CPR ........................................................ S-53
Custodian .................................................. S-34
Cut-off Date ............................................... S-2
Cut-off Date Balance ....................................... S-8
Cut-off Date LTV Ratio ..................................... S-30
Debt Service Coverage Ratio ................................ S-30
Definitive Class A Certificate ............................. S-6
Delivery Date .............................................. S-1
Depositor .................................................. S-2
Determination Date ......................................... S-40
Distributable Certificate Interest ......................... S-14, S-43
Distributable Principal Collections and Advances ........... S-15, S-44
Distribution Date .......................................... S-2, S-12, S-40
Distribution Date Statement ................................ S-46
DTC ........................................................ S-6
Due Date ................................................... S-6
Due Period ................................................. S-12, S-40
Effective Net Mortgage Rate ................................ S-11
ERISA ...................................................... S-18, S-55
Excess Funds ............................................... S-14, S-41
Excess Pool Balance ........................................ S-10, S-39
Exemption .................................................. S-55
FHLB of San Francisco ...................................... S-25
Fixed Rate Loans ........................................... S-2, S-7, S-24
Form 8-K ................................................... S-35
Funds-Available Cap Rate ................................... S-11, S-42
Gross Margin ............................................... S-7
Index ...................................................... S-2, S-7, S-24
Initial Pool Balance ....................................... S-2
Interest Rate Adjustment Date .............................. S-7
LIBOR ...................................................... S-11, S-42
LIBOR Adjustment Date ...................................... S-42
LIBOR business day ......................................... S-42
Lock-out Expiration Date ................................... S-8, S-25
Lock-out Period ............................................ S-8, S-25
Master Servicer Reimbursement Rate ......................... S-15, S-46
S-59
<PAGE>
PAGE
----
Monthly Payments ........................................... S-2, S-6
Mortgage ................................................... S-23
Mortgage File .............................................. S-34
Mortgage Loan Purchase Agreement ........................... S-5, S-32
Mortgage Loan Seller ....................................... S-2, S-23, S-32
Mortgage Loans ............................................. S-2
Mortgage Note .............................................. S-23
Mortgage Pool .............................................. S-2
Mortgage Rate .............................................. S-2, S-6
Mortgaged Property ......................................... S-6, S-23
Net Aggregate Prepayment Interest Shortfall ................ S-16, S-43
Net Mortgage Rate .......................................... S-11, S-42
Net Operating Income ....................................... S-30
Nonrecoverable P&I Advance ................................. S-46
Offered Certificates ....................................... S-1, S-5, S-39
Ownership Percentage ....................................... S-15, S-44
P&I Advance ................................................ S-15, S-45
Participants ............................................... S-6
Pass-Through Rate .......................................... S-2
Payment Adjustment Date .................................... S-7
Payment Cap ................................................ S-7, S-24
Penalty Charges ............................................ S-37
Percentage Interest ........................................ S-40
Permitted Investments ...................................... S-36
Plan ....................................................... S-18, S-55
Pooling and Servicing Agreement ............................ S-9, S-38
Prepayment Interest Excess ................................. S-16, S-36
Prepayment Interest Shortfall .............................. S-16, S-36
Prepayment Premiums ........................................ S-8, S-25
Private Certificates ....................................... S-5, S-39
Purchase Price ............................................. S-34
Rating Agencies ............................................ S-18
Record Date ................................................ S-12
Reference Banks ............................................ S-42
Related Proceeds ........................................... S-46
REMIC ...................................................... S-2, S-17
REMIC Regular Certificates ................................. S-2, S-5, S-39
REO Loan ................................................... S-44
REO Property ............................................... S-15, S-39
Reserve Interest Rate ...................................... S-43
Restricted Group ........................................... S-56
Reuters Screen LIBO Page ................................... S-42
Scheduled Principal Distribution Amount .................... S-14, S-44
Securities Act ............................................. S-57
Servicing Fee .............................................. S-5, S-36
Servicing Fee Rate ......................................... S-5, S-36
SMMEA ...................................................... S-18, S-57
Stated Principal Balance ................................... S-10, S-44
Subordinate Certificates ................................... S-16, S-45
Treasury Index ............................................. S-7
Trust Fund ................................................. S-2, S-9
Uncovered Portion .......................................... S-10, S-45
Underwriter ................................................ S-1
Unscheduled Principal Distribution Amount .................. S-14
Weighted Average Effective Net Mortgage Rate ............... S-11, S-42
S-60
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
S-61
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
----------
The mortgage pass-through certificates (the "Offered Certificates") offered
hereby and by the supplements hereto (each, a "Prospectus Supplement") will be
offered from time to time in series. The Offered Certificates of each series,
together with any other mortgage pass-through certificates of such series, are
collectively referred to herein as the "Certificates."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") consisting primarily of a segregated pool of one or more of
various types of multifamily or commercial mortgage loans (the "Mortgage Loans")
secured by interests in the following property types residential properties
consisting of five or more rental or cooperatively-owned dwelling units, retail
stores, hotels or motels, office buildings, industrial plants, nursing homes,
mobile home parks, self-storage facilities, or mixed use or other types of
income producing properties, mortgage-backed securities ("MBS") that evidence
interests in, or that are secured by pledges of, one or more of various types of
multifamily or commercial mortgage loans, or a combination of Mortgage Loans and
MBS (collectively, "Mortgage Assets"). See "Description of the Trust Funds."
Mortgage Loans (or mortgage loans underlying an MBS) may be delinquent as of the
date Certificates of a series are issued, if so specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Trust Fund for a series of Certificate may include amounts on deposit in a
separate account (the "Pre-Funding Account") which may be used by the Trust Fund
to acquire additional assets as more fully described herein and in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Trust Fund for a series of Certificates may include letters of credit, insurance
policies, guarantees, reserve funds or other types of credit support, or any
combination thereof (with respect to any series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other financial
assets, or any combination thereof (with respect to any series, collectively,
"Cash Flow Agreements"). See "Risk Factors--Effects of Pre-Funding and
Acquisition of Additional Mortgage Assets," "Description of the Certificates"
and "Description of Credit Support."
Each series of Certificates will consist of one or more classes of
Certificates, and such class or classes (including classes of Offered
Certificates) may (i) provide for the accrual of interest thereon based on a
fixed, variable or adjustable rate; (ii) be senior or subordinate to one or more
other classes of Certificates in entitlement to certain distributions on the
Certificates; (iii) be entitled to distributions of principal, with
disproportionately small, nominal or no distributions of interest; (iv) be
entitled to distributions of interest, with disproportionately small, nominal or
no distributions of principal; (v) provide for distributions of principal and/or
interest that commence only following the occurrence of certain events, such as
the retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal to be made, subject to available funds, based on a specified principal
payment schedule or other methodology. See "Description of the Certificates."
Distributions in respect of the Certificates of each series will be made on
a monthly, quarterly, semi-annual or other periodic basis as specified in the
related Prospectus Supplement. Such distributions will be made only from the
assets of the related Trust Fund.
This Prospectus and related Prospectus Supplements may be used by the
Depositor, Merrill Lynch, an affiliate of the Depositor, and any other affiliate
of the Depositor when required under the federal securities law in connection
with offers and sales of Offered Certificates in furtherance of market-making
activities in Offered Certificates. Merrill Lynch or any such other affiliate
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing marketing prices at the time of sale or otherwise.
No Certificates of any series will represent an obligation of or interest
in the Depositor or any of its affiliates, except to the limited extent
described herein and in the related Prospectus Supplement. Neither the
Certificates of any series nor the assets in the related Trust Fund will be
guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. See
"Yield and Maturity Considerations." A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates."
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. See "Material Federal Income Tax Consequences" herein.
----------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE 16 OF THIS PROSPECTUS AND SUCH INFORMATION AS MAY BE SET
FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
Prior to issuance there will have been no market for the Certificates of
any series and there can be no assurance that a secondary market for any Offered
Certificates will develop or that, if it does develop, it will continue. See
"Risk Factors." This Prospectus may not be used to consummate sales of the
Offered Certificates of any series unless accompanied by the Prospectus
Supplement for such series.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as more fully
described under "Method of Distribution" herein and in the related Prospectus
Supplement.
JUNE 23, 1998
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, each Prospectus Supplement will,
among other things, set forth, as and to the extent appropriate: (i) a
description of the class or classes of Offered Certificates of the related
series, including the payment provisions with respect to each such class, the
aggregate principal amount of each such class (the "Certificate Balance"), the
rate at which interest will accrue from time to time, if at all, with respect to
each such class (the "Pass-Through Rate") or the method of determining such
rate; (ii) information with respect to any other classes of Certificates of the
same series; (iii) the respective dates on which distributions are to be made to
Certificateholders; (iv) information as to the assets constituting the related
Trust Fund, including the general characteristics of the assets included
therein, including the Mortgage Assets and any Credit Support and Cash Flow
Agreements (with respect to the Certificates of any series, the "Trust Assets");
(v) the circumstances, if any, under which the related Trust Fund may be subject
to early termination; (vi) additional information with respect to the method of
distribution of such Offered Certificates; (vii) whether one or more REMIC
elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created; (viii) the initial percentage
ownership interest in the related Trust Fund to be evidenced by each class of
Certificates of such series; (ix) information concerning the trustee (as to any
series, the "Trustee") of the related Trust Fund; (x) information concerning the
master servicer (as to any series, the "Master Servicer") and any special
servicer (as to any series, the "Special Servicer") engaged to administer the
related Mortgage Assets; (xi) information as to the nature and extent of any
subordination in entitlement to distributions of any class of Certificates of
such series; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to the
Offered Certificates of each series contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. Publicly filed information, including
information regarding the Registrant, is available at the Commission's web site
at www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and any related Prospectus
Supplement and, if given or made, such information or representation must not be
relied upon. This Prospectus and any related Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Offered Certificates, or an offer of the Offered Certificates to
any person in any state or other jurisdiction in which such offer would be
unlawful. The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to its date; however, if
any material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be amended or supplemented accordingly.
The related Master Servicer or Trustee will be required to mail to holders
of the Offered Certificates of each series periodic unaudited reports concerning
the related Trust Fund. If beneficial interests in a class of Offered
Certificates are being held and transferred in book-entry format through the
facilities of The Depository Trust Company ("DTC") as described herein, then
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to a nominee of DTC as the
registered holder of the Offered Certificates. The means by which notices and
other communications are conveyed by DTC to its participating organizations, and
directly or indirectly through such participating organizations to the
beneficial owners of the applicable Offered Certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive Certificates," and "Description of the Pooling Agreements--Evidence
as to Compliance." The Depositor will file or cause to be filed with the
Commission such periodic reports with respect to each Trust Fund as are required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Certificates evidencing interests therein. The
Depositor, upon request, will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the offering
of one or more classes of Offered Certificates, a copy of any or all documents
or reports incorporated herein by reference, in each case to the extent such
documents or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Requests to the
Depositor should be directed in writing to its principal executive office at
250Vesey Street, Fifteenth Floor, New York, New York 10281-1315, Attention:
Secretary, or by telephone at (212)449-0336. The Depositor has determined that
its financial statements will not be material to the offering of any Offered
Certificates.
3
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT ............................................................................ 2
AVAILABLE INFORMATION ............................................................................ 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ................................................ 3
SUMMARY OF PROSPECTUS ............................................................................ 8
RISK FACTORS ..................................................................................... 16
Limited Liquidity for Offered Certificates ..................................................... 16
Limited Assets to Support Payment on Certificates .............................................. 16
Prepayments on Mortgage Loans; Effects on Average Life of Certificates; Effects on Yields
on Certificates ............................................................................... 16
Optional Early Termination ..................................................................... 18
Limited Nature of Ratings on Certificates ...................................................... 18
Effects of Pre-Funding and Acquisition of Additional Mortgage Assets ........................... 18
Risks to Lenders Associated With Certain Income Producing Loans and Mortgaged Properties ....... 19
Risks Associated with Mortgage Loans Secured by Multifamily Properites ....................... 19
Risks Associated with Mortgage Loans Secured by Retail Properties ............................ 20
Risks Associated with Mortgage Loans Secured by Hospitality Properties ....................... 20
Risks Associated with Mortgage Loans Secured by Office Buildings ............................. 20
Risks Associated with Mortgage Loans Secured by Industrial & Mixed-Use Facilities ............ 21
Risks Associated with Mortgage Loans Secured by Residential Healthcare Facilities ............ 21
Risks Associated with Mortgage Loans Secured by Healthcare-Related Properties ................ 21
Risks Associated with Mortgage Loans Secured by Warehouse and Storage Facilities ............. 23
Management Risks ............................................................................... 23
Balloon Payments on Mortgage Loans; Heightened Risk of Borrower Default ........................ 23
Leases and Rents Serving as Security for Mortgage Loans Pose Special Risks ..................... 24
Delinquent Mortgage Loans ...................................................................... 24
Environmental Liability May Affect Lien on Mortgaged Property and Expose Lender to Costs ....... 24
Credit Support Limitations--May Not Cover All Risks or Full Payment on Certificates ............ 25
Certain Federal Tax Considerations Regarding REMIC Residual Certificates ....................... 25
ERISA Considerations--Covered Investors May Experience Liability ............................... 26
Book-Entry Registration of Certificates Affects Ownership of Certificates and Receipt of Payment 26
DESCRIPTION OF THE TRUST FUNDS ................................................................... 26
General ........................................................................................ 26
Mortgage Loans ................................................................................. 26
General ...................................................................................... 26
Default and Loss Considerations with Respect to the Mortgage Loans ........................... 27
Payment Provisions of the Mortgage Loans ..................................................... 28
Mortgage Loan Information in Prospectus Supplements .......................................... 28
MBS ............................................................................................ 29
Certificate Accounts ........................................................................... 29
Credit Support ................................................................................. 30
Cash Flow Agreements ........................................................................... 30
Pre-Funding .................................................................................... 30
YIELD AND MATURITY CONSIDERATIONS ................................................................ 31
General ........................................................................................ 31
Pass-Through Rate .............................................................................. 31
Payment Delays ................................................................................. 31
Certain Shortfalls in Collections of Interest .................................................. 31
Yield and Prepayment Considerations ............................................................ 31
Weighted Average Life and Maturity ............................................................. 33
Controlled Amortization Classes and Companion Classes .......................................... 33
Other Factors Affecting Yield, Weighted Average Life and Maturity .............................. 34
Balloon Payments; Extensions of Maturity ..................................................... 34
Negative Amortization ........................................................................ 34
Foreclosures and Payment Plans ............................................................... 35
Losses and Shortfalls on the Mortgage Assets ................................................. 35
Additional Certificate Amortization .......................................................... 35
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THE DEPOSITOR .................................................................................... 36
USE OF PROCEEDS .................................................................................. 36
DESCRIPTION OF THE CERTIFICATES .................................................................. 36
General ........................................................................................ 36
Distributions .................................................................................. 36
Distributions of Interest on the Certificates .................................................. 37
Distributions of Certificate Principal ......................................................... 38
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of
Equity Participations ......................................................................... 38
Allocation of Losses and Shortfalls ............................................................ 38
Advances in Respect of Delinquencies ........................................................... 39
Reports to Certificateholders .................................................................. 39
Voting Rights .................................................................................. 41
Termination .................................................................................... 41
Book-entry Registration and Definitive Certificates ............................................ 42
DESCRIPTION OF THE POOLING AGREEMENTS ............................................................ 43
General ........................................................................................ 43
Assignment of Mortgage Loans; Repurchases ...................................................... 43
Representations and Warranties; Repurchases .................................................... 44
Certificate Account ............................................................................ 45
General ...................................................................................... 45
Deposits ..................................................................................... 45
Withdrawals .................................................................................. 46
Collection and Other Servicing Procedures ...................................................... 47
Modifications, Waivers and Amendments of Mortgage Loans ........................................ 47
Sub-Servicers .................................................................................. 47
Special Servicers .............................................................................. 48
Realization Upon Defaulted Mortgage Loans ...................................................... 48
Hazard Insurance Policies ...................................................................... 49
Due-on-Sale and Due-on-Encumbrance Provisions .................................................. 50
Servicing Compensation and Payment of Expenses ................................................. 50
Evidence as to Compliance ...................................................................... 51
Certain Matters Regarding the Master Servicer and the Depositor ................................ 51
Events of Default .............................................................................. 52
Rights Upon Event of Default ................................................................... 52
Amendment ...................................................................................... 53
List of Certificateholders ..................................................................... 53
The Trustee .................................................................................... 53
Duties of the Trustee .......................................................................... 53
Certain Matters Regarding the Trustee .......................................................... 54
Resignation and Removal of the Trustee ......................................................... 54
DESCRIPTION OF CREDIT SUPPORT .................................................................... 54
General ........................................................................................ 54
Subordinate Certificates ....................................................................... 55
Cross-support Provisions ....................................................................... 55
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Insurance or Guarantees with Respect to Mortgage Loans ....................................... 55
Letter of Credit ............................................................................. 55
Certificate Insurance and Surety Bonds ....................................................... 55
Reserve Funds ................................................................................ 56
Credit Support with Respect to MBS ........................................................... 56
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS ........................................................ 56
General ...................................................................................... 57
Types of Mortgage Instruments ................................................................ 57
Leases and Rents ............................................................................. 57
Personalty ................................................................................... 57
Junior Mortgages; Rights of Senior Lenders ................................................... 58
Foreclosure .................................................................................. 58
General .................................................................................... 58
Foreclosure Procedures Vary From State to State ............................................ 58
Judicial Foreclosure ....................................................................... 58
Non-Judicial Foreclosure/Power of Sale ..................................................... 59
Limitations on the Rights of Mortgage Lenders .............................................. 59
Rights of Redemption ....................................................................... 60
Anti-Deficiency Legislation ................................................................ 60
Leasehold Considerations ................................................................... 60
Bankruptcy Laws .............................................................................. 61
Environmental Considerations ................................................................. 62
General .................................................................................... 62
Superlien Laws ............................................................................. 62
CERCLA ..................................................................................... 62
Certain State and Other Federal Laws ....................................................... 62
Additional Considerations .................................................................. 63
Due-on-Sale and Due-on-Encumbrance ........................................................... 63
Subordinate Financing ........................................................................ 63
Default Interest and Limitations on Prepayments .............................................. 64
Applicability of Usury Laws .................................................................. 64
Soldiers' and Sailors' Civil Relief Act of 1940 .............................................. 64
Americans with Disabilities Act .............................................................. 64
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ....................................................... 65
General ...................................................................................... 65
REMICs ....................................................................................... 65
Classification of REMICs ................................................................... 65
Characterization of Investments in REMIC Certificates ...................................... 66
Tiered REMIC Structures .................................................................... 66
Taxation of Owners of REMIC Regular Certificates ............................................. 67
General .................................................................................... 67
Original Issue Discount .................................................................... 67
Market Discount ............................................................................ 68
Premium .................................................................................... 70
Realized Losses ............................................................................ 70
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Taxation of Owners of REMIC Residual Certificates ................................................ 70
General ........................................................................................ 70
Taxable Income of the REMIC .................................................................... 71
Basis Rules, Net Losses and Distributions ...................................................... 72
Excess Inclusions .............................................................................. 73
Noneconomic REMIC Residual Certificates ........................................................ 74
Mark-to-Market Rules ........................................................................... 74
Possible Pass-Through of Miscellaneous Itemized Deductions ..................................... 75
Sales of REMIC Certificates .................................................................... 75
Prohibited Transactions Tax and Other Taxes .................................................... 76
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain Organizations ...... 77
Termination .................................................................................... 77
Reporting and Other Administrative Matters ..................................................... 78
Backup Withholding with Respect to REMIC Certificates .......................................... 78
Foreign Investors in REMIC Certificates ........................................................ 78
Grantor Trust Funds .............................................................................. 79
Classification of Grantor Trust Funds .......................................................... 79
Characterization of Investments in Grantor Trust Certificates .................................... 79
Grantor Trust Fractional Interest Certificates ................................................. 79
Grantor Trust Strip Certificates ............................................................... 80
Taxation of Owners of Grantor Trust Fractional Interest Certificates ............................. 80
General ........................................................................................ 80
If Stripped Bond Rules Apply ................................................................... 81
If Stripped Bond Rules Do Not Apply ............................................................ 82
Market Discount ................................................................................ 83
Premium ........................................................................................ 84
Taxation of Owners of Grantor Trust Strip Certificates ......................................... 85
Possible Application of Proposed Contingent Payment Rules ...................................... 86
Sales of Grantor Trust Certificates ............................................................ 86
Grantor Trust Reporting ........................................................................ 86
Backup Withholding ............................................................................. 87
Foreign Investors .............................................................................. 87
STATE AND OTHER TAX CONSEQUENCES ................................................................. 87
ERISA CONSIDERATIONS ............................................................................. 87
General ........................................................................................ 87
Plan Asset Regulations ......................................................................... 87
Prohibited Transaction Exemptions .............................................................. 88
LEGAL INVESTMENT ................................................................................. 89
METHOD OF DISTRIBUTION ........................................................................... 91
LEGAL MATTERS .................................................................................... 92
FINANCIAL INFORMATION ............................................................................ 92
RATING ........................................................................................... 92
INDEX OF DEFINITIONS ............................................................................. 93
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of Offered Certificates of such
series. An Index of Definitions is included at the end of this Prospectus.
Title of Certificates ............... Mortgage Pass-Through Certificates,
issuable in series (the
"Certificates").
Depositor .......................... Merrill Lynch Mortgage Investors, Inc.,
a wholly-owned limited purpose
subsidiary of Merrill Lynch Mortgage
Capital Inc. (the "Depositor"). See
"The Depositor."
Issuer ............................. The Trust Fund established under a
Pooling and Servicing Agreement, as
described below in this Summary of
Prospectus under "Description of
Certificates."
Master Servicer .................... The master servicer (the "Master
Servicer"), if any, for a series of
Certificates will be named in the
related Prospectus Supplement and may
be an affiliate of the Depositor. See
"Description of the Pooling
Agreements--Collection and Other
Servicing Procedures."
Special Servicer ................... The special servicer (the "Special
Servicer"), if any, for a series of
Certificates will be named, or the
circumstances under which a Special
Servicer will be appointed will be
described, in the related Prospectus
Supplement. See "Description of the
Pooling Agreements--Special
Servicers."
Trustee ............................ The trustee (the "Trustee") for each
series of Certificates will be named
in the related Prospectus Supplement.
See "Description of the Pooling
Agreements--The Trustee."
The Trust Assets ................... Each series of Certificates will
represent in the aggregate the entire
beneficial ownership interest in a
Trust Fund consisting primarily of:
A. Mortgage Assets ............ The Mortgage Assets with respect to each
series of Certificates will consist of
a pool of mortgage loans
(collectively, the "Mortgage Loans")
secured by liens on, or security
interests in, (i) residential
properties consisting of five or more
rental or cooperatively-owned dwelling
units (the "Multifamily Properties")
or (ii) retail stores, shopping
centers, hotels or motels, office
buildings, industrial plants, nursing
homes, hospitals or other health-care
related facilities, mobile home parks,
warehouse facilities, MINI-warehouse
facilities or self-storage facilities,
industrial plants, mixed use or other
types of income-producing properties
or improved land (the "Commercial
Properties"). If so specified in the
related Prospectus Supplement, a Trust
Fund may include Mortgage Loans
secured by liens on real estate
projects under construction. If so
specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent as of the date of their
deposit into the related Trust Fund. A
Mortgage Loan will be considered
"delinquent" if it is thirty (30) days
or more past its most recently
contractual scheduled payment date in
payment of all amounts due according
to its terms. In any event, at the
time of its creation the Trust Fund
will not include delinquent loans
which by principal amount are more
than 20% of the aggregate principal
amount of all Mortgage Loans in the
Trust Fund. The Mortgage Loans will
not be guaranteed or insured by the
Depositor, any of its affiliates or,
unless otherwise specified in the
Prospectus Supplement, by any
governmental agency or instrumentality
or other person.
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As and to the extent described in the
related Prospectus Supplement, a
Mortgage Loan (i) may provide for
accrual of interest thereon at an
interest rate (a "Mortgage Rate")
that is fixed over its term or that
adjusts from time to time, or that
may be converted at the borrower's
election from an adjustable to a
fixed Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, (ii)
may provide for level payments to
maturity or for payments that adjust
from time to time to accommodate
changes in the Mortgage Rate or to
reflect the occurrence of certain
events, and may permit negative
amortization, (iii) may be fully
amortizing over its term to maturity,
or may provide for little or no
amortization over its term and thus
require a balloon payment on its
stated maturity date, (iv) may
contain a prohibition on prepayment
or require payment of a premium or a
yield maintenance penalty in
connection with a prepayment and (v)
may provide for payments of
principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other
interval as is specified in the
related Prospectus Supplement. Unless
otherwise provided in the related
Prospectus Supplement, each Mortgage
Loan will have had an original term
to maturity of not more than 40
years, and will have been originated
by a person other than the Depositor.
See "Description of the Trust
Funds--Mortgage Loans."
If and to the extent specified in the
related Prospectus Supplement, the
Mortgage Assets that constitute a
particular Trust Fund may also
include or consist solely of (i)
private mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities,
such as mortgage-backed securities
that are similar to a series of
Certificates or (ii) certificates
insured or guaranteed by the Federal
Home Loan Mortgage Corporation
("FHLMC"), the Federal National
Mortgage Association ("FNMA") or the
Governmental National Mortgage
Association ("GNMA") or the Federal
Agricultural Mortgage Corporation
("FAMC") (collectively, the
mortgage-backed securities referred
to in clauses (i) and (ii), "MBS"),
provided that each MBS will evidence
an interest in, or will be secured by
a pledge of, one or more mortgage
loans that conform to the
descriptions of the Mortgage Loans
contained herein. See "Description of
the Trust Funds--MBS."
Each Mortgage Asset will be selected by
the Depositor for inclusion in a
Trust Fund from among those
purchased, either directly or
indirectly, from a prior holder
thereof (a "Mortgage Asset Seller"),
which prior holder may or may not be
the originator of such Mortgage Loan
or the issuer of such MBS and may be
an affiliate of the Depositor.
B. Certificate Account ........ Each Trust Fund will include one or more
accounts (collectively, the
"Certificate Account") established
and maintained on behalf of the
Certificateholders into which the
person or persons designated in the
related Prospectus Supplement will,
to the extent described herein and in
such Prospectus Supplement, deposit
all payments and collections received
or advanced with respect to the
Mortgage Assets and other assets in
the Trust Fund. A Certificate Account
may be maintained as an interest
bearing or a non-interest bearing
account, and funds held therein may
be held as cash or invested in
certain short-term, investment grade
obligations, in each case as
described in the related Prospectus
Supplement. See "Description of the
Trust Funds--Certificate
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9
<PAGE>
Accounts" and "Description of the
Pooling Agreements--Certificate
Account."
