<PAGE>
Filed Pursuant to Rule No. 424(b)(5)
File No. 333-24327
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 22, 1998)
$62,036,000
PACIFICAMERICA HOME EQUITY LOAN
ASSET-BACKED NOTES, SERIES 1998-2F, CLASS A-F
$137,964,000
PACIFICAMERICA HOME EQUITY LOAN
ASSET-BACKED NOTES, SERIES 1998-2V, CLASS A-V
PACIFICAMERICA MONEY CENTER, INC.
SELLER AND MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
PacificAmerica Home Equity Loan Trust Series 1998-2F (the 'Series 1998-2F
Issuer') will be formed pursuant to a Trust Agreement, dated as of June 1, 1998,
between Merrill Lynch Mortgage Investors, Inc. (the 'Depositor') and Wilmington
Trust Company, (the 'Owner Trustee'). The Series 1998-2F Issuer will issue
$62,036,000 aggregate principal amount of PacificAmerica Home Equity Loan
Asset-Backed Notes, Series 1998-2F (the 'Class A-F Notes'). The Class A-F Notes
will be issued pursuant to an Indenture, dated as of June 1, 1998, between the
Series 1998-2F Issuer and Bankers Trust Company of California, N.A. (the
'Indenture Trustee'). PacificAmerica Home Equity Loan Trust Series 1998-2V (the
'Series 1998-2V Issuer') will be formed pursuant to a Trust Agreement, dated as
of June 1, 1998, between the Depositor and the Owner Trustee. The Series 1998-2V
Issuer will issue $137,964,000 aggregate principal amount of PacificAmerica Home
Equity Loan Asset-Backed Notes, Series 1998-2V (the 'Class A-V Notes'). The
Class A-V Notes will be issued pursuant to an Indenture, dated as of June 1,
1998, between the Series 1998-2V Issuer and the Indenture Trustee. Only the
Class A-F Notes and the Class A-V Notes (together, the 'Notes') are offered
hereby.
The Class A-F Notes and the Class A-V Notes will represent indebtedness of
the related Issuer and will be secured by the related trust estate (the related
'Trust Estate') created by the related Trust Agreement. The Trust Estate with
respect to the Class A-F Notes will consist primarily of fixed rate, one- to
four-family, first and second lien home equity loans (the 'Initial Fixed Rate
Loans') and any funds on deposit in the related Interest Coverage Account and
related Pre-Funding Account (each as defined herein). Additional Fixed Rate
Loans (the 'Fixed Rate Subsequent Loans' and, together with the Initial Fixed
Rate Loans, the 'Fixed Rate Loans') having an aggregate unpaid principal balance
of up to $15,959,776 meeting the criteria set forth herein are intended to be
purchased by the Series 1998-2F Issuer on or before August 25, 1998, with funds
on deposit in the related Pre-Funding Account, which will become part of the
related Trust Estate. The Trust Estate with respect to the Class A-V Notes will
consist primarily of adjustable rate, one- to four-family, first lien home
equity loans (the 'Initial Adjustable Rate Loans') and any funds on deposit in
the related Interest Coverage Account and related Pre-Funding Account.
Additional Adjustable Rate Loans (the 'Adjustable Rate Subsequent Loans' and,
together with the Initial Adjustable Rate Loans, the 'Adjustable Rate Loans')
having an aggregate unpaid principal balance of up to $35,493,597 meeting the
criteria set forth herein are intended to be purchased by the Series 1998-2V
Issuer on or before August 25, 1998, with funds on deposit in the related
Pre-Funding Account, which will become part of the related Trust Estate. The
Fixed Rate Loans and the Adjustable Rate Loans (each, a 'Loan Group') are
sometimes referred to herein collectively as the Loans. In addition, the Class
A-F Notes and the Class A-V Notes will each have the benefit of an irrevocable
and unconditional financial guaranty insurance policy (the related 'Note
Insurance Policy') to be issued by Financial Security Assurance Inc. (the 'Note
Insurer') as described under 'Description of the Notes--Note Insurance Policies'
herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' ON PAGE S-15 OF THIS PROSPECTUS SUPPLE-
MENT AND THE INFORMATION SET FORTH UNDER 'RISK FACTORS' ON PAGE 13 OF THE
PROSPECTUS BEFORE PURCHASING ANY OF THE NOTES.
(Continued on following page)
------------------------
THE ASSETS PLEDGED TO SECURE THE NOTES AND PROCEEDS FROM THE NOTE INSURANCE
POLICIES ARE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. THE NOTES WILL
REPRESENT NON-RECOURSE OBLIGATIONS SOLELY OF THE RELATED ISSUER AND WILL
NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE
MASTER SERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE, THE
SUB-SERVICER OR ANY OF THEIR AFFILIATES, OTHER THAN THE RELATED
ISSUER. NEITHER THE NOTES NOR THE UNDERLYING RELATED LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
There is currently no secondary market for the Notes. Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the 'Underwriter') intends to make a secondary
market in the Notes, but is not obligated to do so. There can be no assurance
that a secondary market for the Notes will develop or, if it does develop, that
it will continue or provide Noteholders (as defined herein) with sufficient
liquidity of investment. The Notes will not be listed on any securities
exchange.
The Notes will be purchased from the Depositor by the Underwriter and will
be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Depositor from the sale of the Class A-F Notes are
expected to be approximately $61,827,491 before deducting expenses plus accrued
interest thereon from the Cut-off Date (as defined herein) and the proceeds to
the Depositor from the sale of the Class A-V Notes are expected to be
approximately $137,543,210 before deducting expenses.
The Notes are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject any order in whole or in part. It is expected that
delivery of the Notes will be made on or about June 25, 1998 in book-entry form
through DTC, Cedel and Euroclear (each as defined herein) as discussed herein,
against payment therefor in immediately available funds.
<PAGE>
Upon receipt of a request by an investor for an electronic Prospectus
Supplement from the Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus
Supplement, the Underwriter will promptly deliver, or cause to be delivered, in
addition to such electronic Prospectus Supplement, without charge, a paper copy
of the Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is June 22, 1998
<PAGE>
(Continued from previous page)
The interest rates on the Fixed Rate Loans will be fixed and the interest
rates on the Adjustable Rate Loans will be adjustable, subject to semi-annual
adjustment commencing on the related first Adjustment Date (as defined herein)
based on the Index (as defined herein) and the respective Gross Margins
described herein, subject to certain periodic and lifetime limitations as
described more fully herein.
The Loans were generally underwritten in accordance with the underwriting
standards described herein in 'Description of the Home Equity Loan
Pool--Underwriting.' See also 'Risk Factors--Underwriting Standards' in this
Prospectus Supplement. Approximately 26.80% and 23.61% of the Initial Fixed Rate
Loans and the Initial Adjustable Rate Loans, respectively, each by aggregate
principal balance of the related Loan Group as of the Cut-off Date, are secured
by Mortgaged Properties in California. See 'Risk Factors--Delinquencies and
Potential Delinquencies' in this Prospectus Supplement.
Payments on the Notes will be made on the 25th day of each month or, if
such day is not a business day, then on the next business day, commencing in
July 1998 (each, a 'Payment Date'). Each Series of Notes represents the right to
receive payments from funds available to be distributed with respect to the
related Loan Group, as described herein; provided that in the limited
circumstances described herein under 'Description of the Notes,' excess cash
flow from the Loan Group related to a Series of Notes may be available to cover
certain shortfalls on the other Series of Notes. As described herein, interest
will accrue on the Class A-F Notes and the Class A-V Notes at a rate (the
related 'Note Interest Rate'), which (i) for the Class A-F Notes, is 6.59% per
annum, subject to an increase of 0.50% per annum on or after the Payment Date on
which the aggregate Principal Balance (as defined herein) of the Fixed Rate
Loans is less than or equal to 10% of the sum of the aggregate Principal Balance
of the Initial Fixed Rate Loans as of the Cut-off Date and the related Original
Pre-Funded Amount (such sum, the 'Class A-F Original Pool Balance'), and (ii)
for the Class A-V Notes, is a floating rate equal to the lesser of (i)(a) with
respect to each Payment Date up to and including the Payment Date which occurs
on or prior to the date on which the aggregate Principal Balance of the
Adjustable Rate Loans is less than or equal to 10% of the sum of the aggregate
Principal Balance of the Initial Adjustable Rate Loans as of the Cut-off Date
and the related Original Pre-Funded Amount (such sum, the 'Class A-V Original
Pool Balance'), One-Month LIBOR (as defined herein) plus 0.17% and (b) with
respect to each Payment Date thereafter, One-Month LIBOR plus 0.34% and (ii)
15.50% per annum (the 'Maximum Interest Rate'). See 'Description of the
Notes--Class A-F Notes--Interest Payments' and '--Class A-V Notes--Interest
Payments' herein. As described herein, interest payable each Payment Date (i) on
the Class A-F Notes will accrue on the basis of a 360-day year consisting of
twelve 30-day months and (ii) on the Class A-V Notes will accrue on the basis of
a 360-day year and the actual number of days elapsed during the period
commencing on the Payment Date immediately preceding the month in which such
Payment Date occurs and ending on the calendar day immediately preceding such
Payment Date, except with respect to the first Payment Date for the Class A-V
Notes, which has an accrual period from June 25, 1998 to July 27, 1998, and will
be based on the related Note Principal Balance thereof and the then-applicable
related Note Interest Rate thereof. Payments in respect of principal of the
Notes will be made as described herein under 'Description of the Notes.'