C. Credit Support ............. If so provided in the related Prospectus
Supplement, partial or full
protection against certain defaults
and losses on the Mortgage Assets in
the related Trust Fund may be
provided to one or more classes of
Certificates of the related series in
the form of subordination of one or
more other classes of Certificates of
such series, which other classes may
include one or more classes of
Offered Certificates, or by one or
more other types of credit support,
such as a letter of credit, insurance
policy, guarantee or reserve fund, or
a combination thereof (any such
coverage with respect to the
Certificates of any series, "Credit
Support"). The amount and types of
any Credit Support, the
identification of the entity
providing it (if applicable) and
related information will be set forth
in the related Prospectus Supplement.
See "Risk Factors--Credit Support
Limitations," "Description of the
Trust Funds--Credit Support" and
"Description of Credit Support."
D. Cash Flow Agreements ....... If so provided in the related Prospectus
Supplement, a Trust Fund may include
guaranteed investment contracts
pursuant to which moneys held in the
funds and accounts established for
the related series will be invested
at a specified rate. The Trust Fund
may also include interest rate
exchange agreements, interest rate
cap or floor agreements, currency
exchange agreements or similar
agreements designed to reduce the
effects of interest rate or currency
exchange rate fluctuations on the
Mortgage Assets or on one or more
classes of Certificates. The
principal terms of any such
guaranteed investment contract or
other agreement (any such agreement,
a "Cash Flow Agreement"), including,
without limitation, provisions
relating to the timing, manner and
amount of payments thereunder and
provisions relating to the
termination thereof, will be
described in the Prospectus
Supplement for the related series. In
addition, the related Prospectus
Supplement will contain certain
information that pertains to the
obligor under any such Cash Flow
Agreement. See "Description of the
Trust Funds--Cash Flow Agreements."
E. Pre-Funding If so provided in the related Prospectus
Supplement, a Trust Fund may include
amounts on deposit in a separate
account (the "Pre-Funding Account")
which amounts will not exceed 25% of
the pool balance of the Trust Fund as
of the Cut-off Date. Amounts on
deposit in the Pre-Funding Account
may be used by the Trust Fund to
acquire additional Mortgage Assets,
which additional Mortgage Assets will
be selected using criteria that is
substantially similar to the criteria
used to select the Mortgage Assets
included in the Trust Fund on the
Closing Date. The Trust Fund may
acquire such additional Mortgage
Assets for a period of time of not
more than 120 days after the Closing
Date (the "Pre-Funding Period") as
specified in the related Prospectus
Supplement. Amounts on deposit in the
Pre-Funding Account after the end of
the Pre-Funding Period, will be
distributed to Certificateholders or
such other person as set forth in the
related Prospectus Supplement. If so
provided in the related Prospectus
Supplement, the Trust Fund may
include amounts on deposit in a
separate account (the "Capitalized
Interest Account"). Amounts on
deposit in the Capitalized Interest
Account may be used to supplement
investment earnings, if any, of
amounts on deposit in the Pre-Funding
Account, supplement interest
collections of the Trust Fund, or
such other purpose as specified in
the related Prospectus Supplement. As
set forth in a related Prospectus
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Supplement, amounts on deposit in the
Capitalized Interest Account and
Pre-Funding Account will be held in
cash or invested in short-term
investment grade obligations. Any
amounts on deposit in the Capitalized
Interest Account will be released
after the end of the Pre-Funding
Period as specified in the related
Prospectus Supplement. See "Risk
Factors--Effects of Pre-Funding and
Acquisition of Additional Mortgage
Assets."
Description of Certificates ........ Each series of Certificates will be
issued in one or more classes
pursuant to a pooling and servicing
agreement or other agreement
specified in the related Prospectus
Supplement (in either case, a
"Pooling Agreement") and will
represent in the aggregate the entire
beneficial ownership interest in the
related Trust Fund.
Each series of Certificates will consist
of one or more classes of
Certificates, and such class or
classes (including classes of Offered
Certificates) may (i) be senior
(collectively, "Senior Certificates")
or subordinate (collectively,
"Subordinate Certificates") to one or
more other classes of Certificates in
entitlement to certain distributions
on the Certificates; (ii) be entitled
to distributions of principal, with
disproportionately small, nominal or
no distributions of interest
(collectively, "Stripped Principal
Certificates"); (iii) be entitled to
distributions of interest, with
disproportionately small, nominal or
no distributions of principal
(collectively, "Stripped Interest
Certificates"); (iv) provide for
distributions of principal and/or
interest that commence only after the
occurrence of certain events, such as
the retirement of one or more other
classes of Certificates of such
series; (v) provide for distributions
of principal to be made, from time to
time or for designated periods, at a
rate that is faster (and, in some
cases, substantially faster) or
slower (and, in some cases,
substantially slower) than the rate
at which payments or other
collections of principal are received
on the Mortgage Assets in the related
Trust Fund; or (vi) provide for
distributions of principal to be
made, subject to available funds,
based on a specified principal
payment schedule or other
methodology.
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain REMIC
Residual Certificates (as defined
below), will have a stated principal
amount (a "Certificate Balance"); and
each class of Certificates, other
than certain classes of Stripped
Principal Certificates and certain
REMIC Residual Certificates, will
accrue interest on its Certificate
Balance or, in the case of certain
classes of Stripped Interest
Certificates, on a notional amount
("Notional Amount"), based on a
fixed, variable or adjustable
interest rate (a "Pass-Through
Rate"). The related Prospectus
Supplement will specify the
Certificate Balance, Notional Amount
and Pass-Through Rate for each class
of Offered Certificates, as
applicable, or, in the case of a
variable or adjustable Pass-Through
Rate, the method for determining the
Pass-Through Rate.
The Certificates will not be guaranteed
or insured by the Depositor or any of
its affiliates, by any governmental
agency or instrumentality or by any
other person, unless otherwise
provided in the related Prospectus
Supplement. See "Risk
Factors--Limited Assets" and
"Description of the Certificates."
Distributions of Interest on the
Certificates ..................... Interest on each class of Offered
Certificates (other than certain
classes of Stripped Principal
Certificates and Stripped Interest
Certificates and
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certain REMIC Residual Certificates)
of each series will accrue at the
applicable Pass-Through Rate on the
Certificate Balance or, in the case
of certain classes of Stripped
Interest Certificates, the Notional
Amount thereof outstanding from time
to time and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each
of the specified dates on which
distributions are to be made, a
"Distribution Date"). Distributions
of interest with respect to one or
more classes of Certificates
(collectively, "Accrual
Certificates") may not commence until
the occurrence of certain events,
such as the retirement of one or more
other classes of Certificates, and
interest accrued with respect to a
class of Accrual Certificates prior
to the occurrence of such an event
will either be added to the
Certificate Balance thereof or
otherwise deferred. Distributions of
interest with respect to one or more
classes of Certificates may be
reduced to the extent of certain
delinquencies, losses and other
contingencies described herein and in
the related Prospectus Supplement.
See "Risk Factors--Prepayments;
Average Life of Certificates;
Yields," "Yield and Maturity
Considerations," and "Description of
the Certificates--Distributions of
Interest on the Certificates."
Distributions of Certificate
Principal ....................... Each class of the Certificates of each
series (other than certain classes of
Stripped Interest Certificates and/or
REMIC Residual Certificates) will
have a Certificate Balance which, as
of any date, will represent the
maximum amount that the holders
thereof are then entitled to receive
in respect of principal from future
cash flow on the Mortgage Assets in
the related Trust Fund. Unless
otherwise specified in the related
Prospectus Supplement, the initial
aggregate Certificate Balance of all
classes of a series of Certificates
will not exceed the outstanding
principal balance of the related
Mortgage Assets as of a specified
date (the "Cut-off Date"), after
application of scheduled payments due
on or before such date, whether or
not received. As and to the extent
described in the related Prospectus
Supplement, distributions of
principal with respect to each series
of Certificates will be made on each
Distribution Date to the holders of
the class or classes of Certificates
of such series entitled thereto until
the Certificate Balances of such
Certificates have been reduced to
zero. Distributions of principal with
respect to one or more classes of
Certificates (i) may be made at a
rate that is faster (and, in some
cases, substantially faster) than the
rate at which payments or other
collections of principal are received
on the Mortgage Assets in the related
Trust Fund; (ii) may not commence
until the occurrence of certain
events, such as the retirement of one
or more other classes of Certificates
of the same series, or may be made at
a rate that is slower (and, in some
cases, substantially slower) than the
rate at which payments or other
collections of principal are received
on the Mortgage Assets in the related
Trust Fund; (iii) may be made,
subject to available funds, based on
a specified principal payment
schedule (any such class, a
"Controlled Amortization Class"); and
(iv) may be contingent on the
specified principal payment schedule
for a Controlled Amortization Class
of the same series and the rate at
which payments and other collections
of principal on the Mortgage Assets
in the related Trust Fund are
received (any such class, a
"Companion Class"). Unless otherwise
specified in the related Prospectus
Supplement, dis-
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tributions of principal of any class
of Certificates will be made on a pro
rata basis among all of the
Certificates of such class. See
"Description of the
Certificates--Distributions of
Certificate Principal."
Advances ........................... If and to the extent provided in the
related Prospectus Supplement, the
Master Servicer and/or other
specified person will be obligated to
make, or have the option of making,
certain advances with respect to
delinquent scheduled payments of
principal and/or interest on the
Mortgage Loans in the related Trust
Fund. Any such advances made with
respect to a particular Mortgage Loan
will be reimbursable from subsequent
recoveries in respect of such
Mortgage Loan and otherwise to the
extent described herein and in the
related Prospectus Supplement. If and
to the extent provided in the
Prospectus Supplement for a series of
Certificates, the Master Servicer or
other specified person will be
entitled to receive interest on its
advances for the period that they are
outstanding, payable from amounts in
the related Trust Fund. See
"Description of the
Certificates--Advances in Respect of
Delinquencies." If a Trust Fund
includes MBS, any comparable
advancing obligation of a party to
the related Pooling Agreement, or of
a party to the related MBS Agreement,
will be described in the related
Prospectus Supplement.
Termination ........................ If so specified in the related
Prospectus Supplement, a series of
Certificates may be subject to
optional early termination by means
of the repurchase of the Mortgage
Assets in the related Trust Fund by
the party or parties specified
therein, under the circumstances and
in the manner set forth therein. If
so provided in the related Prospectus
Supplement, upon the reduction of the
Certificate Balance of a specified
class or classes of Certificates by a
specified percentage or amount, a
party specified therein may be
authorized or required to solicit
bids for the purchase of all of the
Mortgage Assets of the Trust Fund, or
of a sufficient portion of such
Mortgage Assets to retire such class
or classes, under the circumstances
and in the manner set forth therein.
See "Description of the
Certificates--Termination."
Registration of Book-Entry
Certificates .................... If so provided in the related Prospectus
Supplement, one or more classes of
the Offered Certificates of any
series will be offered in book-entry
format (collectively, "Book-Entry
Certificates") through the facilities
of The Depository Trust Company
("DTC"). Each class of Book-Entry
Certificates will be initially
represented by one or more
Certificates registered in the name
of a nominee of DTC. No person
acquiring an interest in a class of
Book-Entry Certificates (a
"Certificate Owner") will be entitled
to receive a Certificate of such
class in fully registered, definitive
form (a "Definitive Certificate"),
except under the limited
circumstances described herein. See
"Risk Factors--Book-Entry
Registration" and "Description of the
Certificates--Book-Entry Registration
and Definitive Certificates."
Risk Factors ....................... There are material risks associated with
an investment in Certificates. See
"Risk Factors" herein. Additional
risks pertaining to a particular
series of Certificates may be
disclosed in the applicable
Prospectus Supplement.
Tax Status of the Certificates ..... The Certificates of each series will
constitute either (i) "regular
interests" ("REMIC Regular
Certificates") and "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
designated portion
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13
<PAGE>
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thereof, treated as a REMIC under
Sections 860A through 860G of the
Internal Revenue Code of 1986 (the
"Code"), or (ii) interests ("Grantor
Trust Certificates") in a Trust Fund
treated as a grantor trust under
applicable provisions of the Code. If
so indicated in the related
Prospectus Supplement, an election
alternatively may be made to treat
the Trust Fund as a financial asset
securitization investment trust
("FASIT").
A. REMIC ...................... REMIC Regular Certificates generally
will be treated as debt obligations
of the applicable REMIC for federal
income tax purposes. In general, to
the extent the assets and income of
the REMIC are treated as qualifying
assets and income under the following
sections of the Code, REMIC Regular
Certificates owned by a real estate
investment trust will be treated as
"real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and
interest income therefrom will be
treated as "interest on obligations
secured by mortgages on real
property" for purposes of Section
856(c)(3)(B) of the Code. In
addition, REMIC Regular Certificates
will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of
the Code. Moreover, if 95% or more of
the assets and the income of the
REMIC qualify for any of the
foregoing treatments, the REMIC
Regular Certificates will qualify for
the foregoing treatments in their
entirety. However, REMIC Regular
Certificates owned by a thrift
institution will constitute assets
described in Section 7701(a)(19)(C)
of the Code only if so specified in
the related Prospectus Supplement.
Holders of REMIC Regular Certificates
must report income with respect
thereto on the accrual method,
regardless of their method of tax
accounting generally. Holders of any
class of REMIC Regular Certificates
issued with original issue discount
generally will be required to include
the original issue discount in income
as it accrues, which will be
determined using an initial
prepayment assumption and taking into
account, from time to time, actual
prepayments occurring at a rate
different than the prepayment
assumption. See "Material Federal
Income Tax
Consequences--REMICs--Taxation of
Owners of REMIC Regular
Certificates."
REMIC Residual Certificates generally
will be treated as representing an
interest in qualifying assets and
income to the same extent described
above for institutions subject to
Sections 856(c)(4)(A) and
856(c)(3)(B) of the Code, but not for
purposes of Section 7701(a)(19)(C) of
the Code unless otherwise stated in
the related Prospectus Supplement. A
portion (or, in certain cases, all)
of the income from REMIC Residual
Certificates (i) may not be offset by
any losses from other activities of
the holder of such REMIC Residual
Certificates, (ii) may be treated as
unrelated business taxable income for
holders of REMIC Residual
Certificates that are subject to tax
on unrelated business taxable income
(as defined in Section 511 of the
Code), and (iii) may be subject to
foreign withholding rules. See
"Material Federal Income Tax
Consequences--REMICs--Taxation of
Owners of REMIC Residual
Certificates."
B. Grantor Trust ............... If so provided in the related Prospectus
Supplement, Grantor Trust
Certificates may be either
Certificates that have a Certificate
Balance and a Pass-Through Rate or
that are Stripped Principal
Certificates (collectively, "Grantor
Trust Fractional Interest
Certificates"), or may be Stripped
Interest Certificates.
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14
<PAGE>
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Owners of Grantor Trust Fractional
Interest Certificates will be treated
for federal income tax purposes as
owners of an undivided pro rata
interest in the assets of the related
Trust Fund, and generally will be
required to report their pro rata
share of the entire gross income
(including amounts incurred as
servicing or other fees and expenses)
from the Mortgage Assets and will be
entitled, subject to certain
limitations, to deduct their pro rata
shares of any servicing or other fees
and expenses incurred during the
year. Holders of Grantor Trust
Fractional Interest Certificates
generally will be treated as owning
an interest in qualifying assets and
income under Sections 856(c)(4)(A),
856(c)(3)(B) and 860G(a)(3) of the
Code, but will not be so treated for
purposes of Section 7701(a)(19)(C) of
the Code unless otherwise stated in
the related Prospectus Supplement.
It is unclear whether Stripped Interest
Certificates will be treated as
representing an ownership interest in
qualifying assets and income under
Sections 856(c)(4)(A) and
856(c)(3)(B) of the Code, although
the policy considerations underlying
those Sections suggest that such
treatment should be available.
However, such Certificates will not
be treated as representing an
ownership interest in assets
described in Section 7701(a)(19)(C)
of the Code unless otherwise stated
in the related Prospectus Supplement.
The taxation of holders of Stripped
Interest Certificates is uncertain in
various respects, including in
particular the method such holders
should use to recover their purchase
price and to report their income with
respect to such Stripped Interest
Certificates. See "Material Federal
Income Tax Consequences--Grantor
TrustFunds."
Investors are advised to consult their
tax advisors and to review "Material
Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
ERISA Considerations ............... Fiduciaries of employee benefit plans
and certain other retirement plans
and arrangements, including
individual retirement accounts,
annuities, Keogh plans, and
collective investment funds and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that are
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of
the Code, should carefully review
with their legal advisors whether the
purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is
not otherwise permissible either
under ERISA or Section 4975 of the
Code. See "ERISA Considerations"
herein and in the related Prospectus
Supplement.
Legal Investment ................... The Offered Certificates of any series
will constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 only if so specified in
the related Prospectus Supplement.
Investors whose investment authority
is subject to legal restrictions
should consult their own legal
advisors to determine whether and to
what extent the Offered Certificates
constitute legal investments for
them. See "Legal Investment" herein
and in the related Prospectus
Supplement.
Rating ............................. At their respective dates of issuance,
each class of Offered Certificates
will be rated not lower than
investment grade by one or more
nationally recognized statistical
rating agencies (each, a "Rating
Agency"). See "Rating" herein and in
the related Prospectus Supplement.
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15
<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following factors and any
other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. Additional risk factors are set forth elsewhere in the
Prospectus under separate headings, and will be set forth in the related
Prospectus Supplement under separate headings, in connection with discussions
regarding particular aspects of Trust Fund Assets or the Certificates. In
general, to the extent that the factors discussed below pertain to or are
influenced by the characteristics or behavior of Mortgage Loans included in a
particular Trust Fund, they would similarly pertain to and be influenced by the
characteristics or behavior of the mortgage loans underlying any MBS included in
such Trust Fund.
LIMITED LIQUIDITY FOR OFFERED CERTIFICATES
Merrill Lynch, Pierce, Fenner & Smith Incorporated, itself or through one
or more of its affiliates, currently expects to make a secondary market in the
Offered Certificates of each series, but has no obligation to do so. However,
there can be no assurance that a secondary market for the Offered Certificates
of any series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue for as long as such Certificates
remain outstanding. Furthermore, because, among other things, the timing of
receipt of payments with respect to a pool of multifamily or commercial mortgage
loans may be substantially more difficult to predict than that of a pool of
single family mortgage loans, any such secondary market that does develop may
provide less liquidity to investors than any comparable market for securities
that evidence interests in single-family mortgage loans.
The primary source of continuing information regarding the Offered
Certificates of any series, including information regarding the status of the
related Mortgage Assets and any Credit Support for such Certificates, will be
the periodic reports to Certificateholders delivered pursuant to the related
Pooling Agreement as described herein under the heading "Description of the
Certificates--Reports to Certificateholders." There can be no assurance that any
additional continuing information regarding the Offered Certificates of any
series will be available through any other source, and the limited nature of
such information may adversely affect the liquidity thereof, even if a secondary
market for such Certificates does develop.
Except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates--Termination."
LIMITED ASSETS TO SUPPORT PAYMENT ON CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person; and no Offered Certificate of any series will represent a claim against
or security interest in the Trust Funds for any other series. Accordingly, if
the related Trust Fund has insufficient assets to make payments on such
Certificates, no other assets will be available for payment of the deficiency.
See "Description of the Trust Funds." Additionally, certain amounts on deposit
from time to time remaining in certain funds or accounts constituting part of a
Trust Fund, including the Certificate Account and any accounts maintained as
Credit Support, may be withdrawn under certain conditions that will be described
in the related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If so provided
in the Prospectus Supplement for a series of Certificates consisting of one or
more classes of Subordinate Certificates, on any Distribution Date in respect of
which losses or shortfalls in collections on the Mortgage Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Certificates, and, thereafter, by the remaining
classes of Certificates in the priority and manner and subject to the
limitations specified in such Prospectus Supplement.
PREPAYMENTS ON MORTGAGE LOANS; EFFECTS ON AVERAGE LIFE OF CERTIFICATES; EFFECTS
ON YIELDS ON CERTIFICATES
For a number of reasons, including the difficulty of predicting the rate of
prepayments on the Mortgage Loans in a particular Trust Fund, the amount and
timing of distributions of principal and/or interest on the Offered Certificates
16
<PAGE>
of the related series may be highly unpredictable. Prepayments on the Mortgage
Loans in any Trust Fund will result in a faster rate of principal payments on
one or more classes of the related Certificates than if payments on such
Mortgage Loans were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans may affect the average life of each class of such Certificates,
including a class of Offered Certificates. The rate of principal payments on
pools of mortgage loans varies among pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. For example, if prevailing interest rates fall significantly below the
Mortgage Rates borne by the Mortgage Loans included in a Trust Fund, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rates borne by those Mortgage Loans. Conversely, if prevailing interest
rates rise significantly above the Mortgage Rates borne by the Mortgage Loans
included in a Trust Fund, principal prepayments thereon are likely to be lower
than if prevailing interest rates remain at or below the rates borne by those
Mortgage Loans. There can be no assurance as to the rate of prepayments on the
Mortgage Loans in any Trust Fund or that such rate will conform to any model
described herein or in any Prospectus Supplement. As a result, depending on the
anticipated rate of prepayment for the Mortgage Loans in any Trust Fund, the
retirement of any class of Certificates of the related series could occur
significantly earlier or later thanexpected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the related
series will depend on the terms of such Certificates. A class of Certificates,
including a class of Offered Certificates, may provide that on any Distribution
Date the holders of such Certificates are entitled to (i) a pro rata share of
the prepayments (including prepayments occasioned by defaults) on the Mortgage
Loans in the related Trust Fund that are distributable on such date, (ii) a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or (iii) a disproportionately small share (which, in some cases,
may be none) of such prepayments. A class of Certificates that entitles the
holders thereof to a disproportionately large share of prepayments enhances the
risk of early retirement of such class ("call risk") if the rate of prepayment
is faster than anticipated. A class of Certificates that entitles the holders
thereof to a disproportionately small share of prepayments enhances the risk of
an extended average life of such class ("extension risk") if the rate of
prepayment is slower than anticipated. As and to the extent described in the
related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related Trust
Fund may vary based on the occurrence of certain events (e.g., the retirement of
one or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
A series of Certificates may include one or more Controlled Amortization
Classes that will be entitled to receive principal distributions according to a
specified principal payment schedule. Although prepayment risk cannot be
eliminated entirely for any class of Certificates, it can be reduced
substantially in the case of a Controlled Amortization Class so long as the
actual rate of prepayments on the Mortgage Loans in the related Trust Fund
remains relatively constant at the rate, or within the range of rates, of
prepayment used to establish the specific principal payment schedule for such
Certificates. However, the reduction of prepayment risk afforded to a Controlled
Amortization Class comes at the expense of one or more Companion Classes of the
same series, any of which Companion Classes may also be a class of Offered
Certificates. In general, and as more specifically described in the related
Prospectus Supplement, a Companion Class will entitle the holders thereof to a
disproportionately large share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively fast and to a
disproportionately small share of those prepayments when the rate of prepayment
is relatively slow. A Companion Class thus absorbs some (but not all) of the
"call risk" and/or "extension risk" that would otherwise affect the related
Controlled Amortization Class if all payments of principal of the Mortgage Loans
were allocated on a pro rata basis.
A series of Certificates may also include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund. Where the amount of
interest payable with respect to a class is disproportionately large, as
compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recoup its original investment
under some prepayment scenarios. An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield to such investor that is lower than the anticipated yield and, in
the case of any Offered Certificate purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower
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<PAGE>
than the anticipated yield. See "Yield and Maturity Considerations" herein and,
if applicable, in the related Prospectus Supplement.
OPTIONAL EARLY TERMINATION
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination by means of the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set forth
therein. If so provided in the related Prospectus Supplement, upon the reduction
of the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, a party specified therein may be authorized or
required to solicit bids for the purchase of all of the Mortgage Assets of the
Trust Fund, or of a sufficient portion of such Mortgage Assets to retire such
class or classes, under the circumstances and in the manner set forth therein.
In the event of a partial or complete termination of a Trust Fund, there can be
no assurance that the proceeds from a sale of the Mortgage Assets will be
sufficient to distribute the outstanding Certificate Balance plus accrued
interest and any undistributed shortfalls in interest accrued on the
Certificates subject to the termination. Accordingly the holders of such
Certificates may incur a loss. See "Description of the Certificates
- --Termination." In the event that partial or complete early termination of a
series of Certificates is authorized and does occur in this manner, the holders
of the series of Certificates or one or more classes of a series of Certificates
that are terminated early may experience repayment of their investment outside
their control at an unpredictable and inopportune time. Moreover, such early
termination could have an adverse impact on the overall yield received by such
holder, depending upon the amount of the series of Certificates or class or
classes of such series that is outstanding at the time of early termination,
among other factors.
LIMITED NATURE OF RATINGS ON CERTIFICATES
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of Certificates
of such class will receive payments to which such Certificateholders are
entitled under the related Pooling Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Mortgage
Loans will be made, the degree to which the rate of such prepayments might
differ from that originally anticipated or the likelihood of early optional
termination of the related Trust Fund. Neither will such rating address the
possibility that prepayments on the related Mortgage Loans at a higher or lower
rate than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor that purchases an Offered
Certificate at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. See "Description
of Credit Support" and "Rating."
EFFECTS OF PRE-FUNDING AND ACQUISITION OF ADDITIONAL MORTGAGE ASSETS
Any amounts on deposit in a Pre-Funding Account as described in the
Prospectus Supplement for a series of Certificates that is not used to acquire
additional Mortgage Assets by the end of the Pre-Funding Period, may be
distributed to holders of Certificates as a prepayment of principal as set forth
in the related Prospectus Supplement. Such a prepayment of principal to the
holders of Certificates may materially and adversely effect the yield on the
Certificates. See "Yield and Maturity Considerations" herein and, if applicable,
in the related Prospectus Supplement.
Any additional Mortgage Assets acquired by a Trust Fund during the
Pre-Funding Period, as described in the related Prospectus Supplement, may
possess substantially different characteristics than the Mortgage Assets in the
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<PAGE>
Trust Fund on the Closing Date. Therefore the aggregate characteristics of a
Trust Fund following the Pre-Funding Period may be substantially different than
the characteristics of a Trust Fund on the Closing Date.
RISKS TO LENDERS ASSOCIATED WITH CERTAIN MORTGAGE LOANS AND INCOME PRODUCING
PROPERTIES
Mortgage loans made on the security of multifamily or commercial property
may entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with loans made on the
security of single-family property. See "Description of the Trust
Funds--Mortgage Loans." The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. If the
net operating income of the property is reduced (for example, if rental or
occupancy rates decline or real estate tax rates or other operating expenses
increase), the borrower's ability to repay the loan may be impaired. A number of
the Mortgage Loans may be secured by liens on owner-occupied Mortgaged
Properties or on Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the borrower or single tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
Mortgaged Property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors beyond the control of a Master Servicer.
It is anticipated that some or all of the Mortgage Loans included in any
Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to those Mortgage Loans, recourse in the event
of borrower default will be limited to the specific real property and other
assets, if any, that were pledged to secure the Mortgage Loan. However, even
with respect to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that enforcement of
such recourse provisions will be practicable, or that the assets of the borrower
will be sufficient to permit a recovery in respect of a defaulted Mortgage Loan
in excess of the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
Risks Associated with Mortgage Loans Secured by Multifamily Properties. It
is expected that Mortgage Loans secured by multi-family properties will
constitute a material consentration of the Mortgage Loans in a Trust Fund.
Adverse economic conditions, either local, regional or national, may limit the
amount of rent that can be charged for rental units, and may result in a
reduction in timely rent payments or a reduction in occupancy levels. Occupancy
and rent levels may also be affected by construction of additional housing
units, local military base closings, developments at local colleges and
universities and national, regional and local politics, including, in the case
of multifamily rental properties, current or future rent stabilization and rent
control laws and agreements. In addition, the level of mortgage interest rates
may encourage tenants in multifamily rental properties to purchase housing.
Furthermore, tax credit and city, state and federal housing subsidy or similar
programs may impose rent limitations and may adversely affect the ability of the
applicable borrowers to increase rents to maintain such Mortgaged Properties in
proper condition during periods of rapid inflation or declining market value of
such Mortgaged Properties. In addition, such programs may impose income
restrictions on tenants, which may reduce the number of eligible tenants in such
Mortgaged Properties and result in a reduction in occupancy rates applicable
thereto. Furthermore, some eligible tenants may not find any differences in
rents between such subsidized or supported properties and other multifamily
rental properties in the same area to be a sufficient economic incentive to
reside at a subsidized or supported property, which may have fewer amenities or
otherwise be less attractive as a residence. All of these conditions and events
may increase the possibility that a borrower may be unable to meet its
obligations under its Mortgage Loan.
Multifamily projects are part of a market that, in general, is
characterized by low barriers to entry. Thus, a particular apartment market with
historically low vacancies could experience substantial new construction, and a
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<PAGE>
resultant oversupply of units, in a relatively short period of time. Because
multifamily apartment units are typically leased on a short-term basis, the
tenants who reside in a particular project within such a market may easily move
to alternative projects with more desirable amenities or locations.
Risks Associated with Mortgage Loans Secured by Retail Properties. Mortgage
Loans secured by retail properties may constitute a material consentration of
the Mortgage Loans in a Trust Fund. Significant factors determining the value of
retail properties are the quality of the tenants as well as fundamental aspects
of real estate such as location and market demographics. The correlation between
the success of tenant businesses and property value is more direct with respect
to retail properties than other types of commercial property because a
significant component of the total rent paid by retail tenants is often tied to
a percentage of gross sales. Significant tenants at a retail property play an
important part in generating customer traffic and making a retail property a
desirable location for other tenants at such property. Accordingly, retail
properties may be adversely affected if a significant tenant ceases operations
at such locations (which may occur on account of a voluntary decision not to
renew a lease, bankruptcy or insolvency of such tenant, such tenant's general
cessation of business activities or for other reasons). In addition, certain
tenants at retail properties may be entitled to terminate their leases or pay
reduced rent if an anchor tenant ceases operations at such property. In such
cases, there can be no assurance that any such anchor tenants will continue to
occupy space in the related shopping centers.
Shopping centers, in general, are affected by the health of the retail
industry, which is currently undergoing a consolidation and is experiencing
changes due to the growing market share of "off-price" retailing, and a
particular shopping center may be adversely affected by the bankruptcy or
decline in drawing power of an anchor tenant, the risk that an anchor tenant may
vacate notwithstanding such tenant's continuing obligation to pay rent, a shift
in consumer demand due to demographic changes (for example, population decreases
or changes in average age or income) and/or changes in consumer preference (for
example, to discount retailers).
Unlike other income producing properties, retail properties also face
competition from sources outside a given real estate market. Catalogue
retailers, home shopping networks, the Internet, telemarketing and outlet
centers all compete with more traditional retail properties for consumer
dollars. Continued growth of these alternative retail outlets (which are often
characterized by lower operating costs) could adversely affect the rents
collectible at the retail properties which secure Mortgage Loans in a Trust
Fund.
Risks Associated with Mortgage Loans Secured by Hospitality Properties.
Mortgage Loans secured by hospitality properties may constitute a material
consentration of the Mortgage Loans in a Trust Fund. Various factors, including
location, quality and franchise affiliation (or lack thereof), affect the
economic viability of a hotel. Adverse economic conditions, either local,
regional or national, may limit the amount that a consumer is willing to pay for
a room and may result in a reduction in occupancy levels. The construction of
competing hotels or motels can have similar effects. Because hotel rooms
generally are rented for short periods of time, hotel properties tend to be more
sensitive to adverse economic conditions and competition than do other
commercial properties. Furthermore, the financial strength and capabilities of
the owner and operator of a hotel may have a substantial impact on such hotel's
quality of service and economic performance. Additionally, the hotel and lodging
industry is generally seasonal in nature and this seasonality can be expected to
cause periodic fluctuations in room and other revenues, occupancy levels, room
rates and operating expenses.
In addition, the successful operation of a hospitality property with a
franchise affiliation may depend in part upon the strength of the franchisor,
the public perception of the franchise service mark and the continued existence
of any franchise license agreement. The transferability of a franchise license
agreement may be restricted, and a lender or other person that acquires title to
a hotel property as a result of foreclosure may be unable to succeed to the
borrower's rights under the franchise license agreement. Moreover, the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements and may not be transferable.
Risks Associated with Mortgage Loans Secured by Office Buildings. Mortgage
Loans secured by office buildings may constitute a material consentration of the
Mortgage Loans in a Trust Fund. Significant factors determining the value of
office properties are the quality of the tenants in the building, the physical
attributes of the building in relation to competing buildings and the strength
and stability of the market area as a desirable business location. Office
properties may be adversely affected by an economic decline in the business
operated by the tenants.
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The risk of such an adverse effect is increased if revenue is dependent on a
single tenant or if there is a significant concentration of tenants in a
particular business or industry.
Office properties are also subject to competition with other office
properties in the same market. Competition is affected by a property's age,
condition, design (e.g., floor sizes and layout), access to transportation and
ability or inability to offer certain amenities to its tenants, including
sophisticated building systems (such as fiberoptic cables, satellite
communications or other base building technological features).
The success of an office property also depends on the local economy. A
company's decision to locate office headquarters in a given area, for example,
may be affected by such factors as labor cost and quality, tax environment and
quality of life issues such as schools and cultural amenities. A central
business district may have an economy which is markedly different from that of a
suburb. The local economy and the financial condition of the owner will impact
on an office property's ability to attract stable tenants on a consistent basis.
In addition, the cost of refitting office space for a new tenant is often more
costly than for other property types.
Risks Associated with Mortgage Loans Secured by Industrial & Mixed-Use
Facilities. Mortgage Loans secured by industrial and mixed-use facilities may
constitute a material consentration of the Mortgage Loans in a Trust Fund.
Significant factors determining the value of industrial properties are the
quality of tenants, building design and adaptability and the location of the
property. Concerns about the quality of tenants, particularly major tenants, are
similar in both office properties and industrial properties, although industrial
properties are more frequently dependent on a single tenant. In addition,
properties used for many industrial purposes are more prone to environmental
concerns than other property types.
Aspects of building site design and adaptability affect the value of an
industrial property. Site characteristics which are valuable to an industrial
property include clear heights, column spacing, zoning restrictions, number of
bays and bay depths, divisibility, truck turning radius and overall
functionality and accessibility. Location is also important because an
industrial property requires the availability of labor sources, proximity to
supply sources and customers and accessibility to rail lines, major roadways and
other distribution channels.
Industrial properties may be adversely affected by reduced demand for
industrial space occasioned by a decline in a particular industry segment (for
example, a decline in defense spending), and a particular industrial property
that suited the needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer
properties.]
Risks Associated with Mortgage Loans Secured by Residential Healthcare
Facilities. Mortgage Loans secured by residential healthcare facilities may
constitute a material consentration of the Mortgage Loans in a Trust Fund.
Mortgage Loans secured by liens on residential health care facilities pose
additional risks not associated with loans secured by liens on other types of
income-producing properties. Providers of long-term nursing care, assisted
living and other medical services are subject to federal and state laws that
relate to the adequacy of medical care, distribution of pharmaceuticals, rate
setting, equipment, personnel, operating policies and additions to facilities
and services and, to the extent dependent on patients whose fees are reimbursed
by private insurers, to the reimbursement policies of such insurers. The failure
of any of such borrowers to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Mortgaged Property (in
which case no revenues would be received from such property or portion thereof
requiring licensing) or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, in the event of foreclosure, there can be
no assurance that the Trustee or any other purchaser at a foreclosure sale would
be entitled to the rights under such licenses and such party may have to apply
in its own right for such a license. There can be no assurance that a new
license could be obtained or that the related Mortgaged Property would be
adaptable to other uses. To the extent any nursing home receives a significant
portion of its revenues from government reimbursement programs, primarily
Medicaid and Medicare, such revenue may be subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings, policy
interpretations, delays by fiscal intermediaries and government funding
restrictions. Moreover, governmental payors have employed cost-containment
measures that limit payments to health care providers, and there are currently
under consideration various proposals in the United States Congress that could
materially change or curtail those payments. Accordingly, there can be no
assurance that payments under government reimbursement programs will, in the
future, be sufficient to fully reimburse the cost of caring for program
beneficiaries. If not, net operating income of the Mortgaged Properties that
receive substantial revenues from those sources, and consequently the
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ability of the related borrowers to meet their Mortgage Loan obligations, could
be adversely affected. Under applicable federal and state laws and regulations,
including those that govern Medicare and Medicaid programs, only the provider
who actually furnished the related medical goods and services may sue for or
enforce its rights to reimbursement. Accordingly, in the event of foreclosure,
none of the Trustee, the Master Servicer, the Special Servicer or a subsequent
lessee or operator of the property would generally be entitled to obtain from
federal or state governments any outstanding reimbursement payments relating to
services furnished at the respective properties prior to such foreclosure.
Risk Associated with Mortgage Loans Secured by Health Care-Related
Properties. The Mortgaged Properties may include Senior Housing, Assisted Living
Facilities, Skilled Nursing Facilities and Acute Care Facilities (any of the
foregoing, "Health Care-Related Facilities"). "Senior Housing" generally consist
of facilities with respect to which the residents are ambulatory, handle their
own affairs and typically are couples whose children have left the home and at
which the accommodations are usually apartment style. "Assisted Living
Facilities" are typically single or double room occupancy, dormitory-style
housing facilities which provide food service, cleaning and some personal care
and with respect to which the tenants are able to medicate themselves but may
require assistance with certain daily routines. "Skilled Nursing Facilities"
provide services to post trauma and frail residents with limited mobility who
require extensive medical treatment. "Acute Care Facilities" generally consist
of hospital and other facilities providing short-term, acute medical care
services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal intermediaries
and government funding restrictions. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers, and
there exist various proposals for national health care reform that could further
limit those payments. Accordingly, there can be no assurance that payments under
government reimbursement programs will, in the future, be sufficient to fully
reimburse the cost of caring for program beneficiaries. If such payments are
insufficient, net operating income of those Health Care-Related Facilities that
receive revenues from those sources, and consequently the ability of the related
borrowers to meet their obligations under any Mortgage Loans secured thereby,
could be adversely affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care or
other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. Providers of assisted living
services are also subject to state licensing requirements in certain states. The
failure of an operator to maintain or renew any required license or regulatory
approval could prevent it from continuing operations at a Health Care-Related
Facility or, if applicable, bar it from participation in government
reimbursement programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted to
be made to any person other than the provider who actually furnished the related
medical goods and services. Accordingly, in the event of foreclosure, none of
the Trustee, the Master Servicer, the Special Servicer or a subsequent lessee or
operator of any Health Care-Related Facility securing a defaulted Mortgage Loan
(a "Health Care-Related Mortgaged Property") would generally be entitled to
obtain from federal or state governments any outstanding reimbursement payments
relating to services furnished at such property prior to such foreclosure. Any
of the aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at least
in part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a determination of
need, evidenced by its issuance of a Certificate of Need ("CON"), before a
long-term care provider can establish a new facility, add beds to an existing
facility or, in some states, take certain other actions (for example, acquire
major medical equipment, make major capital expenditures, add services,
refinance long-term debt, or transfer ownership of a facility). States also
regulate nursing bed supply in other ways. For example, some states have imposed
moratoria on the licensing of new beds, or on the certification of new
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Medicaid beds, or have discouraged the construction of new nursing facilities by
limiting Medicaid reimbursements allocable to the cost of new construction and
equipment. In general, a CON is site specific and operator specific; it cannot
be transferred from one site to another, or to another operator, without the
approval of the appropriate state agency. Accordingly, if a Mortgage Loan
secured by a lien on such a Health Care-Related Mortgaged Property were
foreclosed upon, the purchaser at foreclosure might be required to obtain a new
CON or an appropriate exemption. In addition, compliance by a purchaser with
applicable regulations may in any case require the engagement of a new operator
and the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and approval
process to avoid interruption of care to a facility's residents, but there can
be no assurance that any will do so or that any necessary licenses or approvals
will be issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care providers
that are designed to induce or encourage the referral of patients to, or the
recommendation of, a particular provider for medical products or services.
Violation of these restrictions can result in license revocation, civil and
criminal penalties, and exclusion from participation in Medicare or Medicaid
programs. The state law restrictions in this area vary considerably from state
to state. Moreover, the federal anti-kickback law includes broad language that
potentially could be applied to a wide range of referral arrangements, and
regulations designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or operators
of the Health Care-Related Mortgaged Properties that are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
loca1 and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered by
such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care-Related Facility will generally depend upon the number of competing
facilities in the local market, as well as upon other factors such as its age,
appearance, reputation and management, the types of services it provides and,
where applicable, the quality of care and the cost of that care. The inability
of a Health Care-Related Mortgaged Property to flourish in a competitive market
may increase the likelihood of foreclosure on the related Mortgage Loan,
possibly affecting the yield on one or more classes of the related series of
Offered Certificates.
Risks Associated with Mortgage Loans Secured by Warehouse and Storage
Facilities. Mortgage Loans secured by warehouse and self storage facilities may
constitute a material consentration of the Mortgage Loans in a Trust Fund. Self
storage facilities are part of a market that contains low barriers to entry.
Increased competition among self storage facilities may reduce income available
to repay Mortgage Loans secured by self storage facility. Furthermore, due to
the privacy considerations applicable to self storage facilities, may increase
environmental risks. See "Risk Factors--Environmental Law Considerations"
herein.
MANAGEMENT RISKS
Each Mortgaged Property is managed by a property manager (which generally
is an affiliate of the borrower) or by the borrower itself. The successful
operation of a real estate project is largely dependent on the performance and
viability of the management of such project. The property manager is responsible
for responding to changes in the local market, planning and implementing the
rental structure, including establishing levels of rent payments and advising
the borrowers so that maintenance and capital improvements can be carried out in
a timely fashion. There is no assurance regarding the performance of any
operators, leasing agents and/or managers or persons who may become operators
and/or managers upon the expiration or termination of management agreements or
following any default or foreclosure under a Mortgage Loan. In addition,
generally the property managers are operating companies and unlike limited
purpose entities, may not be restricted from incurring debt and other
liabilities in the ordinary course of business or otherwise. There can be no
assurance that the property managers will at all times be in a financial
condition to continue to fulfill their management responsibilities under the
related management agreements throughout the terms thereof.
BALLOON PAYMENTS ON MORTGAGE LOANS; HEIGHTENED RISK OF BORROWER DEFAULT
Certain of the Mortgage Loans included in a Trust Fund may not be fully
amortizing (or may not amortize at all) over their terms to maturity and, thus,
will require substantial principal payments (that is, balloon payments) at their
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stated maturity. Mortgage Loans of this type involve a greater degree of risk
than self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related Mortgaged Property at a price sufficient to permit
the borrower to make the balloon payment. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the borrower's equity in the
related Mortgaged Property, the financial condition and operating history of the
borrower and therelated Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaidand Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by commercial or
multifamily, as the case may be, real properties generally.
If and to the extent specified in the related Prospectus Supplement, in
order to maximize recoveries on defaulted Mortgage Loans, the Master Servicer or
a Special Servicer will be permitted (within prescribed limits) to extend and
modify Mortgage Loans that are in default or as to which a payment default is
imminent. While a Master Servicer generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery on a present value basis than liquidation, there can be no assurance
that any such extension or modification will in fact increase the present value
of receipts from or proceeds of the affected Mortgage Loans. See "Yield and
Maturity Considerations--Other Factors Affecting Yield, Weighted Average Life
and Maturity --Balloon Payments; Extensions of Maturity."
LEASES AND RENTS SERVING AS SECURITY FOR MORTGAGE LOANS POSE SPECIAL RISKS
The Mortgage Loans included in any Trust Fund typically will be secured by
an assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the related
Mortgaged Property, and the income derived therefrom, as further security for
the related Mortgage Loan, while retaining a license to collect rents for so
long as there is no default. If the borrower defaults, the license terminates
and the lender is entitled to collect rents. Some state laws may require that
the lender take possession of the Mortgaged Property and obtain a judicial
appointment of a receiver before becoming entitled to collect the rents. In
addition, if bankruptcy or similar proceedings are commenced by or in respect of
the borrower, the lender's ability to collect the rents may be adversely
affected. See "Certain Legal Aspects of Mortgage Loans--Leases and Rents."
DELINQUENT MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are delinquent
as of the date they are deposited in the Trust Fund. A Mortgage Loan will be
considered "delinquent" if it is thirty (30) days or more past its most recently
contractual scheduled payment date in payment of all amounts due according to
its terms. In any event, at the time of its creation, the Trust Fund will not
include delinquent loans which by principal amount are more than 20% of the
aggregate principal amount of all Mortgage Loans in the Trust Fund. If so
specified in the related Prospectus Supplement, the servicing of such Mortgage
Loans will be performed by a Special Servicer. Credit Support provided with
respect to a particular series of Certificates may not cover all losses related
to such delinquent Mortgage Loans, and investors should consider the risk that
the inclusion of such Mortgage Loans in the Trust Fund may adversely affect the
rate of defaults and prepayments on the Mortgage Loans in theTrust Fund and the
yield on the Offered Certificates of such series. See "Description of the Trust
Funds--Mortgage Loans-General."
ENVIRONMENTAL LIABILITY MAY AFFECT LIEN ON MORTGAGED PROPERTY AND EXPOSE LENDER
TO COSTS
Under certain laws, contamination of real property may give rise to a lien
on the property to assure the costs of cleanup. In several states, such a lien
has priority over an existing mortgage lien on such property.In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), a lender may be
liable, as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether or not the environmental damage or threat
was caused by the borrower. A lender also risks such liability on foreclosure of
the mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Considerations." If a Trust Fund
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includes Mortgage Loans and the related Prospectus Supplement does not otherwise
specify, the related Pooling Agreement will contain provisions generally to the
effect that the Master Servicer, acting on behalf of the Trust Fund, may not
acquire title to a Mortgaged Property or assume control of its operation unless
the Master Servicer, based upon a report prepared by a person who regularly
conducts environmental site assessments, has made the determination that it is
appropriate to do so, as described under "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans." These provisions are
designed to reduce substantially the risk of liability for costs associated with
remediation of of hazardous substances, but there can be no assurance in a given
case that those risks can be eliminated entirely.
CREDIT SUPPORT LIMITATIONS--MAY NOT COVER ALL RISKS OR FULL PAYMENT ON
CERTIFICATES
The Prospectus Supplement for the Offered Certificates of each series will
describe any Credit Support provided with respect thereto. Use of Credit Support
will be subject to the conditions and limitations described herein and in the
related Prospectus Supplement. Moreover, such Credit Support may not cover all
potential losses or risks; for example, Credit Support may or may not cover
fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount of subordination will be limited and may decline under
certain circumstances. In addition, if principal payments on one or more classes
of Certificates of a series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Support may be exhausted before the principal of the lower priority classes of
Certificates of such series has been fully repaid. As a result, the impact of
losses and shortfalls experienced with respect to the Mortgage Assets may fall
primarily upon those classes of Certificates having a lower priority of payment.
Moreover, if a form of Credit Support covers more than one series of
Certificates, holders of Certificates of one series will be subject to the risk
that such Credit Support will be exhausted by the claims of the holders of
Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the underlying Mortgage Assets and other
factors. There can be, however, no assurance that the loss experience on the
related Mortgage Assets will not exceed such assumed levels. See "--Limited
Nature of Ratings," "Description of the Certificates" and "Description of Credit
Support."
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described under "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Certificates that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of REMIC Residual Certificates report their pro rata share of the
taxable income and net loss of the REMIC will continue until the Certificate
Balances of all classes of Certificates of the related series have been reduced
to zero, even though holders of REMIC Residual Certificates have received full
payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of such Certificateholder's share of the REMIC taxable
income may be treated as "excess inclusion" income to such holder, which (i)
generally will not be subject to offset by losses from other activities, (ii)
for a tax-exempt holder, will be treated as unrelated business taxable income
and (iii) for a foreign holder, will not qualify for exemption from withholding
tax. Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on a REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
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ERISA CONSIDERATIONS--COVERED INVESTORS MAY EXPERIENCE LIABILITY
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series. See "ERISA Considerations."
BOOK-ENTRY REGISTRATION OF CERTIFICATES AFFECTS OWNERSHIP OF CERTIFICATES AND
RECEIPT OF PAYMENT
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Certificates of any series will be issued as Book-Entry
Certificates. Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in the name of a nominee for
DTC. As a result, unless and until corresponding Definitive Certificates are
issued, the Certificate Owners with respect to any class of Book-Entry
Certificates will be able to exercise the rights of Certificateholders only
indirectly through DTC and its participating organizations ("Participants"). In
addition, the access of Certificate Owners to information regarding the
Book-Entry Certificates in which they hold interests may be limited. The means
by which notices and other communications are conveyed by DTC to its
Participants, and directly and indirectly through such Participants to
Certificate Owners, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Furthermore, as described herein, Certificate Owners may experience delays in
the receipt of payments on the Book-Entry Certificates, and the ability of any
Certificate Owner to pledge or otherwise take actions with respect to its
interest in the Book-Entry Certificates may be limited due to the lack of a
physical certificate evidencing such interest. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates."
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) multifamily
and/or commercial mortgage loans (the "Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
such as mortgage-backed securities that are similar to a series of Certificates
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by Merrill Lynch Mortgage Investors, Inc. (the
"Depositor"). Each Mortgage Asset will be selected by the Depositor for
inclusion in a Trust Fund from among those purchased, either directly or
indirectly, from a prior holder thereof (a "Mortgage Asset Seller"), which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such MBS and may be an affiliate of the Depositor. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under the
heading "--Mortgage Loans," unless otherwise noted, applies equally to mortgage
loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create liens on properties (the "Mortgaged
Properties") consisting of (i) residential properties consisting of five or more
rental or cooperatively-owned dwelling units in high-rise, mid-rise or garden
apartment buildings or other residential structures ("Multifamily Properties")
or (ii) office buildings, retail stores, hotels or motels, nursing homes,
hospitals or other heath-care facilities, mobile home parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
plants, mixed use or other types of income-producing properties or unimproved
land ("Commercial Prperties"). The Multifamily Properties may include mixed
commercial and residential structures and may include apartment buildings owned
by private cooperative housing corporations ("Cooperatives"). If so specified in
the related Prospectus Supplement, each Mortgage will create a first priority
mortgage lien on a Mortgaged Property. A Mortgage may create a lien on a
borrower's leasehold estate in a property; however, if so specified in the
related Prospectus Supplement, the term of any such leasehold will exceed the
term of the Mortgage Note by at least two years. Each Mortgage Loan will have
been originated by a person (the "Originator") other than the Depositor.
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If so specified in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans made on the security of real
estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements from
construction reserve funds as portions of the related real estate project are
completed. In addition, the Mortgage Assets for a particular series of
Certificates may include Mortgage Loans that are delinquent or non-performing as
of the date such Certificates are issued. In that case, the related Prospectus
Supplement will set forth, as to each such Mortgage Loan, available information
as to the period of such delinquency or non-performance, any forbearance
arrangement then in effect, the condition of the related Mortgaged Property and
the ability of the Mortgaged Property to generate income to service the mortgage
debt.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are substantially
different from loans made on the security of owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property is
typically dependent upon the successful operation of such property (that is, its
ability to generate income). Moreover, some or all of the Mortgage Loans
included in a particular Trust Fund may be non-recourse loans, which means that,
absent special facts, recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
repayment of the Mortgage Loan.