The Class A-F Notes or the Class A-V Notes may be redeemed in whole, but
not in part, by the holder of the majority of the related Certificates on any
Payment Date on or after the Payment Date on which the aggregate Principal
Balance of the Fixed Rate Loans and the Adjustable Rate Loans is less than or
equal to 10% and 10%, respectively, of the related Original Pool Balance. See
'Description of the Notes--Optional Redemption' herein.
The Notes initially will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company ('DTC'), as further described herein.
The interests of beneficial owners of the Notes will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Notes only under the limited
circumstances described herein. See 'Description of the Notes--Book-Entry Notes'
herein.
It is a condition of the issuance of each Series of the Notes that each
Series of the Notes be rated 'AAA' by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ('S&P') and 'Aaa' by Moody's
Investors Service, Inc. ('Moody's').
S-2
<PAGE>
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON, AMONG OTHER THINGS, THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS AND LIQUIDATIONS) ON THE RELATED LOANS. THE LOANS GENERALLY MAY BE
PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER, WITH RESPECT TO 68.12% AND
58.97% OF THE INITIAL FIXED RATE LOANS AND INITIAL ADJUSTABLE RATE LOANS,
RESPECTIVELY, PREPAYMENT WILL SUBJECT THE MORTGAGOR TO A PREPAYMENT CHARGE. IN
ADDITION, THE YIELD ON THE CLASS A-V NOTES WILL BE SENSITIVE TO FLUCTUATIONS IN
THE LEVEL OF ONE-MONTH LIBOR, WHICH MAY VARY SIGNIFICANTLY OVER TIME. SEE
'CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS' HEREIN AND 'YIELD AND PREPAYMENT
CONSIDERATIONS' IN THE PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF NOTES BEING OFFERED PURSUANT TO THE DEPOSITOR'S PROSPECTUS
DATED JUNE 22, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
AS PROVIDED HEREIN UNDER 'FINANCIAL SECURITY ASSURANCE INC.,' THE DEPOSITOR
WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS SUPPLEMENT IS
DELIVERED, UPON ORAL OR WRITTEN REQUEST OF SUCH PERSON, A COPY OR ANY OR ALL
FINANCIAL STATEMENTS OF THE NOTE INSURER INCORPORATED HEREIN BY REFERENCE.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED AS PROVIDED UNDER 'FINANCIAL
SECURITY ASSURANCE INC.' HEREIN.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under 'Risk Factors' and 'Prepayment
and Yield Considerations' herein. As a consequence, no assurance can be given as
to the actual distributions on, or the yield of, the Notes.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus. Reference
is made to the 'Index of Principal Definitions' for the location of certain
capitalized terms. Capitalized terms used herein and not otherwise defined
herein have the meanings assigned in the Prospectus.
When a defined term beginning with the identifying phrase 'Class A-F' or
'Class A-V' is used herein with the word 'related' or 'such' in lieu of such
identifying phrase, the context shall determine whether the term refers to the
underlying concept as related to the Fixed Rate Loans, the Adjustable Rate
Loans, or both.
<TABLE>
<S> <C>
The Notes................................. $62,036,000 PacificAmerica Home Equity Loan Asset-Backed Notes,
Series 1998-2F and $137,964,000 PacificAmerica Home Equity Loan
Asset-Backed Notes, Series 1998-2V. The Notes will be issued pursuant
to two separate Indentures, each dated as of June 1, 1998 (each, a
related 'Indenture'), between the related Issuer and the Indenture
Trustee. Each Series of Notes represents the right to receive
payments from funds available to be distributed with respect to the
related Loan Group, as described herein; provided that in the limited
circumstances described herein under 'Description of the Notes,'
excess cash flow from the Loan Group related to a Series of Notes may
be available for certain shortfalls on the other Series of Notes.
Issuers................................... The Class A-F Notes will be issued by PacificAmerica Home Equity Loan
Trust Series 1998-2F (the 'Series 1998-2F Issuer') and the Class A-V
Notes will be issued by PacificAmerica Home Equity Loan Trust Series
1998-2V (the 'Series 1998-2V Issuer'), in each case, a Delaware
business trust established pursuant to a Trust Agreement, dated as of
June 1, 1998 (each, a related 'Trust Agreement'), between the
Depositor and the Owner Trustee. The Notes will represent
non-recourse obligations solely of the related Issuer, and the
proceeds of the assets of the related Issuer (such assets, the
related 'Trust Estate') and the related Note Insurance Policy will be
the sole source of payments on the Notes, as applicable. The related
Issuer is not expected to have any significant assets other than
those pledged as collateral to secure the Class A-F Notes and the
Class A-V Notes, as applicable.
Depositor................................. Merrill Lynch Mortgage Investors, Inc. (the 'Depositor'). See 'The
Depositor' in the Prospectus.
Seller.................................... PacificAmerica Money Center, Inc. (in such capacity, the 'Seller').
See 'Description of the Home Equity Loan Pool--The Seller' herein.
Master Servicer........................... PacificAmerica Money Center, Inc. (in such capacity, the 'Master
Servicer'). See 'Description of the Servicing Agreement--The Master
Servicer' herein.
Sub-Servicer.............................. Advanta Mortgage Corp. USA (the 'Sub-Servicer'). See 'Description of
the Servicing Agreement--The Sub-Servicer' herein.
Owner Trustee............................. Wilmington Trust Company, a Delaware banking company.
Indenture Trustee......................... Bankers Trust Company of California, N.A., a national banking
association.
Cut-off Date.............................. June 9, 1998.
Closing Date.............................. On or about June 25, 1998.
</TABLE>
S-4
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<TABLE>
<S> <C>
Payment Date.............................. The 25th day of each month (or, if such day is not a business day,
the next business day), beginning on July 27, 1998 (each, a 'Payment
Date').
Denominations and Registration............ The Notes will be issued, maintained and transferred on the book-
entry records of DTC and its Participants (as defined in the
Prospectus), or Cedel or Euroclear, in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in accordance with
the usual rules and operating procedures of the relevant system. The
Notes will be offered in registered form, in minimum denominations of
$25,000 and integral multiples of $1,000 in excess thereof. The Notes
will be represented by one or more Notes registered in the name of
Cede & Co., as nominee of DTC. No Security owner will be entitled to
receive a Note in fully registered, certificated form (a 'Definitive
Note'), except under the limited circumstances described herein. See
'Description of the Notes--Book-Entry Notes' herein.
The Home Equity Loan Pool................. The Home Equity Loan Pool will consist of two groups (each a 'Loan
Group') of home equity loans (the 'Loans'). The Loans in each Loan
Group are referred to herein as the 'Fixed Rate Loans' and the
'Adjustable Rate Loans,' respectively.
Fixed Rate Loans. The Fixed Rate Loans are secured by first and
second liens on one- to four- family real properties (each, a
'Mortgaged Property'). The Initial Fixed Rate Loans have individual
principal balances as of the Cut-off Date of at least $18,074 but not
more than $437,500 with an average principal balance as of the
Cut-off Date of approximately $79,442. Approximately 13.67% of the
Initial Fixed Rate Loans (by aggregate principal balance of the Fixed
Rate Loans as of the Cut-off Date) are secured by second liens on the
related Mortgaged Properties. The Initial Fixed Rate Loans generally
have terms to maturity of up to 30 years from the date of origination
and a weighted average remaining term to stated maturity of
approximately 321 months as of the Cut-off Date.
The Mortgage Rate on the Fixed Rate Loans will be fixed for the life
of such loan.
As of the Cut-off Date, the Initial Fixed Rate Loans in the aggregate
will have Mortgage Rates of at least 6.99% per annum but not more
than 16.79% per annum, with a weighted average of 10.724%.
Approximately 0.32% of the Initial Fixed Rate Loans (by aggregate
principal balance of the Fixed Rate Loans as of the Cut-off Date)
were thirty days or more but less than sixty days delinquent in their
Monthly Payments as of the Cut-off Date. None of the Initial Fixed
Rate Loans were sixty days or more delinquent in their Monthly
Payments as of the Cut-off Date.
Adjustable Rate Loans. The Adjustable Rate Loans are secured by first
liens on Mortgaged Properties. The Initial Adjustable Rate Loans have
individual principal balances as of the Cut-off Date of at least
$19,822 but not more than $749,534 with an average principal balance
as of the Cut-off Date of approximately $105,422. The Initial
Adjustable Rate Loans generally have terms to maturity of up to 30
years from the date of origination and a weighted average
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<S> <C>
remaining term to stated maturity of approximately 357 months as of
the Cut-off Date.