Lenders typically look to the Debt Service Coverage Ratio of a loan secured
by income-producing property as an important measure of the risk of default on
such a loan. As more fully set forth in the related Prospectus Supplement, the
"Debt Service Coverage Ratio" of a Mortgage Loan at any given time is the ratio
of (i) the Net Operating Income of the related Mortgaged Property for a
twelve-month period to (ii) the annualized scheduled payments on the Mortgage
Loan and on any other loan that is secured by a lien on the Mortgaged Property
prior to the lien of the related Mortgage. As more fully set forth in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Mortgage Loan) secured by liens on the Mortgaged
Property. The Net Operating Income of a Mortgaged Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a non-owner occupied income-producing property, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) may be affected
by the condition of the applicable real estate market and/or area economy. In
addition, properties typically leased, occupied or used on a short-term basis,
such as certain health care-related facilities, hotels and motels, and
mini-warehouse and self-storage facilities, tend to be affected more rapidly by
changes in market or business conditions than do properties typically leased for
longer periods, such as warehouses, retail stores, office buildings and
industrial plants. Commercial Properties may be owner-occupied or leased to a
single tenant. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or the single
tenant, and Mortgage Loans secured by liens on such properties may pose greater
risks than loans secured by liens on Multifamily Properties or on multi-tenant
Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As may
be further described in the related Prospectus Supplement, in some cases leases
of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
measure of risk of loss if a property must be liquidated following a default. As
more fully set forth in the related Prospectus Supplement, the "Loan-to-Value
Ratio" of a Mortgage Loan at any given time is the ratio (expressed as a
percentage) of (i) the then outstanding principal balance of the Mortgage Loan
and the outstanding principal balance of any loan secured by a lien on the
related Mortgaged Property prior to the lien of the related Mortgage, to (ii)
the Value of such Mortgaged Property. The "Value" of a Mortgaged Property, is
generally its fair market value determined in an appraisal obtained by the
originator at the origination of such loan. The lower the Loan-to-Value Ratio,
the greater the percentage of the
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borrower's equity in a Mortgaged Property, and thus the greater the cushion
provided to the lender against loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure of
the risk of liquidation loss in a pool of Mortgage Loans. For example, the value
of a Mortgaged Property as of the date of initial issuance of the related series
of Certificates may be less than the Value determined at loan origination, and
will likely continue to fluctuate from time to time based upon changes in
economic conditions and the real estate market. Moreover, even when current, an
appraisal is not necessarily a reliable estimate of value. Appraised values of
income-producing properties are generally based on the market comparison method
(recent resale value of comparable properties at the date of the appraisal), the
cost replacement method (the cost of replacing the property at such date), the
income capitalization method (a projection of value based upon the property's
projected net cash flow), or upon a selection from or interpolation of the
values derived from such methods. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expense and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans there is no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors--Risks Associated with
Certain Mortgage Loans and Income Producing Properties" and "--Balloon Payments;
Borrower Default."
Payment Provisions of the Mortgage Loans. If so specified in the related
Prospectus Supplement, all of the Mortgage Loans will have had original terms to
maturity of not more than 40 years and will provide for scheduled payments of
principal, interest or both, to be made on specified dates ("Due Dates") that
occur monthly, quarterly or semi-annually. A Mortgage Loan (i) may provide for
accrual of interest thereon at an interest rate(a "Mortgage Rate") that is fixed
over its term or that adjusts from time to time, or that may be converted at the
borrower's election from an adjustable to a fixed Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate,(ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may permit
negative amortization, (iii) may be fully amortizing over its term to maturity,
or may provide for little or no amortization over its term and thus require a
balloon payment on its stated maturity date, and (iv) may contain a prohibition
on prepayment (the period of such prohibition, a "Lock-out Period" and its date
of expiration, a "Lock-out Expiration Date") or require payment of a premium or
a yield maintenance penalty (a "Prepayment Premium") in connection with a
prepayment, in each case as described in the related Prospectus Supplement. A
Mortgage Loan may also contain a provision that entitles the lender to a share
of profits realized from the operation or disposition of the Mortgaged Property
(an "Equity Participation"), as described in the related Prospectus Supplement.
If holders of any class or classes of Offered Certificates of a series will be
entitled to all or a portion of an Equity Participation, the related Prospectus
Supplement will describe the Equity Participation and the method or methods by
which distributions in respect thereof will be made to such holders.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
which will generally be current as of a date specified in the related Prospectus
Supplement and which, to the extent then applicable and specifically known to
the Depositor, will include the following: (i) the aggregate outstanding
principal balance and the largest, smallest and average outstanding principal
balance of the Mortgage Loans, (ii) the type or types of property that provide
security for repayment of the Mortgage Loans, (iii) the original and remaining
terms to maturity of the Mortgage Loans, and the seasoning of the Mortgage
Loans, (iv) the earliest and latest origination date and maturity date and
weighted average original and remaining terms to maturity of the Mortgage Loans,
(v) the original Loan-to-Value Ratios of the Mortgage Loans,(vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the geographic distribution of the Mortgaged
Properties on a state-by-state basis, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) with respect to
Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the index or
indices upon which such adjustments are based, the adjustment dates, the range
of gross margins and the weighted average gross margin, and any limits on
Mortgage Rate
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adjustments at the time of any adjustment and over the life of the ARM Loan, (x)
Debt Service Coverage Ratios either at origination or as of a more recent date
(or both) and (xi) information regarding the payment characteristics of the
Mortgage Loans, including without limitation balloon payment and other
amortization provisions. In appropriate cases, the related Prospectus Supplement
will also contain certain information available to the Depositor that pertains
to the provisions of leases and the nature of tenants of the Mortgaged
Properties. If the Depositor is unable to tabulate the specific information
described above at the time Offered Certificates of a series are initially
offered, more general information of the nature described above will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report which will be available to purchasers of those Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Commission within fifteen days following such
issuance.
MBS
MBS may include (i) private (that is, not guaranteed or insured by the
United States or any agency or instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other mortgage-backed securities such as
mortgage-backed securities that are similar to a series of Certificates or (ii)
certificates insured or guaranteed by FHLMC, FNMA, GNMA or FAMC, provided that
each MBS will evidence an interest in, or will be secured by a pledge of,
mortgage loans that conform to the descriptions of the Mortgage Loans contained
herein.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). The issuer (the "MBS Issuer") of the MBS and/or the
servicer (the "MBS Servicer") of the underlying mortgage loans will have entered
into the MBS Agreement, generally with a trustee (the "MBS Trustee") or, in the
alternative, with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any Rating Agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust Fund, (ii) the original and remaining term to stated
maturity of the MBS, if applicable, (iii) the pass-through or bond rate of the
MBS or the formula for determining such rates, (iv) the payment characteristics
of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the related underlying mortgage loans, or the MBS themselves, may be
purchased prior to their maturity, (viii) the terms on which mortgage loans may
be substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
the type of information in respect of the underlying mortgage loans described
under "--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements"
and (xi) the characteristics of any cash flow agreements that relate to the MBS.
To the extent required under the securities laws, MBS included among the
assets of a Trust Fund will (i) either have been registered under the Securities
Act of 1933, as amended, or be eligible for resale under Rule 144(k) thereunder
and (ii) have been acquired in a bona fide secondary market transaction and not
from the issuer or an affiliate.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus
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Supplement will, to the extent described herein and in such Prospectus
Supplement, deposit all payments and collections received or advanced with
respect to the Mortgage Assets and other assets in the Trust Fund. A Certificate
Account may be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in certain
short-term, investment grade obligations, in each case as described in the
related Prospectus Supplement.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in the
related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee or reserve fund, or by a
combination thereof (any such coverage with respect to the Certificates of any
series, "Credit Support"). The amount and types of Credit Support, the identity
of the entity providing it (if applicable) and related information with respect
to each type of Credit Support, if any, will be set forth in the Prospectus
Supplement for the Offered Certificates of each series. See "Risk
Factors--Credit Support Limitations" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include interest rate exchange
agreements, interest rate cap or floor agreements, currency exchange agreements
or similar agreements designed to reduce the effects of interest rate or
currency exchange rate fluctuations on the Mortgage Assets on one or more
classes of Certificates. The principal terms of any such guaranteed investment
contract or other agreement (any such agreement, a "Cash Flow Agreement"), and
the identity of the Cash Flow Agreement obligor, will be described in the
related Prospectus Supplement.
PRE-FUNDING
If so provided in the related Prospectus Supplement, a Trust Fund may
include amounts on deposit in a separate account (the "Pre-Funding Account")
which amounts will not exceed 25% of the pool balance of the Trust Fund as of
the Cut-off Date. Amounts on deposit in the Pre-Funding Account may be used by
the Trust Fund to acquire additional Mortgage Assets, which additional Mortgage
Assets will be selected using criteria that is substantially similar to the
criteria used to select the Mortgage Assets included in the Trust Fund on the
Closing Date. The Trust Fund may acquire such additional Mortgage Assets for a
period of time of not more than 120 days after the Closing Date (the
"Pre-Funding Period") as specified in the related Prospectus Supplement. Amounts
on deposit in the Pre-Funding Account after the end of the Pre-Funding Period,
will be distributed to Certificateholders or such other person as set forth in
the related Prospectus Supplement. If so provided in the related Prospectus
Supplement, the Trust Fund may include amounts on deposit in a separate account
(the "Capitalized Interest Account"). Amounts on deposit in the Capitalized
Interest Account may be used to supplement investment earnings, if any, of
amounts on deposit in the Pre-Funding Account, supplement interest collections
of the Trust Fund, or such other purpose as specified in the related Prospectus
Supplement. As set forth in a related Prospectus Supplement, amounts on deposit
in the Capitalized Interest Account and Pre-Funding Account will be held in cash
or invested in short-term investment grade obligations. Any amounts on deposit
in the Capitalized Interest Account will be released after the end of the
Pre-Funding Period as specified in the related Prospectus Supplement. See "Risk
Factors--Effects of Pre-Funding and Acquisition of Additional Mortgage Assets."
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount and
timing of distributions on the Certificate. See "Risk Factors--Prepayments;
Average Life of Certificates; Yields." The following discussion contemplates a
Trust Fund that consists solely of Mortgage Loans. While the characteristics and
behavior of mortgage loans underlying MBS can generally be expected to have the
same effect on the yield to maturity and/or weighted average life of a Class of
Certificates as will the characteristics and behavior of comparable Mortgage
Loans, the effect may differ due to the payment characteristics of the MBS. If a
Trust Fund includes MBS, the related Prospectus Supplement will discuss the
effect that the MBS payment characteristics may have on the yield to maturity
and weighted average lives of the Offered Certificates offered thereby.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable or
adjustable Pass-Through Rate, which may or may not be based upon the interest
rates borne by the Mortgage Loans in the related Trust Fund. The Prospectus
Supplement with respect to the Offered Certificates of any series will specify
the Pass-Through Rate for each class of such Certificates or, in the case of a
class of Offered Certificates with a variable or adjustable Pass-Through Rate,
the method of determining the Pass-Through Rate; the effect, if any, of the
prepayment of any Mortgage Loan on the Pass-Through Rate of one or more classes
of Offered Certificates; and whether the distributions of interest on the
Offered Certificates of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related Trust
Fund are due and the Distribution Date on which such payments are passed through
to Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest only for the period from the Due Date
of the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the Due Date of the
preceding scheduled payment up to the Due Date for the next scheduled payment.
However, interest accrued on any series of Certificates and distributable
thereon on any Distribution Date will generally correspond to interest accrued
on the principal balance of Mortgage Loans for their respective full accrual
periods. Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees) may be less
(such shortfall, a "Prepayment Interest Shortfall") than the corresponding
amount of interest accrued and otherwise payable on the Certificates of the
related series. If and to the extent that any such shortfall is allocated to a
class of Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for a series of Certificates will describe the manner in
which any such shortfalls will be allocated among the classes of such
Certificates. If so specified in the related Prospectus Supplement, the Master
Servicer will be required to apply some or all of its servicing compensation for
the corresponding period to offset the amount of any such shortfalls. The
related Prospectus Supplement will also describe any other amounts available to
offset such shortfalls. See "Description of the Pooling Agreements--Servicing
Compensation and Payment of Expenses."
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of principal
payments on the Mortgage Loans in the related Trust Fund and the allocation
thereof to reduce the principal balance (or Notional Amount, if applicable) of
such Certificate. The rate of principal payments on the Mortgage Loans will in
turn be affected by the amortization
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schedules thereof (which, in the case of ARM Loans, will change periodically to
accommodate adjustments to their Mortgage Rates), the dates on which any balloon
payments are due, and the rate of principal prepayments thereon (including for
this purpose, prepayments resulting from liquidations of Mortgage Loans due to
defaults, casualties or condemnations affecting the Mortgaged Properties, or
purchases of Mortgage Loans out of the Trust Fund). Because the rate of
principal prepayments on the Mortgage Loans in any Trust Fund will depend on
future events and a variety of factors (as discussed more fully below), it is
impossible to predict with assurance.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and to
what degree, payments of principal on the Mortgage Loans in the related Trust
Fund are in turn distributed on such Certificates (or, in the case of a class of
Stripped Interest Certificates, result in the reduction of the Notional Amount
thereof). Further, an investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans in the related Trust Fund could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield. In
general, the earlier a prepayment of principal on the Mortgage Loans is
distributed on an Offered Certificate purchased at a discount or premium (or, if
applicable, is allocated in reduction of the Notional Amount thereof), the
greater will be the effect on the investor's yield to maturity. As a result, the
effect on such investor's yield of principal payments (to the extent
distributable in reduction of the principal balance or Notional Amount of such
investor's Offered Certificates) occurring at a rate higher (or lower) than the
rate anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments (including prepayments
occasioned by defaults) on the Mortgage Loans in the related Trust Fund that are
distributable on such date, to a disproportionately large share (which, in some
cases, may be all) of such prepayments, or to a disproportionately small share
(which, in some cases, may be none) of such prepayments. As and to the extent
described in the related Prospectus Supplement, the respective entitlements of
the various classes of Certificateholders of any series to receive payments
(and, in particular, prepayments) of principal of the Mortgage Loans in the
related Trust Fund may vary based on the occurrence of certain events (e.g., the
retirement of one or more classes of Certificates of such series) or subject to
certain contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same series.
Accordingly, the yield on such Stripped Interest Certificates will be directly
related to the amortization of such Mortgage Assets or such classes of
Certificates, as the case may be. Thus, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal Certificates, a
lower than anticipated rate of principal prepayments on the Mortgage Loans in
the related Trust Fund will negatively affect the yield to investors in Stripped
Principal Certificates, and a higher than anticipated rate of principal
prepayments on such Mortgage Loans will negatively affect the yield to investors
in Stripped Interest Certificates.
The Depositor is not aware of any relevant publicly available or
authoritative statistics with respect to the historical prepayment experience of
a large group of multifamily or commercial mortgage loans. However, the extent
of prepayments of principal of the Mortgage Loans in any Trust Fund may be
affected by a number of factors, including, without limitation, the availability
of mortgage credit, the relative economic vitality of the area in which the
Mortgaged Properties are located, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. In addition, the rate of principal
payments on the Mortgage Loans in any Trust Fund may be affected by the
existence of Lock-out Periods and requirements that principal prepayments be
accompanied by Prepayment Premiums, and by the extent to which such provisions
may be practicably enforced.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as
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prevailing market interest rates decline, even borrowers with ARM Loans that
have experienced a corresponding interest rate decline may have an increased
incentive to refinance for purposes of either (i) converting to a fixed rate
loan and thereby "locking in" such rate or (ii) taking advantage of the initial
"teaser rate" (a mortgage interest rate below what it would otherwise be if the
applicable index and gross margin were applied) on another adjustable rate
mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits. The Depositor
will make no representation as to the particular factors that will affect the
prepayment of the Mortgage Loans in any Trust Fund, as to the relative
importance of such factors, as to the percentage of the principal balance of
such Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average life
of one or more classes of the Certificates of such series. Weighted average life
refers to the average amount of time that will elapse from the date of issuance
of an instrument until each dollar of the principal amount of such instrument is
repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related Mortgage
Loans, whether in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes voluntary prepayments, liquidations due
to default and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative to
a prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents an assumed constant rate of prepayment each month (expressed as
an annual percentage) relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of loans, with different
prepayment assumptions often expressed as percentages of SPA. For example, a
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month, and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of loans. Moreover, the
CPR and SPA models were developed based upon historical prepayment experience
for single-family loans. Thus, it is unlikely that the prepayment experience of
the Mortgage Loans included in any Trust Fund will conform to any particular
level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Certificates of such series and the percentage of the
initial Certificate Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the related Mortgage Loans
are made at rates corresponding to various percentages of CPR or SPA, or at such
other rates specified in such Prospectus Supplement. Such tables and assumptions
will illustrate the sensitivity of the weighted average lives of the
Certificates to various assumed prepayment rates and will not be intended to
predict, or to provide information that will enable investors to predict, the
actual weighted average lives of the Certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
A series of Certificates may include one or more Controlled Amortization
Classes that are designed to provide increased protection against prepayment
risk by transferring that risk to one or more Companion Classes. If so specified
in the related Prospectus Supplement, each Controlled Amortization Class will
either be a Planned
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Amortization Class (a "PAC") or a Targeted Amortization Class (a "TAC"). In
general, distributions of principal on a PAC are made in accordance with a
specified amortization schedule so long as prepayments on the underlying
Mortgage Loans occur within a specified range of constant prepayment rates and,
as described below, so long as one or more Companion Classes remain to absorb
excess cash flows and make up for shortfalls. For example, if the rate of
prepayments is significantly higher than expected, the excess prepayments may
retire the Companion Classes much earlier than expected, thus leaving the PAC
without further prepayment protection. A TAC is similar to a PAC, but a TAC
structure generally does not draw on Companion Classes to make up cash flow
shortfalls, and will generally not provide protection to the TAC against the
risk that prepayments occur more slowly than expected.
In general, the reduction of prepayment risk afforded to a Controlled
Amortization Class comes at the expense of one or more Companion Classes of the
same series (any of which may also be a class of Offered Certificates) which
absorb a disproportionate share of the overall prepayment risk of a given
structure. As more particularly described in the related Prospectus Supplement,
the holders of a Companion Class will receive a disproportionately large share
of prepayments when the rate of prepayment exceeds the rate assumed in
structuring the Controlled Amortization Class, and (in the case of a Companion
Class that supports a PAC) a disproportionately small share of prepayments (or
no prepayments) when the rate of prepayment falls below that assumed rate. Thus,
as and to the extent described in the related Prospectus Supplement, a Companion
Class will absorb a disproportionate share of the risk that a relatively fast
rate of prepayments will result in the early retirement of the investment, that
is, "call risk," and, if applicable, the risk that a relatively slow rate of
prepayments will extend the average life of the investment, that is, "extension
risk" that would otherwise be allocated to the related Controlled Amortization
Class. Accordingly, Companion Classes can exhibit significant average life
variability.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage Loans
included in a particular Trust Fund may require that balloon payments be made at
maturity. Because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that Mortgage Loans that require balloon
payments may default at maturity, or that the maturity of such a Mortgage Loan
may be extended in connection with a workout. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted Mortgage Loans, the Master Servicer or a Special
Servicer, to the extent and under the circumstances set forth herein and in the
related Prospectus Supplement, may be authorized to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan may
delay distributions of principal on a class of Offered Certificates and thereby
extend the weighted average life of such Certificates and, if such Certificates
were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of Certificates
can be affected by Mortgage Loans that permit negative amortization. In general,
such Mortgage Loans by their terms limit the amount by which scheduled payments
may adjust in response to changes in Mortgage Rates and/or provide that
scheduled payment amounts will adjust less frequently than the Mortgage Rates.
Accordingly, during a period of rising interest rates, the scheduled payment on
a Mortgage Loan that permits negative amortization may be less than the amount
necessary to amortize the loan fully over its remaining amortization schedule
and pay interest at the then applicable Mortgage Rate. In that case, the
Mortgage Loan balance would amortize more slowly than necessary to repay it over
such schedule and, if the amount of scheduled payment were less than the amount
necessary to pay current interest at the applicable Mortgage Rate, the loan
balance would negatively amortize to the extent of the amount of the interest
shortfall. Conversely, during a period of declining interest rates, the
scheduled payment on such a Mortgage Loan may exceed the amount necessary to
amortize the loan fully over its remaining amortization schedule and pay
interest at the then applicable Mortgage Rate. In that case, the excess would be
applied to principal, thereby resulting in amortization at a rate faster than
necessary to repay the Mortgage Loan balance over such schedule.
A slower or negative rate of Mortgage Loan amortization would
correspondingly be reflected in a slower or negative rate of amortization for
one or more classes of Certificates of the related series. Accordingly, the
weighted average lives of Mortgage Loans that permit negative amortization (and
that of the classes of Certificates to which any such negative amortization
would be allocated or which would bear the effects of a slower rate of
amortization on such Mortgage Loans) may increase as a result of such feature. A
faster rate of Mortgage Loan amortization will shorten the
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weighted average life of such Mortgage Loans and, correspondingly, the weighted
average lives of those classes of Certificates then entitled to a portion of the
principal payments on such Mortgage Loans. The related Prospectus Supplement
will describe, if applicable, the manner in which negative amortization in
respect of the Mortgage Loans in any Trust Fund is allocated among the
respective classes of Certificates of the related series.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance with
their terms will affect the weighted average lives of those Mortgage Loans and,
accordingly, the weighted average lives of and yields on the Certificates of the
related series. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceedings, may also have an
effect upon the payment patterns of particular Mortgage Loans and thus the
weighted average lives of and yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to which
such holders are required to bear the effects of any losses or shortfalls in
collections arising out of defaults on the Mortgage Loans in the related Trust
Fund and the timing of such losses and shortfalls. In general, the earlier that
any such loss or shortfall occurs, the greater will be the negative effect on
yield for any class of Certificates that is required to bear the effects
thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may result in reductions in the entitlements to interest and/or Certificate
Balances of one or more such classes of Certificates, or may be effected simply
by a prioritization of payments among such classes of Certificates. The yield to
maturity on a class of Subordinate Certificates may be extremely sensitive to
losses and shortfalls in collections on the Mortgage Loans in the related Trust
Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may range from none to all) of the
principal payments received on the Mortgage Assets in the related Trust Fund,
one or more classes of Certificates of any series, including one or more classes
of Offered Certificates of such series, may provide for distributions of
principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. As specifically set forth in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any Distribution
Date that represent (i) interest received or advanced on the Mortgage Assets in
the related Trust Fund that is in excess of the interest currently distributable
on the Certificates of such series, as well as any interest accrued but not
currently distributable on any Accrual Certificates of such series, or (ii)
Prepayment Premiums, payments from Equity Participations or any other amounts
received on the Mortgage Assets in the related Trust Fund that do not constitute
interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce the
yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources would have any material effect on
the rate at which such Certificates are amortized.
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THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a Delaware
corporation organized on June 13, 1986 as a wholly-owned limited purpose finance
subsidiary of Merrill Lynch Mortgage Capital Inc. (a wholly-owned indirect
subsidiary of Merrill Lynch & Co.). The Depositor's principal business is to
acquire, hold and/or sell or otherwise dispose of cash flow assets, usually in
connection with the securitization of that asset. The Depositor maintains its
principal office at World Financial Center, North Tower-Fifteenth Floor, 250
Vesey Street, New York, New York 10281-1315. Its telephone number is (212)
449-0336. The Depositor does not have, nor is it expected in the future to have,
any significant assets.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or will
be used by the Depositor for general corporate purposes. The Depositor expects
to sell the Certificates from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series will consist of one or more classes and
will represent the entire beneficial ownership interest in the Trust Fund
created pursuant to the related Pooling Agreement. Each series of Certificates
may consist of one or more classes of Certificates (including classes of Offered
Certificates) that (i) provide for the accrual of interest thereon at a fixed,
variable or adjustable rate; (ii) are senior (collectively, "Senior
Certificates") or subordinate (collectively, "Subordinate Certificates") to one
or more other classes of Certificates in entitlement to certain distributions on
the Certificates; (iii) are entitled to distributions of principal, with
disproportionately small, nominal or no distributions of interest (collectively,
"Stripped Principal Certificates"); (iv) are entitled to distributions of
interest, with disproportionately small, nominal or no distributions of
principal (collectively, "Stripped Interest Certificates"); (v) provide for
distributions of principal and/or interest thereon that commence only after the
occurrence of certain events, such as the retirement of one or more other
classes of Certificates of such series; (vi) provide for distributions of
principal to be made, from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund; or (vii) provide for distributions of principal to be made, subject
to available funds, based on a specified principal payment schedule or other
methodology.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates or REMIC Residual Certificates, Notional Amounts or
percentage interests, specified in the related Prospectus Supplement. As
provided in the related Prospectus Supplement, one or more classes of Offered
Certificates of any series may be issued in fully registered, definitive form
(such Certificates, "Definitive Certificates") or may be offered in book-entry
format (such Certificates, "Book-Entry Certificates") through the facilities of
The Depository Trust Company ("DTC"). The Offered Certificates of each series
(if issued as Definitive Certificates) may be transferred or exchanged, subject
to any restrictions on transfer described in the related Prospectus Supplement,
at the location specified in the related Prospectus Supplement, without the
payment of any service charge, other than any tax or other governmental charge
payable in connection therewith. Interests in a class of Book-Entry Certificates
will be transferred on the book-entry records of DTC and its participating
organizations. See "Risk Factors--Limited Liquidity," "--Limited Assets" and
"--Book-Entry Registration."
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. If so provided in the related
Prospectus Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all
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payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the Certificateholders of such
series on such date. The particular components of the Available Distribution
Amount for any series on each Distribution Date will be more specifically
described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring instructions
(which may be provided in the form of a standing order applicable to all
subsequent distributions) no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus Supplement,
such Certificateholder holds Certificates in the requisite amount or
denomination specified therein), or by check mailed to the address of such
Certificateholder as it appears on the Certificate Register; provided, however,
that the final distribution in retirement of any class of Certificates (whether
Definitive Certificates or Book-Entry Certificates) will be made only upon
presentation and surrender of such Certificates at the location specified in the
notice to Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain REMIC Residual Certificates that
have no Pass-Through Rate) may have a different Pass-Through Rate, which may be
fixed, variable or adjustable. The related Prospectus Supplement will specify
the Pass-Through Rate or, in the case of a variable or adjustable Pass-Through
Rate, the method for determining the Pass-Through Rate, for each class. Unless
otherwise specified in the related Prospectus Supplement, interest on the
Certificates of each series will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Stripped Principal Certificates or
REMIC Residual Certificates that is not entitled to any distributions of
interest) will be made on each Distribution Date based on the Accrued
Certificate Interest for such class and such Distribution Date, subject to the
sufficiency of the portion of the Available Distribution Amount allocable to
such class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates (other than certain classes of Stripped Interest
Certificates and REMIC Residual Certificates), "Accrued Certificate Interest"
for each Distribution Date will be equal to interest at the applicable
Pass-Through Rate accrued for a specified period (generally the period between
Distribution Dates) on the outstanding Certificate Balance thereof immediately
prior to such Distribution Date. Unless otherwise provided in the related
Prospectus Supplement, Accrued Certificate Interest for each Distribution Date
on Stripped Interest Certificates will be similarly calculated except that it
will accrue on a notional amount (a "Notional Amount") that is either (i) based
on the principal balances of some or all of the Mortgage Assets in the related
Trust Fund or (ii) equal to the Certificate Balances of one or more other
classes of Certificates of the same series. Reference to a Notional Amount with
respect to a class of Stripped Interest Certificates is solely for convenience
in making certain calculations and does not represent the right to receive any
distributions of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the Certificate Balance of) one or more classes of the Certificates of
a series will be reduced to the extent that any Prepayment Interest Shortfalls,
as described under "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest," exceed the amount of any sums (including, if and to
the extent specified in the related Prospectus Supplement, the Master Servicer's
servicing compensation) that are applied to offset such shortfalls. The
particular manner in which such shortfalls will be allocated among some or all
of the classes of Certificates of that series will be specified in the related
Prospectus Supplement. The related
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Prospectus Supplement will also describe the extent to which the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Certificates, that may otherwise be added to the Certificate Balance
of) a class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on or in respect of the Mortgage Assets in the related Trust Fund will result in
a corresponding increase in the Certificate Balance of such class. See "Risk
Factors--Prepayments; Average Life of Certificates; Yields" and "Yield and
Maturity Considerations."
DISTRIBUTIONS OF CERTIFICATE PRINCIPAL
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates of REMIC Residual Certificates) will have a
"Certificate Balance" which, at any time, will equal the then maximum amount
that the holders of Certificates of such class will be entitled to receive in
respect of principal out of the future cash flow on the Mortgage Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a class of Certificates will be reduced by distributions of principal
made thereon from time to time and, if so provided in the related Prospectus
Supplement, further by any losses incurred in respect of the related Mortgage
Assets allocated thereto from time to time. In turn, the outstanding Certificate
Balance of a class of Certificates may be increased as a result of any deferred
interest on or in respect of the related Mortgage Assets that is allocated
thereto from time to time, and will be increased, in the case of a class of
Accrual Certificates prior to the Distribution Date on which distributions of
interest thereon are required to commence, by the amount of any Accrued
Certificate Interest in respect thereof (reduced as described above). Unless
otherwise provided in the related Prospectus Supplement, the initial aggregate
Certificate Balance of all classes of a series of Certificates will not be
greater than the aggregate outstanding principal balance of the related Mortgage
Assets as of the applicable Cut-off Date, after application of scheduled
payments due on or before such date, whether or not received. As and to the
extent described in the related Prospectus Supplement, distributions of
principal with respect to a series of Certificates will be made on each
Distribution Date to the holders of the class or classes of Certificates of such
series entitled thereto until the Certificate Balances of such Certificates have
been reduced to zero. Distributions of principal with respect to one or more
classes of Certificates may be made at a rate that is faster (and, in some
cases, substantially faster) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund, may not commence until the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of the same series, or
may be made at a rate that is slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are received
on such Mortgage Assets. In addition, distributions of principal with respect to
one or more classes of Certificates (each such class, a "Controlled Amortization
Class") may be made, subject to available funds, based on a specified principal
payment schedule and, with respect to one or more classes of Certificates (each
such class, a "Companion Class"), may be contingent on the specified principal
payment schedule for a Controlled Amortization Class of the same series and the
rate at which payments and other collections of principal on the Mortgage Assets
in the related Trust Fund are received. Unless otherwise specified in the
related Prospectus Supplement, distributions of principal of any class of
Certificates will be made on a pro rata basis among all of the Certificates of
such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority and
manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
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may result in reductions in the entitlements to interest and/or in the
Certificate Balances of one or more such classes of Certificates, or may be
effected simply by a prioritization of payments among such classes of
Certificates.
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, the
related Master Servicer and/or other specified person (including a provider of
Credit Support) may be obligated to advance, or have the option of advancing, on
or before each Distribution Date, from its or their own funds or from excess
funds held in the related Certificate Account that are not part of the Available
Distribution Amount for the related series of Certificates for such Distribution
Date, an amount up to the aggregate of any payments of principal (other than any
balloon payments) and interest that were due on or in respect of such Mortgage
Loans during the related Due Period and were delinquent on the related
Determination Date. Unless otherwise provided in the related Prospectus
Supplement, a "Due Period" is the period between Distribution Dates, and
scheduled payments on the Mortgage Loans in any Trust Fund that became due
during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related Master Servicer or other specified
person, be distributed on the Distribution Date next succeeding such
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the advancing person's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts received under any
instrument of Credit Support) respecting which such advances were made (as to
any Mortgage Loan, "Related Proceeds") and such other specific sources as may be
identified in the related Prospectus Supplement, including in the case of a
series that includes one or more classes of Subordinate Certificates,
collections on other Mortgage Loans in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by the Master
Servicer or by any other person if, in the good faith judgment of the Master
Servicer or such other person, such advance would not be recoverable from
Related Proceeds or another specifically identified source (any such advance, a
"Nonrecoverable Advance"); and, if previously made by a Master Servicer or
another person, a Nonrecoverable Advance will be reimbursable from any amounts
in the related Certificate Account prior to any distributions being made to the
related series of Certificateholders.
If advances have been made from excess funds in a Certificate Account, the
Master Servicer or other person that advanced such funds will be required to
replace such funds in the Certificate Account on any future Distribution Date to
the extent that funds then in the Certificate Account are insufficient to permit
full distributions to Certificateholders on such date. If so specified in the
related Prospectus Supplement, the obligation of a Master Servicer or other
specified person to make advances may be secured by a cash advance reserve fund
or a surety bond. If applicable, information regarding the characteristics of,
and the identity of any obligor on, any such surety bond, will be set forth in
the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the holders of
each class of the Offered Certificates of a series, a Master Servicer or
Trustee, as provided in the related Prospectus Supplement, will forward to each
such holder, a statement (a "Distribution Date Statement") that, unless
otherwise provided in the related Prospectus Supplement, will set forth, among
other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of Certificates of such
class that was applied to reduce the Certificate Balance thereof;
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(ii) the amount of such distribution to holders of Certificates of
such class that is allocable to Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of
Certificates of such class that is allocable to (A) Prepayment Premiums and
(B) payments on account of Equity Participations;
(iv) the amount of servicing compensation received by the related
Master Servicer (and, if payable directly out of the related Trust Fund, by
any Special Servicer and any Sub-Servicer) and such other customary
information as such Master Servicer or the related Trustee, as the case may
be, deems necessary or desirable, or that a Certificateholder reasonably
requests, to enable Certificateholders to prepare their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the related Mortgage Loans on,
or as of a specified date shortly prior to, such Distribution Date;
(vii) the number and aggregate principal balance of any Mortgage Loans
in respect of which (A) one scheduled payment is delinquent, (B) two
scheduled payments are delinquent, (C) three or more scheduled payments are
delinquent and (D) foreclosure proceedings have been commenced;
(viii) with respect to each Mortgage Loan that is delinquent in
respect of three or more scheduled payments, (A) the loan number thereof,
(B) the unpaid balance thereof, (C) whether the delinquency is in respect
of any balloon payment, (D) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof, (E) if applicable,
the aggregate amount of any interest accrued and payable to the related
Master Servicer, a Special Servicer and/or any other entity on related
servicing expenses and related advances, (F) whether a notice of
acceleration has been sent to the borrower and, if so, the date of such
notice and (G) a brief description of the status of any foreclosure
proceedings or negotiations with the borrower;
(ix) with respect to any Mortgage Loan liquidated during the related
Prepayment Period (that is, the specified period, generally equal in length
to the time period between Distribution Dates, during which prepayments and
other unscheduled collections on the Mortgage Loans in the related Trust
Fund must be received in order to be distributed on a particular
Distribution Date) in connection with a default thereon or by reason of
being purchased out of the related Trust Fund, (A) the loan number thereof,
(B) the manner in which it was liquidated, (C) the aggregate amount of
Liquidation Proceeds received, (D) the portion of such Liquidation Proceeds
payable or reimbursable to the related Master Servicer or a Special
Servicer in respect of such Mortgage Loan and (E) the amount of any loss to
Certificateholders;
(x) with respect to each Mortgaged Property acquired through
foreclosure, deed-in-lieu of foreclosure or otherwise (an "REO Property")
and included in the related Trust Fund as of the end of the related Due
Period or Prepayment Period, as applicable, (A) the loan number of the
related Mortgage Loan, (B) the date of acquisition, (C) the principal
balance of the related Mortgage Loan (calculated as if such Mortgage Loan
were still outstanding taking into account certain limited modifications to
the terms thereof specified in the related Pooling Agreement), (D) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (E) if applicable, the aggregate amount of
interest accrued and payable to the related Master Servicer, a Special
Servicer and/or any other entity on related servicing expenses and related
advances;
(xi) with respect to any REO Property sold during the related
Prepayment Period, (A) the loan number of the related Mortgage Loan, (B)
the aggregate amount of sales proceeds, (C) the portion of such sales
proceeds payable or reimbursable to the related Master Servicer or a
Special Servicer in respect of such REO Property or the related Mortgage
Loan and (D) the amount of any loss to Certificateholders in respect of the
related Mortgage Loan;
(xii) the Certificate Balance or Notional Amount, as the case may be,
of each class of Certificates (including any class of Certificates not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Certificate Balance due to the
allocation of any losses in respect of the related Mortgage Loans and any
increase in the Certificate Balance of a class of Accrual Certificates in
the event that Accrued Certificate Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made on the
Mortgage Loans during the related Prepayment Period;
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(xiv) the amount deposited in or withdrawn from any reserve fund on
such Distribution Date, and the amount remaining on deposit in such reserve
fund as of the close of business on such Distribution Date;
(xv) the amount of any Accrued Certificate Interest due but not paid
on such class of Offered Certificates at the close of business on such
Distribution Date;
(xvi) if such class of Offered Certificates has a variable
Pass-Through Rate or an adjustable Pass-Through Rate, the Pass-Through Rate
applicable thereto for such Distribution Date and, if determinable, for the
next succeeding Distribution Date; and
(xvii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a
surety bond, the amount of coverage under each such instrument as of the
close of business on such Distribution Date.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts will be expressed as a dollar amount per minimum denomination of the
relevant class of Offered Certificates or per a specified portion of such
minimum denomination. The Prospectus Supplement for each series of Offered
Certificates will describe any additional information to be included in reports
to the holders of such Certificates.
Within a reasonable period of time after the end of each calendar year, the
related Master Servicer or Trustee, as the case may be, will be required to
furnish to each person who at any time during the calendar year was a holder of
an Offered Certificate a statement containing the information set forth in
subclauses (i)-(iv) above, aggregated for such calendar year or the applicable
portion thereof during which such person was a Certificateholder. Such
obligation will be deemed to have been satisfied to the extent that
substantially comparable information is provided pursuant to any requirements of
the Code as are from time to time in force. See, however, "Description of the
Certificates--Book-Entry Registration and Definitive Certificates."
If the Trust Fund for a series of Certificates includes MBS, the ability of
the related Master Servicer or Trustee, as the case may be, to include in any
Distribution Date Statement information regarding the mortgage loans underlying
such MBS will depend on the reports received with respect to such MBS. In such
cases, the related Prospectus Supplement will describe the loan-specific
information to be included in the Distribution Date Statements that will be
forwarded to the holders of the Offered Certificates of that series in
connection with distributions made to them.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally have a right to vote only with respect to
required consents to certain amendments to the related Pooling Agreement and as
otherwise specified in the related Prospectus Supplement. See "Description of
the Pooling Agreements--Amendment." The holders of specified amounts of
Certificates of a particular series will have the collective right to remove the
related Trustee and also to cause the removal of the related Master Servicer in
the case of an Event of Default on the part of the Master Servicer. See
"Description of the Pooling Agreements--Events of Default," "--Rights Upon Event
of Default" and "--Resignation and Removal of the Trustee."
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate upon the payment (or provision for payment) to
Certificateholders of that series of all amounts held in the related Certificate
Account, or otherwise by the related Master Servicer or Trustee or by a Special
Servicer, and required to be paid to such Certificateholders pursuant to such
Pooling Agreement following the earlier of (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan subject thereto and (ii)
the purchase of all of the assets of the related Trust Fund by the party
entitled to effect such termination, under the circumstances and in the manner
that will be described in the related Prospectus Supplement. Written notice of
termination of a Pooling Agreement will be given to each Certificateholder of
the related series, and the final distribution will be made only upon
presentation and surrender of the Certificates of such series at the location to
be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by a party that will be specified
therein,
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under the circumstances and in the manner set forth therein. If so provided in
the related Prospectus Supplement, upon the reduction of the Certificate Balance
of a specified class or classes of Certificates by a specified percentage or
amount, a party identified therein will be authorized or required to solicit
bids for the purchase of all the assets of the related Trust Fund, or of a
sufficient portion of such assets to retire such class or classes, under the
circumstances and in the manner set forth therein. In any event, unless
otherwise disclosed in the applicable Prospectus Supplement, any such repurchase
or purchase shall be at a price or prices that are generally based upon the
unpaid principal balance of, plus accrued interest on, all Mortgage Loans (other
than Mortgage Loans secured by REO Properties) then included in a Trust Fund and
the fair market value of all REO Properties then included in the Trust Fund,
which may or may not result in full payment of the aggregate Certificate Balance
plus accrued interest and any undistributed shortfall in interest for the then
outstanding Certificates. Any sale of Trust Fund assets will be without recourse
to the Trust and/or Certificateholders, provided, however, that there can be no
assurance that in all events a court would accept such a contractual
stipulation.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Certificates of any series will be offered in book-entry format
through the facilities of The Depository Trust Company ("DTC"), and each such
class will be represented by one or more global Certificates registered in the
name of DTC or its nominee.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking corporation" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement of
securities certificates. "Direct Participants," which maintain accounts with
DTC, include securities brokers and dealers (including Merrill Lynch, Pierce,
Fenner & Smith Incorporated), banks, trust companies and clearing corporations
and may include certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Direct Participant, either directly or indirectly ("Indirect Participants").
The Rules applicable to DTC and its Participants are on file with the
Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through Direct Participants, which will receive a credit for the Book-Entry
Certificates on DTC's records. The ownership interest of each actual purchaser
of a Book-Entry Certificate (a "Certificate Owner") will in turn be recorded on
the records of Direct and Indirect Participants. Certificate Owners will not
receive written confirmation from DTC of their purchases, but Certificate Owners
are expected to receive written confirmations providing details of such
transactions, as well as periodic statements of their holdings, from the Direct
or Indirect Participant through which each Certificate Owner entered into the
transaction. Transfers of ownership interest in the Book-Entry Certificates will
be accomplished by entries made on the books of Participants acting on behalf of
Certificate Owners. Certificate Owners will not receive certificates
representing their ownership interests in the Book-Entry Certificates, except in
the event that use of the book-entry system for the Book-Entry Certificates of
any series is discontinued as described below.
DTC will not know the identity of actual Certificate Owners of the
Book-Entry Certificates; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Certificates are credited. The Participants
will remain responsible for keeping account of their holdings on behalf of their
customers. Notices and other communications conveyed by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Certificate Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit "Direct Participants" accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such date.
Disbursement of such distributions by Participants to Certificate Owners will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of each such Participant (and not
of DTC, the Depositor or any Trustee or Master Servicer),
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subject to any statutory or regulatory requirements as may be in effect from
time to time. Under a book-entry system, Certificate Owners may receive payments
after the related Distribution Date.
As may be provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement) of a
Book-Entry Certificate will be the nominee of DTC, and the Certificate Owners
will not be recognized as Certificateholders under the Pooling Agreement.
Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly through
the Participants who in turn will exercise their rights through DTC. The
Depositor is informed that DTC will take action permitted to be taken by a
Certificateholder under a Pooling Agreement only at the direction of one or more
Participants to whose account with DTC interests in the Book-Entry Certificates
are credited.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of a
Certificate Owner to pledge its interest in Book-Entry Certificates to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of its interest in Book-Entry Certificates, may be limited due to the
lack of a physical certificate evidencing such interest.
As may be specified in the related Prospectus Supplement, Certificates
initially issued in book-entry form will be issued in fully registered,
certificated form (as so issued, "Definitive Certificates") to Certificate
Owners or their nominees, rather than to DTC or its nominee, only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to such
Certificates and the Depositor is unable to locate a qualified successor or (ii)
the Depositor, at its option, elects to terminate the book-entry system through
DTC with respect to such Certificates. Upon the occurrence of either of the
events described in the preceding sentence, DTC will be required to notify all
Participants of the availability through DTC of Definitive Certificates. Upon
surrender by DTC of the certificate or certificates representing a class of
Book-Entry Certificates, together with instructions for reregistration, the
Trustee or other designated party will be required to issue to the Certificate
Owners identified in such instructions the Definitive Certificates to which they
are entitled, and thereafter the holders of such Definitive Certificates will be
recognized as Certificateholders under the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the Depositor, the Trustee, the Master Servicer
and, in some cases, a Special Servicer appointed as of the date of the Pooling
Agreement. However, a Pooling Agreement that relates to a Trust Fund that
consists solely of MBS may not include a Master Servicer or other servicer as a
party. All parties to each Pooling Agreement under which Certificates of a
series are issued will be identified in the related Prospectus Supplement.
A form of a Pooling and Servicing Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. However, the
provisions of each Pooling Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The following summaries describe certain provisions that may appear in a Pooling
Agreement under which Certificates that evidence interests in Mortgage Loans
will be issued. The Prospectus Supplement for a series of Certificates will
describe any provision of the related Pooling Agreement that materially differs
from the description thereof contained in this Prospectus and, if the related
Trust Fund includes MBS, will summarize all of the material provisions of the
related Pooling Agreement. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Pooling Agreement for each series of Certificates and the
description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term "Certificate" refers to all of the
Certificates of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Pooling Agreement (without exhibits) that relates to any
series of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to Merrill Lynch Mortgage Investors, Inc.,
World Financial Center, North Tower-Fifteenth Floor, 250 Vesey Street, New York,
New York 10281-1315. Attention: Secretary.
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
As set forth in the related Prospectus Supplement, generally at the time of
issuance of any series of Certificates, the Depositor will assign (or cause to
be assigned) to the designated Trustee the Mortgage Loans to be included in the
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related Trust Fund, together with, all principal and interest to be received on
or with respect to such Mortgage Loans after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date. The Trustee will,
concurrently with such assignment, deliver the Certificates to or at the
direction of the Depositor in exchange for the Mortgage Loans and the other
assets to be included in the Trust Fund for such series. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule generally will include detailed information that
pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include the address of the related Mortgaged Property
and type of such property; the Mortgage Rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap information; the original
and remaining term to maturity; the original amortization term; the original and
outstanding principal balance; and the Loan-to-Value Ratio and Debt Service
Coverage Ratio as of the date indicated.
With respect to each Mortgage Loan to be included in a Trust Fund, the
Depositor will deliver (or cause to be delivered) to the related Trustee (or to
a custodian appointed by the Trustee) certain loan documents which, will include
the original Mortgage Note endorsed, without recourse, to the order of the
Trustee, the original Mortgage (or a certified copy thereof) with evidence of
recording indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. The related Pooling Agreement will require that the Depositor
or other party thereto promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records.
The related Trustee (or the custodian appointed by the Trustee) will be
required to review the Mortgage Loan documents within a specified period of days
after receipt thereof, and the Trustee (or the custodian) will hold such
documents in trust for the benefit of the Certificateholders of the related
series. Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective, in either case such that
interests of the Certificateholders are materially and adversely affected, the
Trustee (or such custodian) will be required to notify the Master Servicer and
the Depositor, and the Master Servicer will be required to notify the relevant
Mortgage Asset Seller. In that case, and if the Mortgage Asset Seller cannot
deliver the document or cure the defect within a specified number of days after
receipt of such notice, then unless otherwise specified in the related
Prospectus Supplement, the Mortgage Asset Seller will be obligated to replace
the related Mortgage Loan or repurchase it from the Trustee at a price that will
be specified in the related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
The Depositor will, with respect to each Mortgage Loan in the related Trust
Fund, make or assign certain representations and warranties, (the person making
such representations and warranties, the "Warranting Party") covering, by way of
example: (i) the accuracy of the information set forth for such Mortgage Loan on
the schedule of Mortgage Loans appearing as an exhibit to the related Pooling
Agreement; (ii) the enforceability of the related Mortgage Note and Mortgage and
the existence of title insurance insuring the lien priority of the related
Mortgage; (iii) the Warranting Party's title to the Mortgage Loan and the
authority of the Warranting Party to sell the Mortgage Loan; and (iv) the
payment status of the Mortgage Loan. Each Warranting Party will be identified in
the related Prospectus Supplement.
Each Pooling Agreement will provide that the Master Servicer and/or Trustee
will be required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the related
Certificateholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will be
obligated to repurchase such Mortgage Loan from the Trustee within a specified
period at a price that will be specified in the related Prospectus Supplement.
If so provided in the Prospectus Supplement for a series of Certificates, a
Warranting Party, in lieu of repurchasing a Mortgage Loan as to which a breach
has occurred, will have the option, exercisable upon certain conditions and/or
within a specified period after initial issuance of such series of Certificates,
to replace such Mortgage Loan with one or more other mortgage loans, in
accordance with standards that will be described in the Prospectus Supplement.
This repurchase or substitution obligation may constitute the sole remedy
available to holders of Certificates of any series for a breach of
representation and warranty by a Warranting Party. Moreover, neither the
Depositor (unless it is the Warranting Party) nor the Master Servicer will be
obligated to purchase or replace a Mortgage Loan if a Warranting Party defaults
on its obligation to do so.
The dates as of which representations and warranties have been made by a
Warranting Party will be specified in the related Prospectus Supplement. In some
cases, such representations and warranties will have been made as of a
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date prior to the date upon which the related series of Certificates is issued,
and thus may not address events that may occur following the date as of which
they were made. However, the Depositor will not include any Mortgage Loan in the
Trust Fund for any series of Certificates if anything has come to the
Depositor's attention that would cause it to believe that the representations
and warranties made in respect of such Mortgage Loan will not be accurate in all
material respects as of such date of issuance.
CERTIFICATE ACCOUNT
General. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans (collectively, the "Certificate Account"), which will be established so as
to comply with the standards of each Rating Agency that has rated any one or
more classes of Certificates of the related series. As described in the related
Prospectus Supplement, a Certificate Account may be maintained either as an
interest-bearing or a non-interest-bearing account, and the funds held therein
may be held as cash or invested in United States government securities and other
investment grade obligations specified in the related Pooling Agreement
("Permitted Investments"). Any interest or other income earned on funds in the
Certificate Account will be paid to the related Master Servicer or Trustee as
additional compensation. If permitted by such Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or serviced by it on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be deposited
in the Certificate Account for each Trust Fund within a certain period following
receipt (in the case of collections and payments), the following payments and
collections received, or advances made, by the Master Servicer, the Trustee or
any Special Servicer subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans,
including any default interest collected, in each case net of any portion
thereof retained by the Master Servicer, any Special Servicer or
Sub-Servicer as its servicing compensation or as compensation to the
Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan (other than proceeds applied to the restoration of
the property or released to the related borrower in accordance with the
customary servicing practices of the Master Servicer (or, if applicable, a
Special Servicer) and/or the terms and conditions of the related Mortgage
(collectively, "Insurance Proceeds") and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise
("Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Certificates--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or
any other specified person as described under "--Assignment of Mortgage
Loans; Repurchases" and "--Representations and Warranties; Repurchases,"
all proceeds of the purchase of any defaulted Mortgage Loan as described
under "--Realization Upon Defaulted Mortgage Loans," and all proceeds of
any Mortgage Asset purchased as described under "Description of the
Certificates--Termination" (all of the foregoing, also, "Liquidation
Proceeds");
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(viii) any amounts paid by the Master Servicer to cover Prepayment
Interest Shortfalls arising out of the prepayment of Mortgage Loans as
described under "--Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or a Special Servicer, any
payments on account of modification or assumption fees, late payment
charges, Prepayment Premiums or Equity Participations on the Mortgage
Loans;
(x) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance Policies";
(xi) any amount required to be deposited by the Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Certificate Account; and
(xii) any other amounts required to be deposited in the Certificate
Account as provided in the related Pooling Agreement and described in the
related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to reimburse the Master Servicer or any other specified person
for unreimbursed amounts advanced by it as described under "Description of
the Certificates--Advances in Respect of Delinquencies," such reimbursement
to be made out of amounts received which were identified and applied by the
Master Servicer as late collections of interest (net of related servicing
fees) on and principal of the particular Mortgage Loans with respect to
which the advances were made or out of amounts drawn under any form of
Credit Support with respect to such Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer for
unpaid servicing fees earned by it and certain unreimbursed servicing
expenses incurred by it with respect to Mortgage Loans in the Trust Fund
and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Mortgage Loans and
properties;
(iv) to reimburse the Master Servicer or any other specified person
for any advances described in clause (ii) above made by it and any
servicing expenses referred to in clause (iii) above incurred by it which,
in the good faith judgment of the Master Servicer or such other person,
will not be recoverable from the amounts described in clauses (ii) and
(iii), respectively, such reimbursement to be made from amounts collected
on other Mortgage Loans in the related Trust Fund or, if and to the extent
so provided by the related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts collected on such
other Mortgage Loans that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer or another
specified entity (including a provider of Credit Support) interest accrued
on the advances described in clause (ii) above made by it and the servicing
expenses described in clause (iii) above incurred by it while such remain
outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization
Upon Defaulted Mortgage Loans";
(vii) to reimburse the Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "--Certain Matters Regarding the Master Servicer and
the Depositor";
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(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under
"--Certain Matters Regarding the Trustee";
(x) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of amounts
held in the Certificate Account;
(xi) to pay (generally from related income) for costs incurred in
connection with the operation, management and maintenance of any Mortgaged
Property acquired by the Trust Fund by foreclosure or otherwise;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under "Material Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xv) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xvi) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer for any mortgage pool, directly or through
Sub-Servicers, will be required to make reasonable efforts to collect all
scheduled Mortgage Loan payments and will be required to follow such collection
procedures as it would follow with respect to mortgage loans that are comparable
to such Mortgage Loans and held for its own account, provided such procedures
are consistent with (i) the terms of the related Pooling Agreement and any
related instrument of Credit Support included in the related Trust Fund, (ii)
applicable law and (iii) the servicing standard specified in the Pooling
Agreement and in the related Prospectus Supplement (the "Servicing Standard").
The Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts for payment of taxes, insurance premiums and similar items, or
otherwise monitoring the timely payment of those items; attempting to collect
delinquent payments; supervising foreclosures; conducting property inspections
on a periodic or other basis; managing Mortgaged Properties acquired through or
in lieu of foreclosure (each, an "REO Property"); and maintaining servicing
records relating to the Mortgage Loans. Generally, the Master Servicer will be
responsible for filing and settling claims in respect of particular Mortgage
Loans under any applicable instrument of Credit Support. See "Description of
Credit Support."