The Mortgage Rate on the Adjustable Rate Loans will be adjustable,
subject to adjustment commencing (i) with respect to approximately
9.44% of the Initial Adjustable Rate Loans approximately six months
after the date of origination, (ii) with respect to approximately
72.59% of the Initial Adjustable Rate Loans, approximately two years
after origination (each such Initial Adjustable Rate Loan a '2/28 or
2/13 Loan'), (iii) with respect to approximately 15.30% of the
Initial Adjustable Rate Loans, approximately three years after
origination (each such Initial Adjustable Rate Loan a '3/27 Loan')
and (iv) with respect to approximately 2.68% of the Initial Adjusta-
ble Rate Loans, approximately five years after origination (each such
Initial Adjustable Rate Loan a '5/25 Loan') on the Adjustment Date
(as defined herein) to equal the sum (rounded as described herein) of
the Index described below and a fixed percentage set forth in the
related mortgage note (the 'Gross Margin'). However, (i) on any
Adjustment Date such Mortgage Rate may not increase or decrease by
more than the Periodic Rate Cap (as defined herein), except as
described herein, (ii) over the life of such Adjustable Rate Loan,
such Mortgage Rate may not exceed the related maximum Mortgage Rate
(the 'Maximum Mortgage Rate'), which Maximum Mortgage Rates will
range from 12.890% per annum to 23.440% per annum and (iii) over the
life of such Adjustable Rate Loan, such Mortgage Rate may not be
lower than a specified minimum Mortgage Rate (the 'Minimum Mortgage
Rate'), which Minimum Mortgage Rates will range from 6.390% per annum
to 16.940% per annum. The Adjustable Rate Loans will have Gross
Margins ranging from 4.250% per annum to 11.350% per annum with a
weighted average of 7.192% as of the Cut-off Date.
For a further description of the Loans, see 'Description of the Home
Equity Loan Pool' herein.
Pre-Funding Accounts...................... On the Closing Date, approximately $15,959,776 (the 'Class A-F
Original Pre-Funded Amount') from the sales proceeds of the Class A-F
Notes will be deposited in an account (the 'Class A-F Pre-Funding
Account'), which account is in the name of the Indenture Trustee and
is part of the related Trust Estate and will be used to acquire
Subsequent Fixed Rate Loans. During the Class A-F Funding Period (as
defined below), the Class A-F Original Pre-Funded Amount will be
reduced by the amount thereof used by the related Issuer to purchase
Subsequent Fixed Rate Loans from the Seller. In addition, on the
Closing Date, approximately $35,493,597 (the 'Class A-V Original
Pre-Funded Amount') from the sales proceeds of the Class A-V Notes
will be deposited in an account (the 'Class A-V Pre-Funding
Account'), which account is in the name of the Indenture Trustee and
is part of the related Trust Estate and will be used to acquire
Subsequent Adjustable Rate Loans. During the related Class A-V
Funding Period (as defined below), the Class A-V Original Pre-Funded
Amount will be reduced by the amount thereof used by the related
Issuer to purchase Subsequent Adjustable Rate Loans from the Seller.
The 'Class A-F Funding Period' and the 'Class A-V Funding Period' is
the period commencing on the Closing Date and ending on the earlier
to occur
</TABLE>
S-6
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of (i) the date on which the amount on deposit in the Class A-V Pre-
Funding Account is less than $10,000 and (ii) August 25, 1998. See
'Description of the Home Equity Loan Pool' herein.
Interest Coverage Accounts................ On the Closing Date, a portion of the sales proceeds of the Class A-F
Notes will be deposited in an account (the 'Class A-F Interest
Coverage Account') for application by the Indenture Trustee to cover
shortfalls in the Class A-F Interest Payment Amount (as defined
herein) attributable to the pre-funding feature during the Class A-F
Funding Period. In addition, on the Closing Date, a portion of the
sales proceeds of the Class A-V Notes will be deposited in an account
(the 'Class A-V Interest Coverage Account') for application by the
Indenture Trustee to cover shortfalls in the Class A-V Interest
Payment Amount attributable to the pre- funding feature during the
Class A-V Funding Period. Any amounts remaining in an Interest
Coverage Account at the end of the related Pre-Funding Period will be
paid to the Seller. See 'Description of the Notes--Interest Coverage
Accounts' herein.
The Index................................. As of any Adjustment Date with respect to any Adjustable Rate Loan,
the Index applicable to the determination of the related Mortgage
Rate will be the average of the interbank offered rates for six-month
U.S. dollar deposits in the London market based on quotations of
major banks as most recently available generally as of the first
business day of the month immediately preceding the month in which
such Adjustment Date occurs. ('Six-Month LIBOR').
Interest Payments......................... Interest on the Class A-F Notes will be paid monthly on each Payment
Date, commencing in July 1998, in an amount (the 'Class A-F Interest
Payment Amount') which is equal to interest accrued on the Class A-F
Note Principal Balance immediately prior to such Payment Date at
6.59% per annum, subject to an increase of 0.50% per annum on or
after the Payment Date on which the aggregate Principal Balance of
the Fixed Rate Loans is less than or equal to 10% of the sum of the
aggregate Principal Balance of the Initial Fixed Rate Loans as of the
Cut-off Date and the Class A-F Original Pre-Funded Amount (such sum,
the 'Class A-F Original Pool Balance'). Interest on the Class A-V
Notes will be paid monthly on each Payment Date, commencing in July
1998, in an amount (the 'Class A-V Interest Payment Amount') which is
equal to the lesser of (i) interest accrued on the Class A-V Note
Principal Balance (as defined herein) immediately prior to such
Payment Date at the Class A-V Note Interest Rate for the related
Interest Period (as defined below) and (ii) the Guaranteed Interest
Payment Amount (as defined below). The 'Class A-V Note Interest Rate'
on each Payment Date will be a floating rate equal to the lesser of
(i)(a) with respect to each Payment Date up to and including the
Payment Date which occurs on or prior to the date on which the
aggregate Principal Balance of the Adjustable Rate Loans is less than
or equal to 10% of the sum of the aggregate Principal Balance of the
Initial Adjustable Rate Loans as of the Cut-off Date and the Class
A-F Original Pre-Funded Amount (such sum, the 'Class A-V Original
Pool Balance'), One-Month LIBOR (as defined herein) plus 0.17% and
(b) with respect to each Payment Date thereafter, One-Month LIBOR
plus 0.34% and (ii) 15.50% per annum (the 'Maximum Interest Rate').
Interest in respect of any Payment Date (i) on the
</TABLE>
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Class A-F Notes will accrue on the basis of a 360-day year consisting
of twelve 30-day months and (ii) on the Class A-V Notes will accrue
from the preceding Payment Date (or in the case of the first Payment
Date, from the Closing Date) through the day preceding such Payment
Date (each such period, an 'Interest Period') on the basis of the
actual number of days in the Interest Period and a 360-day year.
As further described herein, with respect to the Class A-V Notes and
any Payment Date, to the extent that the amount calculated pursuant
to clause (i) of the definition of Class A-V Interest Payment Amount
exceeds the Guaranteed Interest Payment Amount (such excess, the
'Carry-Forward Amount'), the holders of the Class A-V Notes will be
paid the amount of such Carry-Forward Amount (with interest thereon
to the extent permitted by applicable law) at the Class A-V Note
Interest Rate applicable from time to time after certain payments to
the holders of the Class A-V Notes and the Note Insurer to the extent
of available funds. The 'Guaranteed Interest Payment Amount' for any
Payment Date is equal to the amount of interest that accrued on the
aggregate outstanding Principal Balance of the Adjustable Rate Loans
payable on the related Due Date minus the aggregate amount of the
related Servicing Fee, the Indenture Trustee Fee, the Owner Trustee
Fee, the Note Insurer Premium and the Minimum Spread (each as defined
below), each relating to the Adjustable Rate Loans.
With respect to each Loan and each Payment Date, the Master Servicer
will be entitled to a fee (the 'Servicing Fee') equal to 1/12 of the
Servicing Fee Rate times the Principal Balance of such Loan as of
such date. With respect to each Loan and each Payment Date, the
Indenture Trustee will be entitled to a fee (the 'Indenture Trustee
Fee') equal to 1/12 of the Indenture Trustee Fee Rate times the
Principal Balance of such Loan as of such date. For any Payment Date,
the Servicing Fee Rate is equal to 0.50% per annum, the Indenture
Trustee Fee Rate is equal to 0.015% per annum, the Owner Trustee Fee
is a per annum amount as specified in the related Indenture (payable
on the Payment Date in July of each year from each related Payment
Account) and the 'Note Insurer Premium' is equal to 1/12 of the per
annum rate specified pursuant to the related Insurance Agreement (as
defined herein), times the Note Principal Balance of the Class A-F
Notes or the Class A-V Notes, as applicable (the Note Insurer Premium
together with the Owner Trustee Fee for each of the Class A-F Notes
and the Class A-V Notes, the related 'Administrative Fee'). With
respect to each Adjustable Rate Loan and each Payment Date, the
'Minimum Spread' is equal to 1/12 of 0.75% per annum times the
Principal Balance of such Loan as of such date. The Note Insurance
Policies do not cover Prepayment Interest Shortfalls, any Relief Act
Shortfalls (each as defined herein) or with respect to the Class A-V
Notes, the Carry-Forward Amount, nor do the ratings assigned to the
Notes address the payment of any Prepayment Interest Shortfalls, any
Relief Act Shortfalls or with respect to the Class A-V Notes, the
Carry-Forward Amount.
Principal Payments........................ Principal payments will be payable on the Notes on each Payment Date
in an aggregate amount equal to the related Principal Payment
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Amount for such Payment Date. The Principal Payment Amount with
respect to the Class A-F Notes and the Class A-V Notes will include,
to the extent of the Class A-F Available Funds and Class A-V
Available Funds (each as defined herein) and except as otherwise
described herein, the principal portion of all scheduled monthly
payments (to the extent received) due from Mortgagors in the related
Loan Group on the related Due Date, and all unscheduled amounts in
the related Loan Group received during the preceding calendar month
that are allocable to principal (including proceeds of repurchases,
principal and adjustments in the case of substitutions, prepayments,
liquidations and insurance (excluding proceeds paid in respect of the
related Note Insurance Policy)) and may be reduced as a result of
overcollateralization in excess of the required level, as described
herein. In addition, on any Payment Date, to the extent of related
funds available therefor, Class A-F Noteholders and Class A-V
Noteholders will also be entitled to receive payments generally equal
to the amount, if any, necessary to increase the related
Subordination Amount to the related Required Subordination Amount
(such amount, the related 'Subordination Increase Amount') and with
respect to the Payment Date immediately following the end of the
related Funding Period, any amounts in the Class A-F Pre-Funding
Account and Class A-V Pre-Funding Account, as applicable, after
giving effect to any purchase of Fixed Rate Subsequent Loans or
Adjustable Rate Subsequent Loans, as applicable. The 'Note Principal
Balance' with respect to the Class A-F Notes and the Class A-V Notes
on any date of determination is the initial principal balance thereof
as of the Closing Date as reduced by all payments of principal
thereon prior to such date of determination.
Any loss on a Liquidated Loan (i.e., a Realized Loss, each as defined
herein), may or may not be allocated to the related Series of Notes
on the Payment Date which immediately follows the event of loss.
However, the holders of the Notes are entitled to receive ultimate
recovery of any Realized Losses which occur in the related Loan Group
which receipt will be no later than the Payment Date occurring after
such Realized Loss creates an Aggregate Subordination Deficit (as
defined herein) and will be in the form of an Insured Payment if not
covered through Net Monthly Excess Cashflow from the related Loan
Group or the other Loan Group. See '--Note Insurance Policies' below.
Insured Payments do not include Realized Losses until such time as
the aggregate cumulative Realized Losses have created an Aggregate
Subordination Deficit.
Note Insurer.............................. Financial Security Assurance Inc. (the 'Note Insurer'). See
'Financial Security Assurance Inc.' herein.
Note Insurance Policies................... On the Closing Date, the Note Insurer will issue (i) a Note Insurance
Policy in favor of the Indenture Trustee for the benefit of the
holders of the Class A-F Notes and (ii) a Note Insurance Policy in
favor of the Indenture Trustee for the benefit of the holders of the
Class A-V Notes. On the second Business Day preceding each Payment
Date, the Indenture Trustee will make a claim on the related Note
Insurance Policy, when necessary, to cover the sum of (a) the amount
by which the related Interest Payment Amount (net of any
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related Prepayment Interest Shortfalls, whether or not such
shortfalls are covered by the Master Servicer by Compensating
Interest (as defined herein), and any Relief Act Shortfalls) exceeds
the related Available Funds for such Loan Group and any Net Monthly
Excess Cashflow from the other Loan Group available to cover such
shortfall as of such Payment Date and (b) the amount by which the
lesser of the Subordination Deficit with respect to the related Loan
Group and the Aggregate Subordination Deficit exceeds the related
Available Funds for such Loan Group and any Net Monthly Excess
Cashflow from the other Loan Group available to cover such shortfall
as of such Payment Date. While the Note Insurer is not obligated to
pay any losses on Liquidated Loans except as set forth in (b) above,
the Note Insurer may, at its sole option, pay any losses on
Liquidated Loans in accordance with the related Note Insurance
Policy. Each Note Insurance Policy will also insure the payment of
any related unpaid Preference Amount. The Note Insurance Policy with
respect to the Class A-V Notes does not insure the payment of the
Carry-Forward Amount. See 'Description of the Notes--Note Insurance
Policies' herein and 'Description of Credit Support' in the
Prospectus.
The Certificates.......................... Trust Certificates, Series 1998-2F and Trust Certificates, Series
1998-2V. Each Series of Certificates will be issued pursuant to the
related Trust Agreement and will represent the beneficial ownership
interest in the related Issuer. The Certificates are not offered
hereby.
Credit Enhancement........................ The credit enhancement provided for the benefit of the Class A-F
Noteholders and the Class A-V Noteholders consists solely of (a) the
related Net Monthly Excess Cashflow (as defined herein), (b) the
related overcollateralization and crosscollateralization and (c) the
related Note Insurance Policy.
Net Monthly Excess Cashflow. Each Indenture requires that, on each
Payment Date, Net Monthly Excess Cashflow from the related Loan
Group, if any, be applied on such Payment Date as an accelerated
payment of principal on the related Notes but only to the limited
extent hereafter described. The 'Net Monthly Excess Cashflow' with
respect to the Class A-F Notes and the Class A-V Notes for any
Payment Date is equal to the amount of related Available Funds
remaining after application to items (i) through (iii) under
'Description of the Notes--Class A-F Notes--Priority of Payment' and
'--Class A-V Notes--Priority of Payment' herein. This application has
the effect of accelerating the amortization of the Class A-F Notes
and the Class A-V Notes, as applicable, relative to the amortization
of the related Loans.
Overcollateralization. The subordination and cash flow provisions of
each Indenture result in a limited acceleration of the Class A-F
Notes or the Class A-V Notes, as applicable, relative to the
amortization of the related Loans. This acceleration feature creates
overcollateralization which results from the excess of the aggregate
Principal Balance of the related Loans over the aggregate Note
Principal Balance of the related Notes. Once the required level of
overcollateralization is reached, the acceleration feature will
cease, unless it becomes necessary to maintain the required level of
overcollateralization. See 'Description of the Notes--Class A-F
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Notes--Overcollateralization Provisions' and 'Class A-V Notes--
Overcollateralization Provisions.'
The actual level of overcollateralization may increase or decrease
over time as described herein. An increase would result in a
temporary period of accelerated amortization of the related Notes to
increase the actual level of overcollateralization to its required
level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of overcollateralization to
its required level.
Cross-collateralization. In addition to the foregoing, each Indenture
provides that Net Monthly Excess Cashflow generated by the related
Loan Group may be used to cover certain shortfalls in Available Funds
in the other Loan Group, subject to certain prior distribution
requirements of Available Funds in such Loan Group.
See 'Description of the Notes--Class-A-F Notes--Overcollateral-
ization Provisions' and '--Cross-collateralization Provisions' and
'Class A-V Notes--Overcollateralization Provisions' and
'--Cross-collateralization Provisions' herein.
The Note Insurance Policies. The Class A-F Notes and the Class A-V
Notes will each have the benefit of a Note Insurance Policy, as
discussed more fully herein. See 'Description of the Notes--Note
Insurance Policies' herein.
Mandatory Prepayments
on the Notes............................ The Class A-F Notes and the Class A-V Notes, as applicable, will be
prepaid in part on the Payment Date immediately following the end of
the related Funding Period in the event that any amount remains on
deposit in the related Pre-Funding Account on such Payment Date after
the purchase by the related Issuer of the related Subsequent Loans,
if any. Although no assurance can be given, it is anticipated that
the principal amount of the Subsequent Fixed Rate Loans and
Subsequent Adjustable Rate Loans purchased by the related Issuer will
require the application of substantially all of the related Original
Pre-Funded Amount and that there should be no material amount of
principal prepaid to the Class A-F Notes and the Class A-V Notes from
the related Pre-Funding Account. However, it is unlikely that the
Seller will be able to sell Subsequent Fixed Rate Loans and
Subsequent Adjustable Rate Loans to the related Issuer with an
aggregate Principal Balance identical to the related Original
Pre-Funded Amount and, therefore, a prepayment will likely occur. See
'Description of the Notes--Mandatory Prepayments on the Notes'
herein.
Advances.................................. Prior to each Payment Date, the Sub-Servicer is required under the
sub-servicing agreement, and the Master Servicer is required under
the Servicing Agreement (as defined herein), to make advances
('Advances') in respect of delinquent payments of interest on the
Loans, subject to the limitations described herein. See 'Description
of the Notes--Advances' herein and 'Description of the Securities' in
the Prospectus.
Optional Redemption of the Notes.......... The Class A-F Notes and the Class A-V Notes may be redeemed in whole,
but not in part, by the holder of a majority of the related
Certificates on any Payment Date on or after the Payment Date on
which the aggregate Principal Balance of the Fixed Rate Loans and
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the Adjustable Rate Loans is less than or equal to 10% and 10%,
respectively, of the related Original Pool Balance. See 'Description
of the Notes--Optional Redemption' herein and 'Description of the
Securities--Termination' in the Prospectus.