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
A Master Servicer may agree to modify, waive or amend any term of any
Mortgage Loan serviced by it in a manner consistent with the Servicing Standard;
provided that, the modification, waiver or amendment will not (i) affect the
amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in the judgment of the Master Servicer, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely payment of
amounts due thereon. A Master Servicer also may agree to any other modification,
waiver or amendment if, in its judgment (i) a material default on the Mortgage
Loan has occurred or a payment default is imminent and (ii) such modification,
waiver or amendment is reasonably likely to produce a greater recovery with
respect to the Mortgage Loan on a present value basis than would liquidation.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Sub-Servicer"), but the Master Servicer will remain liable for such obligations
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under the related Pooling Agreement unless otherwise provided in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, each sub-servicing agreement between a Master Servicer and a
Sub-Servicer (a "Sub-Servicing Agreement") must provide that, if for any reason
the Master Servicer is no longer acting in such capacity, the Trustee or any
successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Generally, the Master Servicer will be solely liable for all fees owed by
it to any Sub-Servicer, irrespective of whether the Master Servicer's
compensation pursuant to the related Pooling Agreement is sufficient to pay such
fees. Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under a Pooling Agreement. See "--Certificate Account" and
"--Servicing Compensation and Payment of Expenses."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (the "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties (for example, the servicing of defaulted
Mortgage Loans) in respect of the servicing of the related Mortgage Loans. The
Master Servicer will be liable for the performance of a Special Servicer only
if, and to the extent, set forth in such Prospectus Supplement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required Mortgage Loan payments may mean that
operating income is insufficient to service the mortgage debt, or may reflect
the diversion of that income from the servicing of the mortgage debt. In
addition, a borrower that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and to otherwise maintain and insure the
related Mortgaged Property. In general, the related Master Servicer will be
required to monitor any Mortgage Loan that is in default, evaluate whether the
causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the related Mortgaged Property and take such other actions as are consistent
with the Servicing Standard. A significant period of time may elapse before the
Master Servicer is able to assess the success of any such corrective action or
the need for additional initiatives.
The time within which the Master Servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the borrower, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. If a borrower files a bankruptcy
petition, the Master Servicer may not be permitted to accelerate the maturity of
the related Mortgage Loan or to foreclose on the Mortgaged Property for a
considerable period of time. See "Certain Legal Aspects of Mortgage Loans."
A Pooling Agreement may grant to the Master Servicer, a Special Servicer, a
provider of Credit Support and/or the holder or holders of certain classes of
Certificates of the related series a right of first refusal to purchase from the
Trust Fund, at a predetermined purchase price (which, if insufficient to fully
fund the entitlements of Certificateholders to principal and interest thereon,
will be specified in the related Prospectus Supplement), any Mortgage Loan as to
which a specified number of scheduled payments are delinquent. In addition,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Mortgage Loan if and when the Master
Servicer determines, consistent with the Servicing Standard, that such a sale
would produce a greater recovery on a present value basis than would liquidation
of the related Mortgaged Property. Generally, the related Pooling Agreement will
require that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Mortgage
Loan. In the absence of any bid determined in accordance with the related
Pooling Agreement to be fair, the Master Servicer will generally be required to
proceed with respect to such defaulted Mortgage Loan as described below.
If a default on a Mortgage Loan has occurred or, in the Master Servicer's
judgment, is imminent, the Master Servicer, on behalf of the Trustee, may at any
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time institute foreclosure proceedings, exercise any power of sale contained in
the related Mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire
title to the related Mortgaged Property, by operation of law or otherwise, if
such action is consistent with the Servicing Standard. The Master Servicer may
not, however, acquire title to any Mortgaged Property or take any other action
that would cause the Trustee, for the benefit of Certificateholders of the
related series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that:
(i) either the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions as
are necessary to bring the Mortgaged Property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) either there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or remediation
could be required under any applicable environmental laws and regulations
or, if such circumstances or conditions are present for which any such
action could be required, taking such actions with respect to the Mortgaged
Property is reasonably likely to produce a greater recovery on a present
value basis than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Considerations."
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Master Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service grants an extension of time
to sell such property or (ii) the Trustee receives an opinion of independent
counsel to the effect that the holding of the property by the Trust Fund for
more than two years after its acquisition will not result in the imposition of a
tax on the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC
under the Code at any time that any Certificate is outstanding. Subject to the
foregoing, the Master Servicer will generally be required to solicit bids for
any Mortgaged Property so acquired in such a manner as will be reasonably likely
to realize a fair price for such property. If the Trust Fund acquires title to
any Mortgaged Property, the Master Servicer, on behalf of the Trust Fund, may
retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Master
Servicer of its obligation to manage such Mortgaged Property in a manner
consistent with the Servicing Standard.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Master Servicer with respect to such Mortgage Loan, the Trust
Fund will realize a loss in the amount of such difference. The Master Servicer
will be entitled to reimburse itself from the Liquidation Proceeds recovered on
any defaulted Mortgage Loan, prior to the distribution of such Liquidation
Proceeds to Certificateholders, amounts that represent unpaid servicing
compensation in respect of the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent payments made with respect to the Mortgage Loan.
If any Mortgaged Property suffers damage that the proceeds, if any, of the
related hazard insurance policy are insufficient to fully restore, the Master
Servicer will not be required to expend its own funds to restore the damaged
property unless (and to the extent not otherwise provided in the related
Prospectus Supplement) it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
HAZARD INSURANCE POLICIES
Each Pooling Agreement may require the related Master Servicer to cause
each Mortgage Loan borrower to maintain a hazard insurance policy that provides
for such coverage as is required under the related Mortgage or, if the Mortgage
permits the holder thereof to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, such coverage as is consistent
with the requirements of the Servicing Standard. Such coverage generally will be
in an amount equal to the lesser of the principal balance owing on such Mortgage
Loan and the replacement cost of the Mortgaged Property, but in either case not
less than the amount necessary to avoid the application of any co-insurance
clause contained in the hazard insurance policy. The ability of the Master
Servicer to
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assure that hazard insurance proceeds are appropriately applied may be dependent
upon its being named as an additional insured under any hazard insurance policy
and under any other insurance policy referred to below, or upon the extent to
which information concerning covered losses is furnished by borrowers. All
amounts collected by the Master Servicer under any such policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Master Servicer's normal
servicing procedures and/or to the terms and conditions of the related Mortgage
and Mortgage Note) will be deposited in the related Certificate Account. The
Pooling Agreement may provide that the Master Servicer may satisfy its
obligation to cause each borrower to maintain such a hazard insurance policy by
maintaining a blanket policy insuring against hazard losses on all of the
Mortgage Loans in the related Trust Fund. If such blanket policy contains a
deductible clause, the Master Servicer will be required, in the event of a
casualty covered by such blanket policy, to deposit in the related Certificate
Account all sums that would have been deposited therein but for such deductible
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
risks.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the improvements on the property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clauses generally provide that the insurer's
liability in the event of partial loss does not exceed the lesser of (i) the
replacement cost of the improvements less physical depreciation and (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
The Master Servicer will determine whether to exercise any right the Trustee may
have under any such provision in a manner consistent with the Servicing
Standard. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will be entitled to retain as additional servicing compensation
any fee collected in connection with the permitted transfer of a Mortgaged
Property. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance."
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Generally, a Master Servicer's primary servicing compensation with respect
to a series of Certificates will come from the periodic payment to it of a
portion of the interest payments on each Mortgage Loan in the related Trust
Fund. Since that compensation is generally based on a percentage of the
principal balance of each such Mortgage Loan outstanding from time to time, it
will decrease in accordance with the amortization of the Mortgage Loans. The
Prospectus Supplement with respect to a series of Certificates may provide that,
as additional compensation, the Master Servicer may retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned on
funds held in the Certificate Account. Any Sub-Servicer will receive a portion
of the Master Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer may
be required, to the extent provided in the related Prospectus Supplement, to pay
from amounts that represent its servicing compensation certain expenses incurred
in connection with the administration of the related Trust Fund, including,
without limitation, payment of the
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fees and disbursements of independent accountants and payment of expenses
incurred in connection with distributions and reports to Certificateholders.
Certain other expenses, including certain expenses related to Mortgage Loan
defaults and liquidations and, to the extent so provided in the related
Prospectus Supplement, interest on such expenses at the rate specified therein,
and the fees of the Trustee and any Special Servicer, may be required to be
borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to Prepayment Interest
Shortfalls. See "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement may require that, on or before a specified date in
each year, the Master Servicer cause a firm of independent public accountants to
furnish a statement to the Trustee to the effect that, based on an examination
by such firm conducted substantially in compliance with either the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, the servicing by or on behalf of the Master Servicer of
mortgage loans under pooling and servicing agreements substantially similar to
each other (which may include the related Pooling Agreement) was conducted
through the preceding calendar year or other specified twelve-month period in
compliance with the terms of such agreements except for any significant
exceptions or errors in records that, in the opinion of such firm, either the
Audit Program for Mortgages serviced for FHLMC or paragraph 4 of the Uniform
Single Audit Program for Mortgage Bankers, as the case may be, requires it to
report. Each Pooling Agreement will also provide for delivery to the Trustee, on
or before a specified date in each year, of a statement signed by one or more
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its material obligations under the Pooling Agreement throughout the
preceding calendar year or other specified twelve-month period.
Copies of the annual accountants' statement and the statement of officers
of a Master Servicer will be made available to Certificateholders without charge
upon written request to the Master Servicer.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under a Pooling Agreement may be an affiliate of the
Depositor and may have other normal business relationships with the Depositor or
the Depositor's affiliates. The related Pooling Agreement may permit the Master
Servicer to resign from its obligations thereunder only upon a determination
that such obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it at the date of the Pooling Agreement. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Pooling Agreement. The Master
Servicer will also be required to maintain a fidelity bond and errors and
omissions policy that provides coverage against losses that may be sustained as
a result of an officer's or employee's misappropriation of funds, errors and
omissions or negligence, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions.
Each Pooling Agreement may further provide that none of the Master
Servicer, the Depositor and any director, officer, employee or agent of either
of them will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or not taken, in good faith pursuant to
the Pooling Agreement or for errors in judgment; provided, however, that none of
the Master Servicer, the Depositor and any such person will be protected against
any breach of a representation, warranty or covenant made in such Pooling
Agreement, or against any expense or liability that such person is specifically
required to bear pursuant to the terms of such Pooling Agreement, or against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties thereunder
or by reason of reckless disregard of such obligations and duties. Unless
otherwise specified in the related Prospectus Supplement, each Pooling Agreement
will further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of either of them will be entitled to indemnification
by the related Trust Fund against any loss, liability or expense incurred in
connection with any legal action that relates to the Pooling Agreement or the
related series of Certificates; provided, however, that such indemnification
will not extend to any loss, liability or expense (i) that such person is
specifically required to bear pursuant to the terms of such agreement, or is
incidental to the performance of obligations and duties thereunder and is not
reimbursable pursuant to the Pooling Agreement; (ii) incurred in connection with
any breach of a representation,
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warranty or covenant made in the Pooling Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties under the Pooling Agreement, or by reason of reckless disregard of such
obligations or duties; or (iv) incurred in connection with any violation of any
state or federal securities law. In addition, each Pooling Agreement will
provide that neither the Master Servicer nor the Depositor will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Pooling Agreement and
that in its opinion may involve it in any expense or liability. However, each of
the Master Servicer and the Depositor will be permitted, in the exercise of its
discretion, to undertake any such action that it may deem necessary or desirable
with respect to the enforcement and/or protection of the rights and duties of
the parties to the Pooling Agreement and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action, and any
liability resulting therefrom, will be expenses, costs and liabilities of the
Certificateholders, and the Master Servicer or the Depositor, as the case may
be, will be entitled to charge the related Certificate Account therefor.
Subject, in certain cases, to the satisfaction of certain conditions that
may be required in the Pooling Agreement, any person into which the Master
Servicer or the Depositor may be merged or consolidated, or any person resulting
from any merger or consolidation to which the Master Servicer or the Depositor
is a party, or any person succeeding to the business of the Master Servicer or
the Depositor, will be the successor of the Master Servicer or the Depositor, as
the case may be, under the related Pooling Agreement.
EVENTS OF DEFAULT
The "Events of Default for a series of Certificates" under the related
Pooling Agreement generally will include (i) any failure by the Master Servicer
to distribute or cause to be distributed to Certificateholders, or to remit to
the Trustee for distribution to Certificateholders in a timely manner, any
amount required to be so distributed or remitted, which failure continues
unremedied for five days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by Certificateholders entitled to not less than
25% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series); (ii) any failure by the Master Servicer duly
to observe or perform in any material respect any of its other covenants or
obligations under the Pooling Agreement which continues unremedied for sixty
days after written notice of such failure has been given to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings in respect of or
relating to the Master Servicer and certain actions by or on behalf of the
Master Servicer indicating its insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to add
thereto or shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under a Pooling Agreement remains
unremedied, the Depositor or the Trustee will be authorized, and at the
direction of Certificateholders entitled to not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series, the Trustee will be required, to terminate all of the rights
and obligations of the Master Servicer as master servicer under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under the Pooling Agreement
(except that if the Master Servicer is required to make advances in respect of
Mortgage Loan delinquencies, but the Trustee is prohibited by law from
obligating itself to do so, or if the related Prospectus Supplement so
specifies, the Trustee will not be obligated to make such advances) and will be
entitled to similar compensation arrangements. If the Trustee is unwilling or
unable so to act, it may (or, at the written request of Certificateholders
entitled to at least 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be required
to) appoint, or petition a court of competent jurisdiction to appoint, a loan
servicing institution that (unless otherwise provided in the related Prospectus
Supplement) is acceptable to each Rating Agency that assigned ratings to the
Offered Certificates of such series to act as successor to the Master Servicer
under the Pooling Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity.
No Certificateholder will have the right under any Pooling Agreement to
institute any proceeding with respect thereto unless such holder previously has
given to the Trustee written notice of default and unless Certificateholders
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entitled to at least 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for the related series shall have
made written request upon the Trustee to institute such proceeding in its own
name as Trustee thereunder and shall have offered to the Trustee reasonable
indemnity, and the Trustee for sixty days (or such other period specified in the
related Prospectus Supplement) shall have neglected or refused to institute any
such proceeding. The Trustee, however, will be under no obligation to exercise
any of the trusts or powers vested in it by any Pooling Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates of the related series, unless
such Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without the
consent of any of the holders of the related Certificates, (i) to cure any
ambiguity, (ii) to correct a defective provision therein or to correct, modify
or supplement any provision therein that may be inconsistent with any other
provision therein, (iii) to add any other provisions with respect to matters or
questions arising under the Pooling Agreement that are not inconsistent with the
provisions thereof, (iv) to comply with any requirements imposed by the Code or
(v) for any other purpose; provided that such amendment (other than an amendment
for the purpose specified in clause (iv) above) may not (as evidenced by an
opinion of counsel to such effect satisfactory to the Trustee) adversely affect
in any material respect the interests of any such holder. Each Pooling Agreement
may also be amended for any purpose by the parties, with the consent of
Certificateholders entitled to at least 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights for the related
series allocated to the affected classes; provided, however, that, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Mortgage Loans that are required to be
distributed in respect of any Certificate without the consent of the holder of
such Certificate, (ii) adversely affect in any material respect the interests of
the holders of any class of Certificates, in a manner other than as described in
clause (i), without the consent of the holders of all Certificates of such class
or (iii) modify the provisions of the Pooling Agreement described in this
paragraph without the consent of the holders of all Certificates of the related
series. However, unless otherwise specified in the related Pooling Agreement,
the Trustee will be prohibited from consenting to any amendment of a Pooling
Agreement pursuant to which a REMIC election is to be or has been made unless
the Trustee shall first have received an opinion of counsel to the effect that
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause the related Trust Fund to fail to qualify as a REMIC at any time
that the related Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of any Certificateholder of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholder access, during normal
business hours, to the most recent list of Certificateholders of that series
then maintained by such person.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for a series of Certificates will make no representation as to
the validity or sufficiency of the related Pooling Agreement, the Certificates
or any Mortgage Loan or related document and will not be accountable for the use
or application by or on behalf of any Master Servicer of any funds paid to the
Master Servicer or any Special Servicer in respect of the Certificates or the
Mortgage Loans, or any funds deposited into or withdrawn from the Certificate
Account or any other account by or on behalf of the Master Servicer or any
Special Servicer. If no Event of Default has occurred and is continuing, the
Trustee will be required to perform only those duties specifically required
under the related Pooling Agreement. However, upon receipt of any of the various
certificates, reports or other
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instruments required to be furnished to it pursuant to the Pooling Agreement,
the Trustee will be required to examine such documents and to determine whether
they conform to the requirements of the Pooling Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee for a series of Certificates may be entitled to
indemnification, from amounts held in the related Certificate Account, for any
loss, liability or expense incurred by the Trustee in connection with the
Trustee's acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability imposed on the
Trustee pursuant to the Pooling Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein. As and to the extent described in the related Prospectus
Supplement, the fees and normal disbursements of any Trustee may be the expense
of the related Master Servicer or other specified person or may be required to
be borne by the related Trust Fund.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee for a series of Certificates will be permitted at any time to
resign from its obligations and duties under the related Pooling Agreement by
giving written notice thereof to the Depositor. Upon receiving such notice of
resignation, the Master Servicer (or such other person as may be specified in
the related Prospectus Supplement) will be required to use reasonable efforts to
promptly appoint a successor trustee. If no successor trustee shall have
accepted an appointment within a specified period after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction to appoint a successor trustee.
Unless otherwise provided in the related Prospectus Supplement, if at any
time the Trustee ceases to be eligible to continue as such under the related
Pooling Agreement, or if at any time the Trustee becomes incapable of acting, or
if certain events of (or proceedings in respect of) bankruptcy or insolvency
occur with respect to the Trustee, the Depositor will be authorized to remove
the Trustee and appoint a successor trustee. Unless otherwise provided in the
related Prospectus Supplement, in addition, holders of the Certificates of any
series entitled to at least 51% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights for such series may at any
time (with or without cause) remove the Trustee and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of the
Certificates of any series, or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a pool insurance policy or
guarantee insurance, the establishment of one or more reserve funds or another
method of Credit Support described in the related Prospectus Supplement, or any
combination of the foregoing. If so provided in the related Prospectus
Supplement, any form of Credit Support may provide credit enhancement for more
than one series of Certificates to the extent described therein.
The Credit Support generally will not provide protection against all risks
of loss and will not guarantee payment to Certificateholders of all amounts to
which they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the Credit Support or that
are not covered by the Credit Support, Certificateholders will bear their
allocable share of deficiencies. Moreover, if a form of Credit Support covers
more than one series of Certificates, holders of Certificates of one series will
be subject to the risk that such Credit Support will be exhausted by the claims
of the holders of Certificates of one or more other series before the former
receive their intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of
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coverage under such Credit Support, (ii) any conditions to payment thereunder
not otherwise described herein, (iii) the conditions (if any) under which the
amount of coverage under such Credit Support may be reduced and under which such
Credit Support may be terminated or replaced and (iv) the material provisions
relating to such Credit Support. Additionally, the related Prospectus Supplement
will set forth certain information with respect to the obligor under any
instrument of Credit Support, generally including (i) a brief description of its
principal business activities, (ii) its principal place of business, place of
incorporation and the jurisdiction under which it is chartered or licensed to do
business, (iii) if applicable, the identity of the regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders "equity or policyholders" surplus, if
applicable, as of a date that will be specified in the Prospectus Supplement.
See "Risk Factors--Credit Support Limitations."
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination
provided by a class or classes of Subordinate Certificates in a series, the
circumstances under which such subordination will be available and the manner in
which the amount of subordination will be made available.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of a series, Credit
Support may be provided by cross-support provisions requiring that distributions
be made on Senior Certificates evidencing interests in one group of Mortgage
Assets prior to distributions on Subordinate Certificates evidencing interests
in a different group of Mortgage Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. To the extent material, a
copy of each such instrument will accompany the Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Certificates of the
related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of credit, issued by a
bank or financial institution specified in such Prospectus Supplement (the "L/C
Bank"). Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Assets on the
related Cut-off Date or of the initial aggregate Certificate Balance of one or
more classes of Certificates. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws only in the event of certain
types of losses and shortfalls. The amount available under the letter of credit
will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder and may otherwise be reduced as described in the related Prospectus
Supplement. The obligations of the L/C Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit will accompany the Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Certificates of the
related series.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies and/or surety bonds
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provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or determined
in the manner specified in the related Prospectus Supplement. A copy of any such
instrument will accompany the Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Certificates of the related series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments, a
demand note or a combination thereof will be deposited, in the amounts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the reserve fund for a series may also be funded over time by a
specified amount of the collections received on the related Mortgage Assets.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, reserve funds may be established
to provide protection only against certain types of losses and shortfalls.
Following each Distribution Date, amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or other
gain from such investments will be credited to the related reserve fund for such
series, and any loss resulting from such investments will be charged to such
reserve fund. However, such income may be payable to any related Master Servicer
or another service provider as additional compensation for its services. The
reserve fund, if any, for a series will not be a part of the Trust Fund unless
otherwise specified in the related Prospectus Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete, to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans (or mortgage loans underlying any MBS)
is situated. Accordingly, the summaries are qualified in their entirety by
reference to the applicable laws of those states. See "Description of the Trust
Funds--Mortgage Loans." For purposes of the following discussion, "Mortgage
Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgage instruments." A mortgage instrument
creates a lien upon, or grants a title interest in, the real property covered
thereby, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on the terms of the mortgage instrument and, in
some cases, on the terms of separate subordination agreements or intercreditor
agreements with others that hold interests in the real property, the knowledge
of the parties to the mortgage instrument as to the existence of prior liens
and, generally, the order of
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recordation of the mortgage instrument in the appropriate public recording
office. However, the lien of a recorded mortgage instrument will generally be
subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In a mortgage,
the mortgagor grants a lien on the subject property in favor of the mortgagee. A
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property to the trustee, in trust, irrevocably until the
debt is paid, and generally with a power of sale. A deed to secure debt
typically has two parties. The borrower, or grantor, conveys title to the real
property to the grantee, or lender, generally with a power of sale, until such
time as the debt is repaid. In a case where the borrower is a land trust, there
would be an additional party to a mortgage instrument because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the borrower. At origination of a mortgage loan involving a land trust, the
borrower generally executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the related instrument,
the law of the state in which the real property is located, certain federal laws
and, in some deed of trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgage instruments that encumber income-producing property often contain
or are accompanied by an assignment of rents and leases, pursuant to which the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the rates and must file
continuation statements, generally every five years, to maintain perfection of
such security interest. Even if the lender's security interest in room rates is
perfected under the UCC, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to collect the room
rates following a default.
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the borrower
and not previously pledged) may constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the UCC. Accordingly, if a borrower pledges personal
property as security for a mortgage loan, the lender generally must file UCC
financing statements in order to perfect its security interest therein, and must
file continuation statements, generally every five years, to maintain that
perfection.
JUNIOR MORTGAGES; RIGHTS OF SENIOR LENDERS
Some of the Mortgage Loans included in a Trust Fund may be secured by
mortgage instruments that are subordinate to mortgage instruments held by other
lenders. The rights of the Trust Fund (and therefore the Certificateholders), as
holder of a junior mortgage instrument, are subordinate to those of the senior
lender, including the prior rights of the senior lender to receive rents, hazard
insurance and condemnation proceeds and to cause the Mortgaged Property to be
sold upon borrower's default and thereby extinguish the Trust Fund's junior lien
unless the Master Servicer or Special Servicer asserts its subordinate interest
in a property in a foreclosure litigation or satisfies the defaulted senior
loan. As discussed more fully below, in many states a junior lender may satisfy
a defaulted senior loan in full, adding the amounts expended to the balance due
on the junior loan. Absent a provision in the senior mortgage instrument or in a
subordination or intercreditor agreement, no notice of default is required to be
given to the junior lender.
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The form of the mortgage instrument used by many institutional lenders
confers on the lender the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with any condemnation
proceedings, and (subject to any limits imposed by applicable state law) to
apply such proceeds and awards to any indebtedness secured by the mortgage
instrument in such order as the lender may determine. Thus, if improvements on a
property are damaged or destroyed by fire or other casualty, or if the property
is taken by condemnation, the holder of the senior mortgage instrument will have
the prior right to collect any insurance proceeds payable under a hazard
insurance policy and any award of damages in connection with the condemnation
and to apply the same to the senior indebtedness. Accordingly, only the proceeds
in excess of the amount of senior indebtedness will be available to be applied
to the indebtedness secured by a junior mortgage instrument.
The form of mortgage instrument used by many institutional lenders
typically contains a "future advance" clause, which provides, in general, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage instrument. While
such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or an "optional" advance. If the lender is obligated to
advance the additional amounts, the advance may be entitled to receive the same
priority as the amounts advanced at origination, notwithstanding that
intervening junior liens may have been recorded between the date of recording of
the senior mortgage instrument and the date of the future advance, and
notwithstanding that the senior lender had actual knowledge of such intervening
junior liens at the time of the advance. Where the senior lender is not
obligated to advance the additional amounts and has actual knowledge of the
intervening junior liens, the advance may be subordinate to such intervening
junior liens. Priority of advances under a "future advance" clause rests, in
many other states, on state law giving priority to all advances made under the
loan agreement up to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of mortgage instrument used
by many institutional lenders permits the lender to itself perform certain
obligations of the borrower (for example, the obligations to pay when due all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property that are senior to the lien of the mortgage
instrument, to maintain hazard insurance on the property, and to maintain and
repair the property) upon a failure of the borrower to do so, with all sums so
expended by the lender becoming part of the indebtednesss secured by the
mortgage instrument.
The form of mortgage instrument used by many institutional lenders
typically requires the borrower to obtain the consent of the lender in respect
of actions affecting the mortgaged property, including the execution of certain
new leases and the termination or modification of certain existing leases, the
performance of certain alterations to buildings forming a part of the mortgaged
property and the execution of managment and leasing agreements for the mortgaged
property. Tenants will often refuse to execute leases unless the lender executes
a written agreement with the tenant not to disturb the tenant's possession of
its premises in the event of a foreclosure. A senior lender may refuse to
consent to matters approved by a junior lender, with the result that the value
of the security for the junior mortgage instrument is diminished.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to recover
the borrower's mortgage debt by enforcing its rights and available legal
remedies under the mortgage instrument. If the borrower defaults in payment or
performance of its obligations under the note or mortgage instrument, the lender
has the right to institute foreclosure proceedings to sell the real property at
public auction to satisfy the indebtedness.