Special Prepayment Considerations......... The rate and timing of principal payments on the Notes will depend,
among other things, on the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of the
related Loans due to a breach of a representation or warranty) on the
related Loans. As is the case with mortgage-backed securities
generally, the Notes are subject to substantial inherent cash-flow
uncertainties because the Loans may be prepaid at any time; however,
a prepayment may subject the related Mortgagor to a prepayment charge
with respect to approximately 68.12% and 58.97% of the Initial Fixed
Rate Loans and Initial Adjustable Rate Loans, respectively (each by
aggregate principal balance of the related Loan Group as of the
Cut-off Date). Generally, when prevailing interest rates increase,
prepayment rates on mortgage loans tend to decrease, resulting in a
slower return of principal to investors at a time when reinvestment
at such higher prevailing rates would be desirable. Conversely, when
prevailing interest rates decline, prepayment rates on mortgage loans
tend to increase, resulting in a faster return of principal to
investors at a time when reinvestment at comparable yields may not be
possible. Typically, the Initial Loans with a prepayment charge
provision provide for a prepayment charge for partial prepayments and
full prepayments. Prepayment charges may be payable for a period of
time ranging from one to five years from origination. Such prepayment
charges may reduce the rate of prepayment on the Loans.
Investors should be aware that 13.67% of the Initial Fixed Rate Loans
are secured by second liens on the related Mortgaged Properties. In
addition, some of the Subsequent Fixed Rate Loans may be secured by
second liens on the related Mortgaged Properties. Generally, Loans
secured by second liens are not viewed by Mortgagors as permanent
financing. Accordingly, such Fixed Rate Loans may experience a higher
rate of prepayment than Fixed Rate Loans secured by first liens. None
of the Adjustable Rate Loans are secured by second liens.
See 'Certain Yield and Prepayment Considerations' herein, and
'Maturity and Prepayment Considerations' in the Prospectus.
Special Yield Considerations.............. The yield to maturity on the Notes will depend on, among other
things, the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of the related
Loans due to a breach of a representation or warranty) on the related
Loans and the allocation thereof to reduce the related Note Principal
Balance thereof. The yield to maturity on the Notes will also depend
on the related Note Interest Rate and the purchase price for such
Notes. If the Notes are purchased at a premium and principal payments
thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Notes are
purchased at a discount and principal payments thereon occur at a
rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at
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the time of purchase. The Notes were structured assuming, among other
things, a prepayment rate and corresponding weighted average lives as
described herein. The prepayment, yield and other assumptions to be
used for pricing purposes for the Notes may vary as determined at the
time of sale. See 'Certain Yield and Prepayment Considerations'
herein and 'Yield Considerations' in the Prospectus.
Material Federal Income Tax
Consequences............................ Upon the issuance of the Notes, Thacher Proffitt & Wood, counsel to
the Depositor, will deliver its opinion generally to the effect that
based on the application of existing law and assuming compliance with
the related Trust Agreement for federal income tax purposes (a) each
of the Class A-F Notes and the Class A-V Notes will be characterized
as indebtedness and not as representing an ownership interest in the
related Trust Estate or an equity interest in the related Issuer or
the Depositor, and (b) each of the Series 1998-2F Issuer and the
Series 1998-2V Issuer will not be (i) classified as an association
taxable as a corporation for federal income tax purposes, (ii) a
taxable mortgage pool as defined in Section 7701(i) of the Code, or
(iii) a 'publicly traded partnership' as defined in Treasury
Regulation Section 1.7704-1. Each holder of a Note, by its acceptance
of such Note, will agree to treat the Notes as indebtedness. For
further information regarding certain federal income tax consequences
of an investment in the Notes see 'Material Federal Income Tax
Consequences' herein and 'Material Federal Income Tax Consequences'
and 'State Tax Consequences' in the Prospectus.
ERISA Considerations...................... A fiduciary of an employee benefit plan and 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, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), or Section 4975 of the Code (each,
a 'Plan') should carefully review with its legal advisors whether the
purchase or holding of Notes could give rise to a transaction that is
prohibited or is not otherwise permissible either under ERISA or
Section 4975 of the Code or cause the related Loans securing the
Notes to be treated as plan assets for purposes of regulations of the
Department of Labor set forth in 29 C.F.R. 2510.3-101 (the 'Plan
Asset Regulations'). Although certain exceptions from the application
of the prohibited transaction rules and the Plan Asset Regulations
exist, there can be no assurance that any such exception will apply
with respect to the acquisition of the Notes. Although not entirely
free from doubt, it is believed that, as of the date hereof, the
Notes will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations. Accordingly, a
Plan that acquires the Notes should not be treated as having acquired
a direct interest in the assets of the related Issuer. However, there
can be no complete assurance that the Notes will be treated as debt
obligations without significant equity features for purposes of the
Plan Asset Regulations. Investors are advised to consult their
counsel and to review 'ERISA Considerations' herein and in the
Prospectus.
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Legal Investment.......................... The Notes will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. Institutions whose investment activities are subject to
legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment
in the Notes. See 'Legal Investment' herein.
Rating.................................... It is a condition to the issuance of each Series of Notes that each
Series of the Notes be rated 'AAA' by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ('S&P') and
'Aaa' by Moody's Investors Service, Inc. ('Moody's'). 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 Loans, or the corresponding effect on yield to
investors. The ratings issued by S&P and Moody's on payment of
principal and interest on the Class A-V Notes do not cover the
payment of the Carry-Forward Amount. See 'Certain Yield and
Prepayment Considerations' and 'Ratings' herein.
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RISK FACTORS
Prospective Noteholders should consider, among other things, the items
discussed under 'Risk Factors' in the Prospectus and the following factors in
connection with the purchase of the Notes:
UNDERWRITING STANDARDS
The Loans were underwritten generally in accordance with underwriting
standards described in 'Description of the Home Equity Loan Pool--Underwriting'
below which are primarily intended to provide single family mortgage loans for
non-conforming credits which do not satisfy the requirements of typical 'A'
credit borrowers. A 'non-conforming credit' means a mortgage loan which is
ineligible for purchase by FNMA or FHLMC due to credit characteristics that do
not meet the FNMA or FHLMC underwriting guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such FNMA or FHLMC underwriting guidelines. Accordingly,
Loans underwritten under Pacific's (as defined herein) non-conforming credit
underwriting standards or to standards that do not meet the requirements for
typical 'A' credit borrowers are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the FNMA or FHLMC underwriting
guidelines or typical 'A' credit borrowers.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately 0.32% and 0.24% of the Initial Fixed Rate Loans and the
Initial Adjustable Rate Loans, respectively (each by aggregate principal balance
of the related Loan Group as of the Cut-off Date), were thirty days or more but
less than sixty days delinquent in their Monthly Payments as of the Cut-off
Date. None of the Initial Fixed Rate Loans and the Initial Adjustable Rate Loans
were sixty days or more delinquent in their Monthly Payments as of the Cut-off
Date.
Approximately 26.80% and 23.61% of the Initial Fixed Rate Loans and Initial
Adjustable Rate Loans, respectively (each by aggregate principal balance of the
related Loan Group as of the Cut-off Date), are secured by Mortgaged Properties
located in the State of California. In the event California experiences a
decline in real estate values, losses on the Loans may be greater than otherwise
would be the case.
Approximately 38.70% and 25.42% of the Initial Fixed Rate Loans and Initial
Adjustable Rate Loans, respectively (each by aggregate principal balance of the
related Loan Group as of the Cut-off Date), have Loan-to-Value Ratios (as
defined herein) in excess of 80%. None of such Loans are covered by a primary
mortgage insurance policy and consequently, such Loans will be affected to a
greater extent than Loans with a Loan-to-Value Ratio (as defined herein) equal
to or less than 80% by any decline in the value of the related Mortgaged
Property. No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Loans, and any secondary financing on the Mortgaged Properties, become equal to
or greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
Approximately 3.19% of the Initial Fixed Rate Loans (by aggregate principal
balance of the Fixed Rate Loans as of the Cut-off Date ) require monthly
payments of principal based on 30 year amortization schedules and have scheduled
maturity dates of 15 years from the due date of the first monthly payment (each
such Fixed Rate Loan, a 'Balloon Loan'), in each case leaving a substantial
portion of the original principal amount due and payable on the respective
scheduled maturity date (a 'Balloon Payment'). The Balloon Loans entail a
greater degree of risk for prospective investors because the ability of a
mortgagor to make a Balloon Payment typically will depend upon the mortgagor's
ability either to refinance the related Balloon Loan or to sell the related
Mortgaged Property. The mortgagor's ability to sell or refinance will be
affected by a number of factors, including the level of prevailing mortgage
rates at the time of sale or refinancing, the mortgagor's equity in the related
Mortgaged Property, the financial condition and credit profile of the mortgagor,
applicable tax laws and general economic conditions. None of the Depositor, the
Master Servicer, the Indenture Trustee, the Seller or any
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of their respective affiliates, nor any other person, is obligated to refinance
any Balloon Loan. In addition, the Master Servicer and the Sub-Servicer are not
obligated to make delinquent principal Advances with respect to any such Balloon
Payment. See 'Description of the Servicing Agreements--Advances' herein.
Approximately 13.67% of the Initial Fixed Rate Loans (by aggregate
principal balance of the Fixed Rate Loans as of the Cut-off Date) are secured by
second liens on the related Mortgaged Properties, which liens are subordinate to
the rights of the mortgagee under the related first lien. Accordingly, investors
will be subject to a loss if the holder of a first lien on the related Mortgaged
Property is successful in foreclosure of its mortgage since second liens or
encumbrances do not survive such a foreclosure. Also, due to the priority of the
first lien on the related Mortgaged Property, the holder of a Fixed Rate Loan
secured by a second lien may not be able to control the timing, method or
procedure of any foreclosure action relating to the Mortgaged Property.
Investors should be aware that any liquidation, insurance or condemnation
proceeds received in respect of such Fixed Rate Loans will be available to
satisfy the outstanding balance of such Fixed Rate Loans only to the extent that
the claims of such first liens have been satisfied in full, including any
related foreclosure costs. None of the Adjustable Rate Loans are secured by
second liens.
THE SUBSEQUENT LOANS
Subsequent Loans may have characteristics different from those of the
Initial Loans. However, each Subsequent Loan must satisfy the eligibility
criteria referred to herein under 'Description of the Home Equity Loan Pool' at
the time of its conveyance to the related Trust Estate and must be underwritten
in accordance with the criteria set forth herein under 'Description of the Home
Equity Loan Pool--Underwriting.'
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Class A-F Pre-Funding Account
and the Class A-V Pre-Funding Account have not been fully applied to the
purchase of related Subsequent Loans by the related Issuer by the end of the
related Funding Period, the holders of the Class A-F Notes and the Class A-V
Notes, as applicable, will receive, as described herein, on the Payment Date
immediately following the end of the related Funding Period, any amounts in the
related Pre-Funding Account after giving effect to any purchase of related
Subsequent Loans. Although no assurances can be given, the Issuer intends that
the principal amount of Subsequent Loans sold to the related Trust Estate will
require the application of substantially all amounts on deposit in the related
Pre-Funding Account and that there will be no material principal payment to the
Class A-F Notes and the Class A-V Notes on such Payment Date.
RISK OF HOME EQUITY LOAN YIELD REDUCING NOTE INTEREST RATE ON THE CLASS A-V
NOTES
The Note Interest Rate on the Adjustable Rate Loans is based upon, among
other factors as described herein under 'Description of the Notes--Class A-V
Notes--Interest Payments on the Notes,' the value of an index (One-Month LIBOR
(as defined herein)) which is different from the value of the Index applicable
to the Adjustable Rate Loans (Six-Month LIBOR) (as defined herein)), as
described under 'Description of the Home Equity Loan Pool' herein. The Mortgage
Rate of each Adjustable Rate Loan adjusts semi-annually, commencing on the
related first Adjustment Date (each 2/28 and 2/13, 3/27 and 5/25 Loan will not
have a first Adjustment Date until two years, three years and five years,
respectively, from the origination of each such 2/28 or 2/13, 3/27 and 5/25
Loan), based upon the Index, whereas the Class A-V Note Interest Rate adjusts
monthly based upon One-Month LIBOR plus 0.17% (or after the Payment Date which
occurs on or prior to the date on which the sum of the aggregate Principal
Balance of the Adjustable Rate Loans is less than or equal to 10% of the Class
A-V Original Pool Balance, One-Month LIBOR plus 0.34%), limited by the Maximum
Interest Rate (as defined herein). In addition, One-Month LIBOR and the Index on
the Adjustable Rate Loans may respond differently to economic and market
factors, and there is not necessarily any correlation between them. Moreover,
the Adjustable Rate Loans are subject to Periodic Rate Caps, Maximum Mortgage
Rates and Minimum Mortgage Rates (each, as defined herein). Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which the
Index is stable or falling or that, even if both One-Month LIBOR and the Index
rises during the same period, One-Month LIBOR may rise much more rapidly than
the Index. See 'Description of the Notes--Class A-V Notes--Interest Payments on
the Notes.'
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DESCRIPTION OF THE HOME EQUITY LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the Fixed Rate Loans and the Adjustable Rate Loans included in
the related Trust Estate as of the Closing Date (the 'Initial Fixed Rate Loans'
and the 'Initial Adjustable Rate Loans,' respectively, and together the 'Initial
Loans') and does not include Fixed Rate Loans and Adjustable Rate Loans
purchased by the related Issuer and included in the related Trust Estate after
the Closing Date (the 'Subsequent Fixed Rate Loans' and the 'Subsequent
Adjustable Rate Loans,' respectively, and together with the Initial Loans, the
'Loans').
Subsequent Fixed Rate Loans and Subsequent Adjustable Rate Loans are
intended to be purchased by the related Issuer from the Seller from time to time
on or before August 25, 1998, from funds on deposit in the related Pre-Funding
Account. The Subsequent Fixed Rate Loans and the Subsequent Adjustable Rate
Loans, if available, will be sold by the Seller to the related Issuer for
inclusion in the related Trust Estate. The related Purchase Agreement (as
defined below) will provide that the Subsequent Fixed Rate Loans and the
Adjustable Rate Loans must conform to certain specified characteristics
described below under '--Fixed Rate Loans--Conveyance of Subsequent Loans and
the Pre-Funding Account' and '--Adjustable Rate Loans--Conveyance of Subsequent
Loans and the Pre-Funding Account'. In the sole discretion of the Note Insurer,
Subsequent Loans with characteristics varying from those described herein may be
purchased by the related Issuer and included in the related Trust Estate.
FIXED RATE LOANS
General. The Home Equity Loan Pool with respect to the Fixed Rate Loans
will consist of fixed rate, monthly payment, first and second lien mortgage
loans with terms to maturity of not more than 30 years from the date of
origination or modification. As of the Cut-off Date, the principal balance of
the Initial Fixed Rate Loans was equal to $46,076,103.46. The Depositor will
acquire the Initial Fixed Rate Loans to be included in the Home Equity Loan Pool
from PacificAmerica Money Center, Inc. (in such capacity, the 'Seller'), on the
Closing Date pursuant to a Fixed Rate Loan purchase agreement (the 'Fixed Rate
Purchase Agreement') between the Depositor and the Seller. The Seller acquired
the Initial Fixed Rate Loans from its wholly-owned subsidiary Pacific Thrift &
Loan ('Pacific') as further described herein. All of the Fixed Rate Loans will
be master serviced by PacificAmerica Money Center, Inc. (in such capacity, the
'Master Servicer') and subserviced by Advanta Mortgage Corp. USA (the
'Sub-Servicer'). The Depositor will convey the Initial Fixed Rate Loans to the
related Issuer on the Closing Date pursuant to the related Trust Agreement. The
Seller and Pacific will make certain representations and warranties with respect
to the Fixed Rate Loans and, as more particularly described in the Prospectus,
each will have certain repurchase or substitution obligations in connection with
a breach of any such representation or warranty, or an omission or defect in
respect of certain constituent documents required to be delivered with respect
to the Fixed Rate Loans, if such breach, omission or defect cannot be cured and
it materially and adversely affects the value of the related Fixed Rate Loan or
the interests of holders of the Class A-F Notes or the Note Insurer. See
'Description of the Agreements--Representations and Warranties; Repurchases' in
the Prospectus. The Fixed Rate Loans will have been originated or acquired by
the Seller in accordance with the underwriting criteria described herein. See
'--Underwriting' below.
The representations and warranties made by the Seller and Pacific will be
pledged to the Indenture Trustee for the benefit of the Class A-F Noteholders
and the Note Insurer.
Approximately 38.70% of the Initial Fixed Rate Loans (by aggregate
principal balance of the Fixed Rate Loans as of the Cut-off Date), will have
Loan-to-Value Ratios in excess of 80%. Such Initial Fixed Rate Loans will not be
covered by a primary mortgage insurance policy. See 'Description of the
Agreements--Hazard Insurance Policies' in the Prospectus.