Foreclosure Procedures Vary From State to State. Two primary methods of
foreclosing a mortgage instrument are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances. A foreclosure action is subject to most of the delays and
expenses of other lawsuits if defenses are raised or counterclaims are
interposed, and sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally
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result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument (in particular, a deed to
secure debt) if applicable law so permits. A power of sale under a deed of trust
allows a non-judicial public sale to be conducted generally following a request
from the beneficiary/lender to the trustee to sell the property upon default by
the borrower and after notice of sale is given in accordance with the terms of
the deed of trust and applicable state law. In some states, prior to such sale,
the trustee under the deed of trust must record a notice of default and notice
of sale and send a copy to the borrower and to any other party who has recorded
a request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The borrower or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower or
the junior lienholder is not provided a period to reinstate the loan, but has
only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, state law governs the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods.
Limitations on the Rights of Mortgage Lenders. United States courts have
traditionally imposed general equitable principles to limit the remedies
available to lenders in foreclosure actions. These principles are generally
designed to relieve borrowers from the effects of mortgage defaults perceived as
harsh or unfair. Relying on such principles, a court may alter the specific
terms of a loan to the extent it considers necessary to prevent or remedy an
injustice, undue oppression or overreaching, or may require the lender to
undertake affirmative actions to determine the cause of the borrower's default
and the likelihood that the borrower will be able to reinstate the loan. In some
cases, courts have substituted their judgment for the lender's and have required
that lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from a temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose in the case of a
non-monetary default, such as a failure to adequately maintain the mortgaged
property or an impermissible further encumbrance of the mortgaged property.
Finally, some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
instrument providing for a power of sale does not involve sufficient state
action to trigger constitutional protections.
Also, a third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the exact status of title
to the property (due to, among other things, redemption rights that may exist)
and because of the possibility that physical deterioration of the property may
have occurred during the foreclosure proceedings. Potential buyers may also be
reluctant to purchase property at a foreclosure sale as a result of the 1980
decision of the United States Court of Appeals for the Fifth Circuit in Durrett
v. Washington National Insurance Company. The court in Durrett held that even a
non-collusive, regularly conducted foreclosure sale was a fraudulent transfer
under Section 67d of the former Bankruptcy Act (Section 548 of the Bankruptcy
Code, Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. ss.ss. 101-1330 (the
"Bankruptcy Code")) and, therefore, could be rescinded in favor of the
bankrupt's estate, if (i) the foreclosure sale was held while the debtor was
insolvent and not more than one year prior to the filing of the bankruptcy
petition and (ii) the price paid for the foreclosed property did not represent
"fair consideration" ("reasonably equivalent value" under the Bankruptcy Code).
Although the reasoning and result of Durrett were rejected by the United States
Supreme Court in May, 1994, the case could nonetheless be persuasive to a court
applying a state fraudulent conveyance law with provisions similar to those
construed in Durrett. For these reasons, it is common for the lender to purchase
the mortgaged property for an amount equal to the secured indebtedness and
accrued and unpaid interest plus the expenses of foreclosure, in which event the
borrower's debt will be extinguished. Thereafter, subject to the borrower's
right in some states to remain in possession during a redemption period, the
lender will become the owner of the property and have both the benefits and
burdens of
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ownership, including the obligation to pay debt service on any senior mortgage
loans, to pay taxes, to obtain casualty insurance and to make such repairs as
are necessary to render the property suitable for sale. The costs of operating
and maintaining a commercial or multifamily residential property may be
significant and may be greater than the income derived from that property. The
lender also will commonly obtain the services of a real estate broker and pay
the broker's commission in connection with the sale or lease of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Moreover,
because of the expenses associated with acquiring, owning and selling a
mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all persons
who have interests in the property that are subordinate to that of the
foreclosing lender, from the exercise of their "equity of redemption." The
doctrine of equity of redemption provides that, until the property encumbered by
a mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which should
be distinguished from post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
Anti-Deficiency Legislation. In general, it is expected that some or all of
the Mortgage Loans in a particular Trust Fund may be nonrecourse loans, as to
which recourse in the case of default will be limited to the Mortgaged Property
and such other assets, if any, that were pledged to secure the Mortgage Loan.
However, even if a Mortgage Loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal to the difference between the net amount realized upon the public
sale of the real property and the amount due to the lender. Other statutes may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of those states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy provision
exists will usually proceed first against the security. Finally, other statutory
provisions, designed to protect borrowers from exposure to large deficiency
judgments that might result from bidding at below-market values at the
foreclosure sale, limit any deficiency judgment to the excess of the outstanding
debt over the fair market value of the property at the time of the sale.
Leasehold Considerations. Mortgage loans may be secured by a lien on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a
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lien on the fee estate of the borrower. The most significant of these risks is
that if the borrower's leasehold were to be terminated (for example, as a result
of a lease default or the bankruptcy of the ground lessor or the borrower/ground
lessee), the leasehold mortgagee would be left without its security. This risk
may be substantially lessened if the ground lease contains provisions protective
of the leasehold mortgagee, such as a provision that requires the ground lessor
to give the leasehold mortgagee notices of lessee defaults and an opportunity to
cure them, a provision that permits the leasehold estate to be assigned to and
by the leasehold mortgagee or the purchaser at a foreclosure sale, a provision
that gives the leasehold mortgagee the right to enter into a new ground lease
with the ground lessor on the same terms and conditions as the old ground lease
or a provision that prohibits the ground lessee/borrower from treating the
ground lease as terminated in the event of the ground lessor's bankruptcy and
rejection of the ground lease by the trustee for the debtor/ground lessor.
Certain mortgage loans, however, may be secured by liens on ground leases that
do not contain these provisions.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused by
such automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Some bankruptcy courts have approved plans, based on the particular facts of the
reorganization case, that effected the cure of a mortgage loan default by paying
arrearages over a number of years. Also, a bankruptcy court may permit a debtor,
through its rehabilitative plan, to reinstate a loan mortgage payment schedule
even if the lender has obtained a final judgment of foreclosure prior to the
filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under Section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. However, the
Bankruptcy Code has recently been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case." Thus, unless a court
orders otherwise, revenues from a mortgaged property generated after the date
the bankruptcy petition is filed will constitute "cash collateral" under the
Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the mortgaged properties and the cash collateral is "adequately protected" as
such term is defined and interpreted under the Bankruptcy Code.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that ability
may be impaired by the commencement of a bankruptcy proceeding relating to a
lessee under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition. In addition, the Bankruptcy Code generally provides that a
trustee or debtor-in-possession may, subject to approval of the court, (i)
assume the lease and retain it or assign it to a third party or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must
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cure any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may, in
fact, be inadequate. If the lease is rejected, the lessor will be treated as an
unsecured creditor with respect to its claim for damages for termination of the
lease. The Bankruptcy Code also limits a lessor's damages for lease rejection to
the rent reserved under the lease (without regard to acceleration) for the
greater of one year, or 15%, not to exceed three years, of the remaining term of
the lease.
ENVIRONMENTAL CONSIDERATIONS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military, disposal or
certain commercial activity. Such environmental risks include the possible
diminution of the value of a contaminated property or, as discussed below,
potential liability for clean-up costs or other remedial actions that could
exceed the value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged property
as collateral for its loan rather than foreclose and risk liability for clean-up
costs.
Superlien Laws. Under certain laws, contamination on a property may give
rise to a lien on the property for clean-up costs. In several states, such a
lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. Excluded from CERCLA's definition of "owner" or "operator,"
however, is a lender that, "without participating in the management" of the
facility, holds indicia of ownership primarily to protect his security interest
in the facility. This so-called secured creditor exemption is intended to
provide a lender protection from liability under CERCLA as an owner or operator
of contaminated property. The secured creditor exemption, however, does not
necessarily protect a lender from liability for cleanup of hazardous substances
in every situation. A secured lender may be liable as an "owner" or "operator"
of a contaminated mortgaged property if agents or employees of the lender are
deemed to have participated in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. Moreover, such liability is not limited to
the original or unamortized principal balance of a loan or to the value of the
property securing a loan.
In addition, lenders may face potential liability for remediation of
releases or petroleum or hazardous substances from underground storage tanks
under the federal Resource Conservation and Recovery Act ("RCRA"), if they are
deemed to be the "owners" or "operators" of facilities in which they have a
security interest or upon which they have foreclosed.
The federal Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996 (the "Act") seeks to clarify the actions a lender may
take without incurring liability as an "owner" or "operator" of contaminated
property or underground petroleum storage tanks. The Act amends CERCLA and RCRA
to provide guidance on actions that do or do not constitute "participation in
management."
Importantly, the Act does not, among other things: (1) completely eliminate
potential liability to lenders under CERCLA or RCRA; (2) reduce credit risks
associated with lending to borrowers having significant environmental
liabilities or potential liabilities, (3) eliminate environmental risks
associated with taking possession of contaminated property or underground
storage tanks or assuming control of the operations thereof, or (4) affect
liabilities or potential liabilities under state environmental laws.
Certain State and Other Federal Laws. Many states have statutes similar to
CERCLA and RCRA, and not all of those statutes provide for a secured creditor
exemption.
In a few states, transfers of some types of properties are conditioned upon
cleanup of contamination. In these cases, a lender that becomes the owner of a
property through foreclosure, deed in lieu of foreclosure or otherwise, may be
required to clean up the contamination in order to sell or otherwise transfer
the property.
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Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury, or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold a
lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against other potentially liable parties,
but such parties may be without substantial assets. Accordingly, it is possible
that such costs could become a liability of the Trust Fund and occasion a loss
to the Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling and Servicing Agreement will provide
that the Master Servicer, acting on behalf of the Trustee, may not take
possession of a Mortgaged Property or take over its operation unless the Master
Servicer, based solely (as to environmental matters) on a report prepared by a
person who regularly conducts environmental site assessments, has made the
determination that it is appropriate to do so, as described under "The Pooling
and Servicing Agreements--Realization Upon Defaulted Mortgage Loans."
If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will be
required to operate the property in accordance with those laws and regulations.
Such compliance may entail substantial expense, especially in the case of
industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental conditions
on a property to government entities and/or to prospective buyers (including
prospective buyers at a foreclosure sale or following foreclosure). Such
disclosure may result in the imposition of certain investigation or remediation
requirements or decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially, and thereby decrease the
ability of the lender to recoup its investment in a loan upon foreclosure.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. By virtue, however, of the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn Act"), effective October 15, 1982 (which
purports to preempt state laws that prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in certain
loans made after the effective date of the Garn Act are enforceable, within
certain limitations as set forth in the Garn Act and the regulations promulgated
thereunder), a Master Servicer may nevertheless have the right to accelerate the
maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, regardless of the Master Servicer's
ability to demonstrate that a sale threatens its legitimate security interest.
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of the borrower
to use the Mortgaged Property as security for one or more additional loans.
Where a borrower encumbers a mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may have
difficulty servicing and repaying multiple loans. Moreover, if the subordinate
financing permits recourse to the borrower (as is frequently the case) and the
senior loan does not, a borrower may have more incentive to repay sums due on
the subordinate loan. Second, acts of the senior lender that prejudice the
junior lender or impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the borrower and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the borrower is additionally
burdened. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
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DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or adoption)
be eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof are to be
construed in accordance with the laws of another state under which such interest
rate, discount points and charges would not be usurious and the borrower's
counsel has rendered an opinion that such choice of law provision would be given
effect.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of any servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts distributable to the holders of
the related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition, the
Relief Act imposes limitations that would impair the ability of the servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status, and, under certain circumstances, during an additional three-month
period thereafter.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the
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financial resources of the affected site, owner, landlord or other applicable
person. The requirements of the ADA may also be imposed on a foreclosing lender
who succeeds to the interest of the borrower as owner or landlord. Since the
"readily achievable" standard may vary depending on the financial condition of
the owner or landlord, a foreclosing lender who is financially more capable than
the borrower of complying with the requirements of the ADA may be subject to
more stringent requirements than those to which the borrower is subject.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of Offered
Certificates. This discussion is directed solely to Certificateholders that hold
the Certificates as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986 (the "Code") and it does not purport to discuss
all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers and preparers of tax returns (including those filed by any REMIC or
other issuer) should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions, and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their own tax advisors and tax return preparers regarding the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed herein. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of Offered
Certificates. See "State and Other Tax Consequences." Certificateholders are
advised to consult their own tax advisors concerning the federal, state, local
or other tax consequences to them of the purchase, ownership and disposition of
Offered Certificates.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Master Servicer or the Trustee will elect to have
treated as a real estate mortgage investment conduit ("REMIC") under Sections
860A through 860G (the "REMIC Provisions") of the Code, and (ii) certificates
("Grantor Trust Certificates") representing interests in a Trust Fund ("Grantor
Trust Fund") as to which no such election will be made. If no REMIC election is
made and the Trust Fund does not elect to be treated as a Grantor Trust Fund,
the Trust Fund may elect to be treated as a financial asset securitization
investment trust ("FASIT"). The Prospectus Supplement relating to such an
election will describe the requirements for the classification of the Trust Fund
as a FASIT and the consequences to a holder of owning certificates in a FASIT.
The Prospectus Supplement for each series of Certificates also will indicate
whether a REMIC election (or elections) will be made for the related Trust Fund
and, if such an election is to be made, will identify all "regular interests"
and "residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Certificateholder" or a "holder" are to the beneficial owner of
a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that Mortgage
Assets held by a Trust Fund consist solely of Mortgage Loans. To the extent that
other Mortgage Assets, including REMIC certificates and mortgage pass-through
certificates, are to be held by a Trust Fund, the tax consequences associated
with the inclusion of such assets will be disclosed in the related Prospectus
Supplement. In addition, if Cash Flow Agreements, other than guaranteed
investment contracts, are included in a Trust Fund, the tax consequences
associated with such Cash Flow Agreements also will be disclosed in the related
Prospectus Supplement. See "Description of the Trust Funds--Cash Flow
Agreements."
Furthermore, the following discussion is based in part upon the rules
governing original issue discount that are set forth in Sections 1271-1273 and
1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICs. Upon the issuance of each series of REMIC
Certificates, counsel to the Depositor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
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Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling Agreement with respect to each REMIC will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
Characterization of Investments in REMIC Certificates. In general, the
REMIC Certificates will be "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. However, to the extent that the REMIC assets
constitute mortgages on property not used for residential or certain other
prescribed purposes, the REMIC Certificates will not be treated as assets
qualifying under Section 7701(a)(19)(C)(v). Moreover, if 95% or more of the
assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The Master Servicer
or the Trustee will report those determinations to Certificateholders in the
manner and at the times required by the applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe those Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, counsel to the Depositor will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor nor any other person will
make any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, at a "qualified floating rate," or at an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the Certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the Closing Date is treated as part of the overall cost of such
REMIC Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the stated
redemption price of such REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of such accrued interest may be treated as a
separate asset the cost of which is recovered entirely out of interest paid on
the first Distribution Date. It is unclear how an election to do so would be
made under the OID Regulations and whether such an election could be made
unilaterally by a Certificateholder.
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Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date that
corresponds to a Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (b) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption and (ii) using a discount rate equal to
the original yield to maturity of the Certificate. For these purposes, the
original yield to maturity of the Certificate will be calculated based on its
issue price and assuming that distributions on the Certificate will be made in
all accrual periods based on the Mortgage Loans being prepaid at a rate equal to
the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its
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remaining stated principal amount, or in the case of a REMIC Regular Certificate
issued with original issue discount, at a purchase price less than its adjusted
issue price will recognize gain upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
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purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount." The Committee Report states that the same rules
that apply to accrual of market discount (which rules will require use of a
Prepayment Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Residential Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Residential Loans or the underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a REMIC
Regular Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that as the result of a
realized loss ultimately will not be realized, the law is unclear with respect
to the timing and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
An original holder of a REMIC Residual Certificate generally will be
required to report its daily portion of the taxable income or, subject to the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that such holder owned such REMIC Residual
Certificate. For this purpose, the taxable income or net loss of the REMIC will
be allocated to each day in the calendar quarter ratably using a "30 days per
month/90 days per quarter/360 days per year" convention unless otherwise
disclosed in the related Prospectus Supplement. The daily amounts so allocated
will then be allocated among the REMIC Residual Certificateholders in proportion
to their respective ownership interests on such day. Any amount included in the
gross income or allowed as a loss of any REMIC Residual Certificateholder by
virtue of this paragraph will be treated as ordinary income or loss. The taxable
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income of the REMIC will be determined under the rules described below in
"--Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Master Servicer or the Trustee may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a
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market discount must include such market discount in income currently, as it
accrues, on a constant interest basis. See "--Taxation of Owners of REMIC
Regular Certificates" above, which describes a method for accruing such discount
income that is analogous to that required to be used by a REMIC as to Mortgage
Loans with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions." If the deductions allowed to the REMIC exceed its gross income for
a calendar quarter, such excess will be the net loss for the REMIC for that
calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
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Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the Trust Fund. However, such bases increases may not occur until the
end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders initial
bases are less than the distributions to such REMIC Residual Certificateholders,
and increases in such initial bases either occur after such distributions or
(together with their initial bases) are less than the amount of such
distributions, gain will be recognized to such REMIC Residual Certificateholders
on such distributions and will be treated as gain from the sale of their REMIC
Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates." For a discussion of possible modifications of these rules that
may require adjustments to income of a holder of a REMIC Residual Certificate
other than an original holder in order to reflect any difference between the
cost of such REMIC Residual Certificate to such REMIC Residual Certificateholder
and the adjusted basis such REMIC Residual Certificate would have in the hands
of an original holder, see "--Taxation of Owners of REMIC Residual
Certificates--General."
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price, at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and
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on any required or permitted clean up calls or required liquidation provided for
in the REMIC's organizational documents. Although it has not done so, the
Treasury also has authority to issue regulations that would treat the entire
amount of income accruing on a REMIC Residual Certificate as an excess inclusion
if the REMIC Residual Certificates are considered not to have "significant
value." The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered to have "significant value" under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions, and the Depositor will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above-described
rules. The above-described exception for thrift institutions applies only to
those residual interests held directly by, and deductions, losses and loss
carryovers incurred by, such institutions (and not by other members of an
affiliated group of corporations filing a consolidated income tax return) or by
certain wholly-owned direct subsidiaries of such institutions formed or operated
exclusively in connection with the organization and operation of one or more
REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers.
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This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a REMIC Residual Certificate issued after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described under
"--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net Losses
and Distributions." Except as provided in the following two paragraphs, any such
gain or loss will be capital gain or loss, provided such REMIC Certificate is
held as a capital asset (generally, property held for investment) within the
meaning of Section 1221 of the Code. The Code as of the date of this Prospectus
provides for a top marginal tax rate of 39.6% for individuals and a maximum
marginal rate for long-term capital gains of individuals of 20%. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
A consideration for holders of the Stripped Interest Certificates concerns
the constructive sale provision of the Code added by the Taxpayer Relief Act of
1997 which requires the recognition of gain upon the "constructive sale of an
appreciated financial position". A constructive sale of an appreciated financial
position occurs if a taxpayer enters into certain transactions that have the
effect of substantially eliminating the taxpayer's risk of loss and opportunity
for gain with respect to the financial instrument. For purposes of determining
whether an asset may be subject to a constructive sale, an "appreciated
financial position" does not include a position with respect to a debt
instrument if the debt instrument (i) unconditionally entitles the holder to
receive a specified principal amount, (ii) pays interest at a fixed or variable
rate, and (iii) is not convertible (directly or indirectly) into the stock of
the issuer or a related person. Accordingly, only the Stripped Interest
Certificates could be subject to this provision and only if a holder of a
Stripped Interest Certificate engages in a constructive sale transaction.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually
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includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such REMIC Certificate was held by such holder, reduced by any
market discount included in income under the rules described above under
"--Taxation of Owners of REMIC Regular Certificates--Market Discount" and
"--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires a REMIC Residual Certificate,
or acquires any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions" (a
"Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. It is
not anticipated that the REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer, Special
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Servicer or Trustee in any case out of its own funds, provided that such person
has sufficient assets to do so, and provided further that such tax arises out of
a breach of such person's obligations under the related Pooling Agreement and in
respect of compliance with applicable laws and regulations. Any such tax not
borne by a Master Servicer, Special Servicer or Trustee will be charged against
the related Trust Fund resulting in a reduction in amounts payable to holders of
the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling Agreement, and will be discussed more fully in any Prospectus Supplement
relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate, such REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of such difference. Such loss may be treated as a capital loss and
may be subject to the "wash sale" rules of Section 1091 of the Code.
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Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, either the Trustee
or the Master Servicer, generally will hold at least a nominal amount of REMIC
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee or the Master Servicer, as the case
may be, will, subject to certain notice requirements and various restrictions
and limitations, generally have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders will
generally be required to report such REMIC items consistently with their
treatment on the related REMIC's tax return and may in some circumstances be
bound by a settlement agreement between the Trustee or the Master Servicer, as
the case may be, as tax matters person, and the IRS concerning any such REMIC
item. Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. No
REMIC will be registered as a tax shelter pursuant to Section 6111 of the Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by either the Trustee or the Master Servicer, unless otherwise stated in
the related Prospectus Supplement.
Backup Withholding with Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in
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the related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, an estate whose income from sources without
the United States is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of a trade or
business within the United States, or a trust if a court within the U.S. is able
to exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. It is possible that the IRS may assert the foregoing withholding tax
exemption should not apply with respect to interest distributed on a REMIC
Regular Certificate that is held by (i) a REMIC Residual Certificateholder that
owns directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates or (ii) to the extent of the amount of interest paid by the related
Mortgagor on a particular Mortgage Loan, (A) a REMIC Regular Certificateholder
that owns a 10% or greater ownership interest in such Mortgagor or (B) a REMIC
Regular Certificateholder that is a controlled foreign corporation as to the
United States of which such Mortgagor is a "United States shareholder" within
the meaning of Section 951(b) of the Code. If the holder does not qualify for
exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Transfers of REMIC Residual Certificates to investors that are not United
States persons will be prohibited under the related Pooling Agreement.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Depositor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Depositor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) assets described in Section 7701(a)(19)(C) of the Code; (ii)
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A) of the Code; and (iii)
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code. In
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addition, counsel to the Depositor will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are assets described in Section 7701(a)(19)(C) of the Code and "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code, and the interest
on which is "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, it is unclear whether
the Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that such characterization is
appropriate. Counsel to the Depositor will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult their
tax advisors regarding whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses) and
will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses. Because of stripped interests, market or original issue
discount, or premium, the amount includible in income on account of a Grantor
Trust Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established certain "safe harbors." The servicing
fees paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
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If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Grantor Trust Fractional Interest
Certificates--Market Discount." Under the stripped bond rules, the holder of a
Grantor Trust Fractional Interest Certificate (whether a cash or accrual method
taxpayer) will be required to report interest income from its Grantor Trust
Fractional Interest Certificate for each month in an amount equal to the income
that accrues on such Certificate in that month calculated under a constant yield
method, in accordance with the rules of the Code relating to original issue
discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "--Sales of Grantor Trust Certificates") and the yield of such Grantor
Trust Fractional Interest Certificate to such holder. Such yield would be
computed at the rate (compounded based on the regular interval between payment
dates) that, if used to discount the holder's share of future payments on the
Mortgage Loans, would cause the present value of those future payments to equal
the price at which the holder purchased such Certificate. In computing yield
under the stripped bond rules, a Certificateholder's share of future payments on
the Mortgage Loans will not include any payments made in respect of any spread
or any other ownership interest in the Mortgage Loans retained by the Depositor,
a Master Servicer, a Special Servicer, any Sub-Servicer or their respective
affiliates, but will include such Certificateholder's share of any reasonable
servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
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of Owners of REMIC Regular Certificates--Original Issue Discount." It is unclear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount."
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate," or at an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans in preparing
information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of the payment and
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the denominator of which is the stated redemption price of the Mortgage Loan.
Under the OID Regulations, original issue discount of only a de minimis amount
(other than de minimis original issue discount attributable to a so-called
"teaser" rate or initial interest holiday) will be included in income as each
payment of stated principal price is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the numerator
of which is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loan. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--Market Discount"
below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
The Trustee or Master Servicer, as applicable, will provide to any holder
of a Grantor Trust Fractional Interest Certificate such information as such
holder may reasonably request from time to time with respect to original issue
discount accruing on Grantor Trust Fractional Interest Certificates. See
"--Grantor Trust Reporting" below.
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount
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(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a Mortgage Loan with market discount, the Certificateholder
would be deemed to have made an election to include currently market discount in
income with respect to all other debt instruments having market discount that
such Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate acquired at a
premium would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is less than 0.25% of the stated redemption price of the
Mortgage Loans multiplied by the number of complete years to maturity remaining
after the date of its purchase. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting of
such discount income. If market discount is treated as de minimis under the
foregoing rule, it appears that actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to Mortgage
Loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the Mortgage Loan and be allowed as a
deduction as such payments are made (or, for a Certificateholder using the
accrual method of accounting, when such payments of stated redemption price are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a
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Mortgage Loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the Mortgage
Loan that is allocable to the Certificate and the portion of the adjusted basis
of the Certificate that is allocable to the Mortgage Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, if any, and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply," no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their own tax advisors concerning the method
to be used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Proposed Contingent Payment Rules"
below and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor any other person will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield
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with respect to such Grantor Trust Strip Certificate, it appears that no loss
may be available as a result of any particular prepayment unless prepayments
occur at a rate faster than the Prepayment Assumption. However, if a Grantor
Trust Strip Certificate is treated as an interest in discrete Mortgage Loans, or
if the Prepayment Assumption is not used, then when a Mortgage Loan is prepaid,
the holder of a Grantor Trust Strip Certificate should be able to recognize a
loss equal to the portion of the adjusted issue price of the Grantor Trust Strip
Certificate that is allocable to such Mortgage Loan.
Possible Application of Contingent Payment Rules. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments, Final
regulations have been promulgated with respect to contingent payment debt
instruments. However, like the OID Regulations, such regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange of
a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 20%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
Grantor Trust Reporting. As may be provided in the related Prospectus
Supplement, the Trustee or Master Servicer, as applicable, will furnish to each
holder of a Grantor Trust Certificate with each distribution a statement setting
forth the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, within a reasonable time after the end of each calendar year, the
Trustee or Master Servicer, as applicable, will furnish to each
Certificateholder during such year such customary factual information as the
Depositor or the reporting party deems necessary or desirable to enable holders
of Grantor Trust Certificates to prepare their tax returns and will furnish
comparable information to the IRS as and when required by law to do so. Because
the rules for accruing discount and amortizing premium with respect to the
Grantor
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Trust Certificates are uncertain in various respects, there is no assurance the
IRS will agree with the Trustee's or Master Servicer's, as the case may be,
information reports of such items of income and expense. Moreover, such
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders that bought
their Certificates at the representative initial offering price used in
preparing such reports.