With respect to each Fixed Rate Loan, the loan-to-value ratio
('Loan-to-Value Ratio') at any given time generally will be the ratio, expressed
as a percentage, the numerator of which is the unpaid principal balance of such
Fixed Rate Loan, and the denominator of which is the lesser of (i) the appraised
value of the related Mortgaged Property as of the date of the appraisal used by
or on behalf of the Seller to underwrite such Fixed Rate Loan or (ii) the sale
price of the related Mortgaged Property if such a sale occurred at origination
of the
S-17
<PAGE>
Fixed Rate Loan. As of the Cut-off Date, the minimum and maximum Loan-to-Value
Ratios at origination for the Initial Loans were approximately 8.27% and 92.08%,
respectively, and the weighted average Loan-to-Value Ratio at origination of the
Initial Fixed Rate Loans was approximately 70.02% . As of the Cut-off Date, the
minimum and maximum Combined Loan-to-Value Ratios (as defined below) at
origination for the Initial Fixed Rate Loans were approximately 13.40% and
92.08%, respectively, and the weighted average Combined Loan-to-Value Ratio at
origination of the Initial Fixed Rate Loans was approximately 76.78%. With
respect to each Fixed Rate Loan secured by a Mortgaged Property that is subject
to a second lien, the 'Combined Loan-to-Value Ratio' at any given time generally
will be the ratio, expressed as a percentage, the numerator of which is the sum
of (i) the unpaid principal balance of the Fixed Rate Loan plus (ii) the
original principal balance of any second lien on the related Mortgaged Property
as of such date, and the denominator of which is the lesser of (i) the appraised
value of the related Mortgaged Property as of the date of the appraisal used by
or on behalf of the Seller to underwrite such Fixed Rate Loan or (ii) the sale
price of the related Mortgaged Property if such a sale occurred at origination
of the Fixed Rate Loan.
The Fixed Rate Loans will contain a customary 'due-on-sale' clause. See
'Certain Yield and Prepayment Considerations' herein. Pursuant to the terms of
the related Servicing Agreement, the Master Servicer or the Sub-Servicer, as the
case may be, will be entitled to all late payment charges and prepayment
penalties received on the Fixed Rate Loans as additional servicing compensation
and such amounts will not be available for distribution on the Class A-F Notes.
Fixed Rate Loan Characteristics. All percentages of the Initial Fixed Rate
Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate principal balance of the Fixed Rate Loans as of the
Cut-off Date.
The Initial Fixed Rate Loans generally have original terms to stated
maturity of approximately 30 years.
Approximately 13.67% of the Initial Fixed Rate Loans (by aggregate
principal balance of the Fixed Rate Loans as of the Cut-off Date) are secured by
second liens on the related Mortgaged Properties.
As of the Cut-off Date, each Initial Fixed Rate Loan will have an unpaid
principal balance of not less than $18,074 or more than $437,500 and the average
unpaid principal balance of the Initial Fixed Rate Loans will be approximately
$79,442. The latest stated maturity date of any of the Initial Fixed Rate Loans
will be in July 2028; however, the actual date on which any Initial Fixed Rate
Loan is paid in full may be earlier than the stated maturity date due to
unscheduled payments of principal.
The weighted average remaining term to stated maturity of the Initial Fixed
Rate Loans will be approximately 321 months. The weighted average original term
to maturity of the Initial Fixed Rate Loans will be approximately 322 months.
The earliest year of origination of any Initial Fixed Rate Loan is 1997 and
the latest month and year of origination is June 1998.
With respect to approximately 18.30% of the Initial Fixed Rate Loans (by
aggregate principal balance of the Fixed Rate Loans as of the Cut-off Date), the
related mortgagors have obtained secondary financing from Pacific on the related
Mortgaged Property, which second lien is not included in the related Trust
Estate. There can be no assurance, however, that the mortgagors have not
obtained or will not obtain secondary financing from sources other than the
Seller and its affiliates.
Certain of the Initial Fixed Rate Loans provide for payment of a prepayment
charge. As to each such Fixed Rate Loan, the prepayment charge provisions
typically provide for payment of a prepayment charge for partial prepayments and
full prepayments. Prepayments may be payable for a period of time ranging from
one to five years from origination date. Prepayment charges received on the
Fixed Rate Loans will be available for distribution on the Class A-F Notes.
None of the Initial Fixed Rate Loans are Buydown Loans.
Approximately 3.19% of the Initial Fixed Rate Loans are Balloon Loans.
Set forth below is a description of certain additional characteristics of
the Initial Fixed Rate Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
S-18
<PAGE>
FIXED RATE LOAN GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
STATE FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Alaska..................................................... 5 $ 437,330 0.95%
Arizona.................................................... 11 896,428 1.95
California................................................. 116 12,347,151 26.80
Colorado................................................... 8 642,450 1.39
Connecticut................................................ 6 527,105 1.14
Delaware................................................... 6 458,887 1.00
Florida.................................................... 42 2,759,963 5.99
Georgia.................................................... 4 280,049 0.61
Hawaii..................................................... 1 252,701 0.55
Iowa....................................................... 2 232,001 0.50
Idaho...................................................... 8 750,012 1.63
Illinois................................................... 9 583,171 1.27
Indiana.................................................... 7 356,239 0.77
Kansas..................................................... 2 44,162 0.10
Kentucky................................................... 6 541,687 1.18
Louisiana.................................................. 7 402,155 0.87
Massachusetts.............................................. 12 990,818 2.15
Maryland................................................... 8 343,310 0.75
Maine...................................................... 2 170,850 0.37
Michigan................................................... 7 675,063 1.47
Minnesota.................................................. 5 340,736 0.74
Missouri................................................... 4 240,336 0.52
Mississippi................................................ 2 102,390 0.22
Montana.................................................... 3 288,480 0.63
North Carolina............................................. 3 161,709 0.35
Nebraska................................................... 3 168,185 0.37
New Hampshire.............................................. 8 598,483 1.30
New Jersey................................................. 37 3,338,240 7.25
New Mexico................................................. 4 383,641 0.83
Nevada..................................................... 14 1,023,549 2.22
New York................................................... 43 3,437,708 7.46
Ohio....................................................... 25 1,613,201 3.50
Oklahoma................................................... 13 944,727 2.05
Oregon..................................................... 10 779,873 1.69
Pennsylvania............................................... 55 2,813,941 6.11
Rhode Island............................................... 5 379,399 0.82
South Carolina............................................. 1 34,300 0.07
Tennessee.................................................. 4 219,633 0.48
Texas...................................................... 24 1,621,957 3.52
Utah....................................................... 13 988,450 2.15
Virginia................................................... 8 530,138 1.15
Washington................................................. 22 2,131,035 4.63
Wisconsin.................................................. 4 204,482 0.44
Wyoming.................................................... 1 39,980 0.09
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
No more than approximately 0.95% of the Initial Fixed Rate Loans will be
secured by Mortgaged Properties in any one zip code.
S-19
<PAGE>
PRINCIPAL BALANCES OF THE INITIAL FIXED RATE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
ORIGINAL HOME EQUITY INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PRINCIPAL BALANCE($) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
0.01- 25,000.00...................................... 60 $ 1,321,353 2.87%
25,000.01- 50,000.00...................................... 183 6,967,490 15.12
50,000.01- 75,000.00...................................... 122 7,526,335 16.33
75,000.01-100,000.00...................................... 75 6,537,330 14.19
100,000.01-125,000.00...................................... 45 5,098,583 11.07
125,000.01-150,000.00...................................... 35 4,819,092 10.46
150,000.01-175,000.00...................................... 14 2,274,847 4.94
175,000.01-200,000.00...................................... 12 2,269,178 4.92
200,000.01-225,000.00...................................... 9 1,915,748 4.16
225,000.01-250,000.00...................................... 4 956,246 2.08
250,000.01-275,000.00...................................... 6 1,588,293 3.45
275,000.01-300,000.00...................................... 6 1,723,749 3.74
300,000.01-325,000.00...................................... 4 1,270,563 2.76
325,000.01-350,000.00...................................... 4 1,369,795 2.97
400,000.01-450,000.00...................................... 1 437,500 0.95
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The average principal balance of the Initial Fixed Rate Loans at
origination will be approximately $79,499.
PRINCIPAL BALANCES OF THE INITIAL FIXED RATE LOANS AT THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
CUT-OFF DATE HOME EQUITY INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PRINCIPAL BALANCE($) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
0.01- 25,000.00...................................... 60 $ 1,321,353 2.87%
25,000.01- 50,000.00...................................... 183 6,967,490 15.12
50,000.01- 75,000.00...................................... 122 7,526,335 16.33
75,000.01-100,000.00...................................... 75 6,537,330 14.19
100,000.01-125,000.00...................................... 45 5,098,583 11.07
125,000.01-150,000.00...................................... 35 4,819,092 10.46
150,000.01-175,000.00...................................... 14 2,274,847 4.94
175,000.01-200,000.00...................................... 12 2,269,178 4.92
200,000.01-225,000.00...................................... 9 1,915,748 4.16
225,000.01-250,000.00...................................... 4 956,246 2.08
250,000.01-275,000.00...................................... 6 1,588,293 3.45
275,000.01-300,000.00...................................... 6 1,723,749 3.74
300,000.01-325,000.00...................................... 4 1,270,563 2.76
325,000.01-350,000.00...................................... 4 1,369,795 2.97
400,000.01-450,000.00...................................... 1 437,500 0.95
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The average Cut-off Date principal balance of the Initial Fixed Rate Loans
will be approximately $79,442.