Backup Withholding. In general, the rules described in "--REMICs--Backup
Withholding with Respect to REMIC Certificates" will also apply to Grantor Trust
Certificates.
Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "--REMICs--Foreign Investors in REMIC Certificates" applies to
Grantor Trust Certificates except that Grantor Trust Certificates will be
eligible for exemption from United States withholding tax, subject to the
conditions described in such discussion, only to the extent the related Mortgage
Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Offered Certificates. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans, and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested that are
subject to the fiduciary responsibility provisions of ERISA and Section 4975 of
the Code (all of which are hereinafter referred to as "Plans"), and on persons
who are fiduciaries with respect to Plans, in connection with the investment of
Plan assets. Certain employee benefit plans, such as governmental plans (as
defined in ERISA Section 3(32)), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in Offered Certificates without regard to the ERISA considerations described
below, subject to the provisions of other applicable federal and state law. Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Section 406 of ERISA and Section 4975 of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Certificates may cause the Trust Assets to be deemed
Plan assets. Section 2510.3-101 of the regulations of the United States
Department of Labor ("DOL") provides that when a Plan acquires an equity
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interest in an entity, the Plan's assets include both such equity interest and
an undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable to this discussion apply, or unless the equity
participation in the entity by "benefit plan investors" (that is, Plans and
certain employee benefit plans not subject to ERISA) is not "significant." For
this purpose, in general, equity participation in a Trust Fund will be
"significant" on any date if, immediately after the most recent acquisition of
any Certificate, 25% or more of any class of Certificates is held by benefit
plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Trust Assets constitute Plan assets, then any party exercising
management or discretionary control regarding those assets, such as a Master
Servicer, a Special Servicer or any Sub-Servicer, may be deemed to be a Plan
"fiduciary" with respect to the investing Plan, and thus subject to the
fiduciary responsibility provisions and prohibited transaction provisions of
ERISA and the Code. In addition, if the Trust Assets constitute Plan assets, the
purchase of Certificates by a Plan, as well as the operation of the Trust Fund,
may constitute or involve a prohibited transaction under ERISA and the Code.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL issued an individual administrative exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), to Merrill Lynch, Pierce, Fenner
& Smith Incorporated, which generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of mortgage pass-through certificates underwritten by an Underwriter
(as hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations,"
the term "Underwriter" includes (i) Merrill Lynch, Pierce, Fenner & Smith
Incorporated, (ii) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with Merrill
Lynch, Pierce, Fenner & Smith Incorporated and (iii) any member of the
underwriting syndicate or selling group of which Merrill Lynch, Pierce, Fenner &
Smith Incorporated or a person described in (ii) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Certificates of
the same series. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Corporation ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps, Inc. ("Duff & Phelps") or Fitch Investors Service,
Inc. ("Fitch"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of any Underwriter, the Depositor, the
Trustee, the Master Servicer, any Sub-Servicer, the provider of any Credit
Support and any obligor with respect to Mortgage Assets (including mortgage
loans underlying an MBS not issued by FNMA, FHLMC or GNMA) constituting more
than 5% of the aggregate unamortized principal balance of the Mortgage Assets in
the related Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Assets to the related Trust Fund must
represent not more than the fair market value of such obligations; and the sum
of all payments made to and retained by the Master Servicer and any Sub-Servicer
must represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the investing Plan must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Certificates; and (iii) certificates in such other
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investment pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1) (A) through (D) of the Code) in connection
with (i) the direct or indirect sale, exchange or transfer of Offered
Certificates acquired by a Plan upon issuance from the Depositor or Underwriter
when the Depositor, Master Servicer, Special Servicer, Sub-Servicer, Trustee,
provider of Credit Support, Underwriter or obligor with respect to Mortgage
Assets is a Party in Interest with respect to the investing Plan, (ii) the
direct or indirect acquisition or disposition in the secondary market of fuel
Certificates by a Plan and (iii) the holding of Offered Certificates by a Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Certificate on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes hereof, an Excluded Plan is a Plan sponsored by any
member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (i) the direct or indirect sale, exchange or
transfer of Offered Certificates in the initial issuance of Offered Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) an obligor with respect to
5% or less of the fair market value of the Mortgage Assets (including mortgage
loans underlying an MBS not issued by FNMA, FHLMC or GNMA) in the related Trust
Fund or (b) an affiliate of such a person, (ii) the direct or indirect
acquisition or disposition in the secondary market of Offered Certificates by a
Plan and (iii) the holding of Offered Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Assets.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a Party in Interest with respect to an investing Plan by virtue of
providing services to the Plan (or by virtue of having certain specified
relationships to such a person) solely as a result of the Plan's ownership of
Offered Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (i) that the Offered Certificates constitute "certificates" for purposes
of the Exemption and (ii) that the specific and general conditions set forth in
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider its general fiduciary obligations under ERISA in determining whether to
purchase any Offered Certificates on behalf of a Plan.
Any fiduciary of a Plan that proposes to cause the Plan to purchase Offered
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
(and scope of relief provided by) the Exemption or any other prohibited
transaction exemption in connection therewith. The Prospectus Supplement with
respect to a series of Certificates may contain additional information regarding
the application of the Exemption or any other exemption, with respect to the
Certificates offered thereby. In addition, any Plan fiduciary that proposes to
cause a Plan to purchase Stripped Interest Certificates should consider the
federal income tax consequences of such investment.
LEGAL INVESTMENT
The Offered Certificates of any series will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") only if so specified in the related Prospectus Supplement.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Offered Certificates constitute legal investments for them.
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Generally, only classes of Offered Certificates that (i) are rated in one
of the two highest rating categories by one or more Rating Agencies and (ii) are
part of a series evidencing interests in a Trust Fund consisting of loans
secured by a single parcel of real estate upon which is located a dwelling or
mixed residential and commercial structure, such as certain Multifamily Loans,
and originated by types of Originators specified in SMMEA, will be "mortgage
related securities" for purposes of SMMEA. "Mortgage related securities" are
legal investments to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, insurance companies and pension
funds created pursuant to or existing under the laws of the United States or of
any state, the authorized investments of which are subject to state regulation).
Under SMMEA, if a state enacted legislation prior to October 3, 1991 that
specifically limits the legal investment authority of any such entities with
respect to "mortgage related securities," Offered Certificates would constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, effective
December 31, 1996, the Office of the Comptroller of the Currency (the "OCC")
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards concerning
"safety and soundness" and retention of credit information in 12 C.F.R. Section
1.5), certain "Type IV securities", defined in 12 C.F.R. Section 1.2(1) to
include certain "commercial mortgage-related securities" and "residential
mortgage-related securities". As so defined, "commercial mortgage-related
security" and "residential mortgage-related security" mean, in relevant part,
"mortgage related security" within the meaning of SMMEA, provided that, in the
case of a "commercial mortgage-related security," it "represents ownership of a
promissory note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which one or
more commercial structures are located and that is fully secured by interests in
a pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous obligors,"
no representation is made as to whether any class of Offered Certificates will
qualify as "commercial mortgage-related securities", and thus as "Type IV
securities", for investment by national banks. Federal credit unions should
review 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. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in certain mortgage related securities
(including securities such as certain classes of Offered Certificates), except
under limited circumstances.
Upon the issuance of final implementing regulations under the Riegle
Community Development and Regulatory Improvement Act of 1994 and subject to any
limitations those regulations may impose, a modification of the definition of
"mortgage related securities" will become effective to include among the types
of loans to which such securities may relate loans secured by "one or more
parcels of real estate upon which is located one or more commercial structures."
In addition, the related legislative history states that this expanded
definition includes multifamily loans secured by more than one parcel of real
estate upon which is located more than one structure. Until September 23, 2001
any state may enact legislation limiting the extent to which "mortgage related
securities" under this expanded definition would constitute legal investments
under that state's laws.
All depository institutions considering an investment in the Offered
Certificates of any series should review the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on the Selection of
Securities Dealers and Unsuitable Investment Practices (to the extent adopted by
their respective regulatory authorities), setting forth, in relevant part,
certain investment practices deemed to be unsuitable for an institution's
investment portfolio, as well as guidelines for investing in certain types of
mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent
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investor" provisions, percentage-of-assets limits and provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by the Prospectus Supplements
hereto will be offered in series. The distribution of the Offered Certificates
may be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. The
Prospectus Supplement for the Offered Certificates of each series will, as to
each class of such Certificates, set forth the method of the offering, either
the initial public offering price or the method by which the price at which the
Certificates of such class will be sold to the public can be determined, the
amount of any underwriting discounts, concessions and commissions to
underwriters, any discounts or commissions to be allowed to dealers and the
proceeds of the offering to the Depositor.
If so specified in the related Prospectus Supplement, the Offered
Certificates of a series will be distributed in a firm commitment underwriting,
subject to the terms and conditions of the underwriting agreement, by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") acting as
underwriter with other underwriters, if any, named therein. Alternatively, the
Prospectus Supplement may specify that Offered Certificates will be distributed
by Merrill Lynch acting as agent. If Merrill Lynch acts as agent in the sale of
Offered Certificates, Merrill Lynch will receive a selling commission with
respect to such Offered Certificates, depending on market conditions, expressed
as a percentage of the aggregate Certificate Balance or Notional Amount of such
Offered Certificates as of the date of issuance. The exact percentage for each
series of Certificates will be disclosed in the related Prospectus Supplement.
To the extent that Merrill Lynch elects to purchase Offered Certificates as
principal, Merrill Lynch may realize losses or profits based upon the difference
between its purchase price and the sales price. The Prospectus Supplement with
respect to any series offered other than through underwriters will contain
information regarding the nature of such offering and any agreements to be
entered into between the Depositor and purchasers of Offered Certificates of
such series.
This Prospectus and related Prospectus Supplements may be used by the
Depositor, Merrill Lynch, an affiliate of the Depositor, and any other affiliate
of the Depositor when required under the federal securities laws in connection
with offers and sales of Offered Certificates in furtherance of market-making
activities in Offered Certificates. Merrill Lynch or any such other affiliate
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale or otherwise.
The Depositor will agree to indemnify Merrill Lynch and any underwriters
and their respective controlling persons against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments that any such person may be required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's mortgage loans
pending the sale of such mortgage loans or interests therein, including the
Certificates.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act of 1933 in connection with reoffers and sales by them of Offered
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
As to each series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any class of Certificates not offered hereby may be initially retained by the
Depositor, and may be sold by the Depositor at any time to one or more
institutional investors.
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LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the Depositor
and for Merrill Lynch, Pierce, Fenner & Smith Incorporated by Willkie Farr &
Gallagher, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of stripped interest certificates in extreme cases
might fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF DEFINITIONS
PAGE
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Accrual Certificates ................................... 12, 37
Accrued Certificate Interest ........................... 37
Acute Care Facilities .................................. 22
Act .................................................... 62
ADA .................................................... 64
ARM Loans .............................................. 28
Assisted Living Facilities ............................. 22
Available Distribution Amount .......................... 36
Bankruptcy Code ........................................ 59
Book-Entry Certificates ................................ 13, 36
call risk .............................................. 17
Capitalized Interest Account ........................... 10, 30
Cash Flow Agreement .................................... 1, 10, 30
CERCLA ................................................. 24, 62
Certificate Account .................................... 9, 29, 45
Certificate Balance .................................... 2, 11, 38
Certificate Owner ...................................... 13, 42
Certificateholders ..................................... 1, 65
Certificates ........................................... 1, 8
Closing Date ........................................... 67
Code ................................................... 14, 65
Commercial Properties .................................. 8, 26
Commission ............................................. 2
Committee Report ....................................... 67
Companion Class ........................................ 12, 38
Con .................................................... 22
Contributions Tax ...................................... 76
Controlled Amortization Class .......................... 12, 38
Cooperatives ........................................... 26
CPR .................................................... 33
Credit Support ......................................... 1, 10, 30
Cut-off Date ........................................... 12
Debt Service Coverage Ratio ............................ 27
Definitive Certificates ................................ 13, 36, 46
Depositor .............................................. 8, 26
Determination Date ..................................... 37
Direct Participants .................................... 42
Distribution Date ...................................... 12
Distribution Date Statement ............................ 39
DOL .................................................... 87
DTC .................................................... 2, 13, 36, 42
Due Dates .............................................. 28
Due Period ............................................. 39
Duff & Phelps .......................................... 88
Equity Participation ................................... 28
ERISA .................................................. 15, 87
Event of Default ....................................... 50
Excess Funds ........................................... 33
Exchange Act ........................................... 2
Exemption .............................................. 88
extension risks ........................................ 17
FAMC ................................................... 9
FASIT .................................................. 14, 65
FHLMC .................................................. 9
Fitch .................................................. 88
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PAGE
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FNMA ................................................... 9
Fraud and Abuse Laws ................................... 23
Garn Act ............................................... 63
GNMA ................................................... 9
Grantor Trust Certificates ............................. 14, 65
Grantor Trust Fractional Interest Certificates ......... 14, 79
Grantor Trust Fund ..................................... 65
Grantor Trust Strip Certificate ........................ 79
Health Care-Related Facilities ......................... 22
holder ................................................. 62
Indirect Participants .................................. 42
Insurance Proceeds ..................................... 45
IRS .................................................... 67
Issue Premium .......................................... 72
L/C Bank ............................................... 55
Liquidation Proceeds ................................... 45
Loan-to-Value Ratio .................................... 27
Lock-out Expiration Date ............................... 28
Lock-out Period ........................................ 28
Mark-to-Market Regulations ............................. 74
Master Servicer ........................................ 2, 8
MBS .................................................... 1, 9, 26
MBS Agreement .......................................... 29
MBS Issuer ............................................. 29
MBS Servicer ........................................... 29
MBS Trustee ............................................ 29
Merrill Lynch .......................................... 91
Moody's ................................................ 88
Mortgage Asset Seller .................................. 9, 26
Mortgage Assets ........................................ 1, 26
mortgage instruments ................................... 56
Mortgage Loans ......................................... 1, 8, 26
Mortgage Notes ......................................... 26
Mortgage Rate .......................................... 9, 28
Mortgaged Properties ................................... 26
Mortgages .............................................. 26
Multifamily Properties ................................. 8, 26
Net Leases ............................................. 27
Net Operating Income ................................... 27
Nonrecoverable Advance ................................. 39
Notional Amount ........................................ 11, 37
OCC .................................................... 90
Offered Certificates ................................... 1
OID Regulations ........................................ 65
Originator ............................................. 26
PAC .................................................... 34
Participants ........................................... 26, 42
Parties in Interest .................................... 87
pass-through entity .................................... 76
Pass-Through Rate ...................................... 2, 11
Permitted Investments .................................. 45
Plans .................................................. 87
Pooling Agreement ...................................... 11, 43
Pre-Funding Account .................................... 1, 10, 28
Pre-Funding Period ..................................... 10
prepayment ............................................. 33
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PAGE
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Prepayment Assumption .................................. 67, 82
Prepayment Interest Shortfall .......................... 31
Prepayment Premium ..................................... 28
Prohibited Transactions Tax ............................ 76
Prospectus Supplement .................................. 1
Rating Agency .......................................... 15
RCRA ................................................... 62
Record Date ............................................ 37
Related Proceeds ....................................... 39
Relief Act ............................................. 64
REMIC .................................................. 1, 65
REMIC Certificates ..................................... 65
REMIC Provisions ....................................... 65
REMIC Regular Certificates ............................. 13, 66
REMIC Regulations ...................................... 65
REMIC Residual Certificates ............................ 13, 66
REO Property ........................................... 47
Restricted Group ....................................... 88
Senior Certificates .................................... 11, 36
Senior Honorary ........................................ 22
Servicing Standard ..................................... 47
Skilled Nursing Facilities ............................. 22
SMMEA .................................................. 89
SPA .................................................... 33
Special Servicer ....................................... 2, 8, 48
Standard & Poor's ...................................... 88
Stripped Interest Certificates ......................... 11, 36
Stripped Principal Certificates ........................ 11, 36
Sub-Servicer ........................................... 47
Sub-Servicing Agreement ................................ 48
Subordinate Certificates ............................... 11, 36
TAC .................................................... 34
Tiered REMICs .......................................... 66
Title V ................................................ 64
Trust Assets ........................................... 2
Trust Fund ............................................. 1
Trustee ................................................ 2, 8
UCC .................................................... 57
Underwriter ............................................ 88
United States person ................................... 79
Value .................................................. 27
Voting Rights .......................................... 41
Warranting Party ....................................... 44
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN
ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS.
-------------------
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Summary ......................................................... S-
Risk Factors .................................................... S-
Description of the Mortgage Pool ................................ S-
Servicing of the Mortgage Loans ................................. S-
Description of the Certificates ................................. S-
Yield and Maturity Considerations ............................... S-
Use of Proceeds ................................................. S-
Material Federal Income Tax Consequences ........................ S-
ERISA Considerations ............................................ S-
Legal Investment ................................................ S-
Method of Distribution .......................................... S-
Legal Matters ................................................... S-
Ratings ......................................................... S-
Index of Principal Definitions .................................. S-
Annex A ......................................................... A-1
Annex B ......................................................... B-1
Annex C ......................................................... C-1
Annex D ......................................................... D-1
PROSPECTUS
Prospectus Supplement ............................................. 2
Available Information ............................................. 2
Incorporation of Certain Information by
Reference ........................................................ 3
Summary of Prospectus ............................................. 8
Risk Factors ...................................................... 16
Description of the Trust Funds .................................... 26
Yield and Maturity Considerations ................................. 31
The Depositor ..................................................... 36
Use of Proceeds ................................................... 36
Description of the Certificates ................................... 36
Description of the Pooling Agreements ............................. 43
Description of Credit Support ..................................... 54
Certain Legal Aspects of Mortgage Loans ........................... 56
Material Federal Income Tax Consequences .......................... 65
State and Other Tax Considerations ................................ 87
ERISA Considerations .............................................. 87
Legal Investment .................................................. 89
Method of Distribution ............................................ 91
Legal Matters ..................................................... 92
Financial Information ............................................. 92
Rating ............................................................ 92
Index of Principal Definitions .................................... 93
MERRILL LYNCH MORTGAGE
INVESTORS, INC.
(DEPOSITOR)
$
CLASS A AND CLASS B
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199
VARIABLE PASS-THROUGH RATE
---------------------
PROSPECTUS SUPPLEMENT
---------------------
MERRILL LYNCH & CO.
______________, 199
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration fee, are estimated.
- --------------------------------------------------------------------------------
Registration Fee............................... $ 295
Rating Agency Fees............................. 500,000*
Printing and Engraving Expenses................ 100,000*
Accounting Fees and Expenses................... 125,000*
Legal Fees and Expenses........................ 400,000*
Blue Sky and Legal Investment Fees and Expenses 25,000*
Trustee Fees and Expenses...................... 50,000*
Miscellaneous.................................. 50,000*
----------
Total.......................................... $1,125,295
===========
- --------------------------------------------------------------------------------
* Estimates based on the offering of a single series of Certificates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The proposed form of Underwriting Agreement provides that the Underwriters
are obligated under certain circumstances to indemnify the Registrant's
directors, each of the Registrant's officers who signed this Registration
Statement, and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933, as amended (the "Act"),
against certain liabilities, including liabilities arising under the Act.
The Registrant's By-laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they are or were such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
The Pooling and Servicing Agreement pursuant to which each series of
Certificates will be issued (the "Pooling Agreement") will provide that no
director, officer, employee or agent of the Registrant will be under any
liability to the trust fund created thereunder (the "Trust Fund") or the holders
of the Certificates issued thereunder, except for such individual's own willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder, or by reason of reckless disregard of such obligations or duties.
The Pooling Agreement will provide further that, with the exceptions stated
above, a director, officer, employee or agent of the Registrant will be entitled
to indemnification by the Trust Fund against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling Agreement
or the Certificates issued thereunder.
II-1
<PAGE>
ITEM 16. EXHIBITS.
Exhibits--
1(a)-- Form of Underwriting Agreement.*
4(a)-- Form of Pooling and Servicing Agreement.*
5(a)-- Opinion of Willkie Farr & Gallagher with respect to legality.
8(a)-- Opinion of Willkie Farr & Gallagher (included as part of
Exhibit 5(a)).
23(a)-- Consent of Willkie Farr & Gallagher (included as part of Exhibit 5(a)
and Exhibit 8(a)).
24(a)-- Power of Attorney (included on page II-4).
- ----------
* Incorporated by reference to the Registration Statement on Form
S-3, as filed with the Securities and Exchange Commission on
April 15, 1993 (File No. 33-61112).
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of the prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in this registration statement;
provided however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
C. The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-2
<PAGE>
D. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
E. The Registrant reasonably believes that the security rating requirement for
the eligibility of this Form S-3 will be met at the time of sale for each series
of Certificates.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on June 23, 1998.
Merrill Lynch Mortgage Investors, Inc.
By: /S/ MICHAEL M. MCGOVERN
--------------------------------
NAME: MICHAEL M. MCGOVERN
TITLE: SECRETARY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Michael M. McGovern, Jeffrey W. Kronthal,
Michael J. Normile, Peter J. Cerwin and Bruce Ackerman, or any of them, his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on June 23, 1998.
SIGNATURE TITLE
--------- -----
/s/ JEFFREY W. KRONTHAL President and Chairman of the
------------------------ Board of Directors
(JEFFREY W. KRONTHAL)
/s/ MICHAEL J. NORMILE Director
------------------------
(MICHAEL J. NORMILE)
/s/ DONALD J. PUGLISI Director
------------------------
(DONALD J. PUGLISI)
/s/ MICHAEL M. MCGOVERN Director
------------------------
(MICHAEL M. MCGOVERN)
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description of Exhibits Page No.
- ----------- ----------------------- --------
<S> <C> <C>
1(a)--Form of Underwriting Agreement.*
4(a)--Form of Pooling and Servicing Agreement.*
5(a)--Opinion of Willkie Farr & Gallagher with respect to legality.
8(a)--Opinion of Willkie Farr & Gallagher (included as part of Exhibit 5(a)).
23(a)--Consent of Willkie Farr & Gallagher (included as part of Exhibit 5(a) and Exhibit 8(a)).
24(a)--Power of Attorney (included on page II-4 of Form S-3).
</TABLE>
- -----------
* Incorporated by reference to the Registration Statement on Form S-3,
as filed with the Securities and Exchange Commission on April 15, 1993
(File No. 33-61112).
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
June 23, 1998
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower, 15th Floor
New York, New York 10281-1310
Re: Merrill Lynch Mortgage Investors, Inc.
Commercial Mortgage Pass-Through Certificates
Registration Statement on Form S-3
---------------------------------------------
Ladies and Gentlemen:
We are counsel to Merrill Lynch Mortgage Investors, Inc., a Delaware
corporation (the "Registrant"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of Commercial Mortgage
Pass-Through Certificates (the "Certificates"), and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration Statement").
The Certificates are issuable in series under separate pooling and servicing
agreements (each such agreement, a "Pooling and Servicing Agreement") among the
Registrant and a trustee, a master servicer and/or a special servicer to be
identified in the prospectus supplement for such series of Certificates. Each
Pooling and Servicing Agreement will be substantially in the form filed as an
Exhibit to the Registration Statement.
In connection with rendering this opinion letter, we have examined the form
of the Pooling and Servicing Agreement incorporated by reference as an Exhibit
to the Registration Statement, the Registration Statement and such other
documents as we have deemed necessary. As to matters of fact, we have examined
and relied upon representations or certifications of officers of the Registrant
or public officials. We have assumed the authenticity of all documents submitted
to us as originals, the genuineness of all signatures, the legal capacity of
natural persons and the conformity to the originals of all documents submitted
to us as copies. We have assumed that all parties other than the Registrant had
the corporate power and authority to enter into and perform all obligations
under the Pooling and Servicing Agreement.
In rendering this opinion letter, we express no opinion as to the laws of
any jurisdiction other than the laws of the State of New York, the corporate
laws of the State of Delaware and the federal laws of the United States, nor do
we express any opinion, either implicitly or otherwise, on any issue not
expressly addressed below. In rendering this opinion letter, we have not passed
upon and do not pass upon the application of the "doing business" or securities
laws of any jurisdiction. This opinion letter is further subject to the
qualification that enforceability may be limited by (i) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other laws affecting
the enforcement of the rights of creditors generally and (ii) general principles
of equity, whether enforcement is sought in a proceeding in equity or at law.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Registrant has the corporate power and authority to enter into
and perform all obligations of the Registrant under the Pooling and
Servicing Agreement, a form of which has been filed as an Exhibit to the
Registration Statement.
2. When a Pooling and Servicing Agreement for a series of Certificates
has been duly authorized by all necessary action and duly executed and
delivered by the parties thereto, the Pooling and Servicing Agreement will
be a legal and valid obligation of the Registrant.
<PAGE>
Merrill Lynch Mortgage Investors, Inc.
June 23, 1998
Page 2
3. When a Pooling and Servicing Agreement for a series of Certificates
has been duly authorized by all necessary action and duly executed and
delivered by the parties thereto, and when the Certificates of such series
have been duly executed and authenticated in accordance with the provisions
of the Pooling and Servicing Agreement and issued and sold as contemplated
in the Registration Statement and the prospectus and prospectus supplement
delivered in connection therewith, the Certificates will be legally and
validly issued and outstanding, fully paid and non-assessable, and the
holders of the Certificates will be entitled to the benefits of the Pooling
and Servicing Agreement.
4. The description of federal income tax consequences appearing under
the heading "Material Federal Income Tax Consequences" in the prospectus
contained in the Registration Statement, including the opinion of counsel
to the Depositor described therein under "REMICs -- Classification of
REMICs," while not purporting to discuss all possible federal income tax
consequences of an investment in Certificates, is accurate with respect to
those tax consequences which are discussed.
We hereby consent to the filing of this opinion letter as an Exhibit to the
Registration Statement, and to the use of our name in the prospectus included in
the Registration Statement under the headings "Legal Matters" without admitting
that we are "experts" within the meaning of the Act and the rules and
regulations thereunder with respect to any part of the Registration Statement,
including this Exhibit.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
------------------------------------
Willkie Farr & Gallagher