S-20
<PAGE>
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL TERM FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
120........................................................ 5 $ 234,351 0.51%
180........................................................ 192 9,035,934 19.61
240........................................................ 8 512,298 1.11
360........................................................ 375 36,293,520 78.77
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The weighted average Original Term to Maturity at origination of the
Initial Fixed Rate Loans will be approximately 322 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
REMAINING TERM FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
1-120.................................................... 5 $ 234,351 0.51%
121-180.................................................... 192 9,035,934 19.61
181-240.................................................... 8 512,298 1.11
301-360.................................................... 375 36,293,520 78.77
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The weighted average Remaining Term to Maturity at origination of the
Initial Fixed Rate Loans will be approximately 321 months.
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
DOCUMENTATION TYPE FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Limited.................................................... 19 $ 1,480,685 3.21%
Stated..................................................... 182 13,082,805 28.39
Full....................................................... 379 31,512,613 68.39
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Investor Non-Owner-Occupied................................ 52 $ 3,042,029 6.60%
Owner...................................................... 528 43,034,074 93.40
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-21
<PAGE>
RISK CATEGORIES OF INITIAL FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
RISK CATEGORY FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
A.......................................................... 145 $13,254,029 28.77%
A-......................................................... 189 17,231,692 37.40
B.......................................................... 103 7,350,813 15.95
C.......................................................... 83 4,648,475 10.09
C-......................................................... 12 648,759 1.41
D.......................................................... 43 2,493,666 5.41
Other...................................................... 5 448,670 0.97
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
See '--Underwriting' below for a description of the credit categories of
the Loans.
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached..................................... 507 $40,336,605 87.54%
Single Family Attached..................................... 32 2,044,202 4.44
Three- to Four-Family...................................... 18 1,676,686 3.64
Condominium................................................ 16 1,474,910 3.20
Townhouse.................................................. 7 543,700 1.18
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
PURPOSES OF INITIAL FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
PURPOSE FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
Refinance-Cashout.......................................... 314 $23,595,183 51.21%
Rate and Term Refinance.................................... 190 15,999,885 34.72
Purchase................................................... 76 6,481,036 14.07
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
See '--Underwriting' below for a description of loan purpose.
LIEN POSITIONS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
LIEN POSITION FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
1st liens.................................................. 444 $39,778,182 86.33%
2nd liens.................................................. 136 6,297,921 13.67
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-22
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(%) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
10.01-15.00................................................ 1 $ 31,487 0.07%
15.01-20.00................................................ 2 49,490 0.11
20.01-25.00................................................ 2 55,347 0.12
25.01-30.00................................................ 3 139,976 0.30
30.01-35.00................................................ 5 228,500 0.50
35.01-40.00................................................ 6 313,786 0.68
40.01-45.00................................................ 8 500,729 1.09
45.01-50.00................................................ 10 455,060 0.99
50.01-55.00................................................ 14 1,032,102 2.24
55.01-60.00................................................ 31 1,853,867 4.02
60.01-65.00................................................ 57 4,110,159 8.92
65.01-70.00................................................ 55 4,773,260 10.36
70.01-75.00................................................ 49 3,437,793 7.46
75.01-80.00................................................ 144 9,525,603 20.67
80.01-85.00................................................ 106 9,356,442 20.31
85.01-90.00................................................ 84 9,761,753 21.19
90.01-95.00................................................ 3 450,750 0.98
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The weighted average Combined Loan-to-Value Ratio at origination of the
Initial Fixed Rate Loans will be approximately 76.78%. In the case of Fixed Rate
Loans which are secured by first lien mortgages, the Combined Loan-to-Value
Ratio is the equivalent of the Original Loan-to-Value Ratio and there can be no
assurance that there are not second lien mortgages securing loans which are
subordinate to such first lien mortgages and not included in the related Trust
Estate.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS(%) FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
5.01-10.00................................................ 1 $ 31,000 0.07%
10.01-15.00................................................ 29 901,341 1.96
15.01-20.00................................................ 39 1,468,033 3.19
20.01-25.00................................................ 28 1,422,411 3.09
25.01-30.00................................................ 21 1,194,164 2.59
30.01-35.00................................................ 17 795,680 1.73
35.01-40.00................................................ 9 580,259 1.26
40.01-45.00................................................ 11 660,607 1.43
45.01-50.00................................................ 10 483,928 1.05
50.01-55.00................................................ 14 1,236,382 2.68
55.01-60.00................................................ 24 1,478,653 3.21
60.01-65.00................................................ 51 3,732,843 8.10
65.01-70.00................................................ 45 3,802,377 8.25
70.01-75.00................................................ 33 2,867,644 6.22
75.01-80.00................................................ 97 7,588,831 16.47
80.01-85.00................................................ 75 8,156,396 17.70
85.01-90.00................................................ 73 9,224,806 20.02
90.01-95.00................................................ 3 450,750 0.98
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The weighted average Loan-to-Value Ratio at origination of the Initial
Fixed Rate Loans will be approximately 70.02%.
S-23
<PAGE>
MORTGAGE RATES FOR INITIAL FIXED RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
6.51- 7.00................................................ 1 $ 164,728 0.36%
7.01- 7.50................................................ 1 110,000 0.24
7.51- 8.00................................................ 6 597,131 1.30
8.01- 8.50................................................ 26 4,038,798 8.77
8.51- 9.00................................................ 30 4,387,188 9.52
9.01- 9.50................................................ 32 3,727,919 8.09
9.51-10.00................................................ 69 6,360,441 13.80
10.01-10.50................................................ 51 4,446,032 9.65
10.51-11.00................................................ 68 5,657,242 12.28
11.01-11.50................................................ 49 3,719,676 8.07
11.51-12.00................................................ 52 2,899,364 6.29
12.01-12.50................................................ 38 1,707,909 3.71
12.51-13.00................................................ 63 3,413,686 7.41
13.01-13.50................................................ 28 1,278,386 2.77
13.51-14.00................................................ 29 1,657,922 3.60
14.01-14.50................................................ 14 503,007 1.09
14.51-15.00................................................ 11 765,459 1.66
15.01-15.50................................................ 5 328,474 0.71
15.51-16.00................................................ 5 205,348 0.45
16.01-16.50................................................ 1 50,695 0.11
16.51-17.00................................................ 1 56,700 0.12
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
The weighted average Mortgage Rate of the Initial Fixed Rate Loans will be
approximately 10.724% per annum.
NUMBER OF DAYS DELINQUENT
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
NUMBER OF DAYS DELINQUENT FIXED RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0-29 Days................................................. 578 $45,928,103 99.68%
30-59 Days................................................. 2 148,000 0.32
--- ----------------- -------
Total................................................. 580 $46,076,103 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-24
<PAGE>
Conveyance of Subsequent Loans and the Pre-Funding Account. Under the
Fixed Rate Purchase Agreement, following the initial issuance of the Class A-F
Notes, the Series 1998-2F Issuer will be obligated to purchase from the Seller
for inclusion in the related Trust Estate during the related Funding Period,
subject to the availability thereof, the Subsequent Fixed Rate Loans secured by
first and second liens on fee simple interests in one- to four-family
residential real properties. Each Subsequent Fixed Rate Loan will have been
underwritten in accordance with the criteria set forth herein under 'Description
of the Home Equity Loan Pool--Underwriting.' Subsequent Fixed Rate Loans will be
transferred to the Series 1998-2F Issuer pursuant to subsequent transfer
instruments (the 'Subsequent Transfer Instruments') between the Seller and the
Series 1998-2F Issuer. In connection with the purchase of Subsequent Fixed Rate
Loans on such dates of transfer (the 'Subsequent Transfer Dates'), the Series
1998-2F Issuer will be required to pay to the Seller from amounts on deposit in
the Class A-F Pre-Funding Account (as defined below) a cash purchase price of
100% of the principal balance thereof. In each instance in which Subsequent
Fixed Rate Loans are transferred pursuant to a Subsequent Transfer Instrument,
the Series 1998-2F Issuer will designate the cut-off date (such cut-off date the
'Subsequent Cut-off Date') with respect to the Subsequent Fixed Rate Loans
acquired on such date. The amount paid from the Class A-F Pre-Funding Account on
each Subsequent Transfer Date will not include accrued interest on the
Subsequent Fixed Rate Loans. Following each Subsequent Transfer Date, the
aggregate Principal Balance of the Fixed Rate Loans will increase by an amount
equal to the aggregate Principal Balance of the Subsequent Fixed Rate Loans so
acquired and the amount in the Class A-F Pre-Funding Account will decrease
accordingly.
On the Closing Date, approximately $15,959,776 (the 'Class A-F Original
Pre-Funded Amount') will be deposited in an, account (the 'Class A-F Pre-Funding
Account'), which account will be in the name of the Indenture Trustee and shall
be part of the related Trust Estate and which amount will be used to acquire
Subsequent Fixed Rate Loans. During the Class A-F Funding Period (as defined
herein), the Class A-F Original Pre-Funded Amount will be reduced (on any date
of determination, the related Class A-F Original Pre-Funded Amount as so
reduced, the 'Class A-F Pre-Funded Amount') by the amount thereof used to
purchase Subsequent Fixed Rate Loans. The 'Class A-F Funding Period' is the
period commencing on the Closing Date and ending on the earlier to occur of (i)
the date on which the amount on deposit in the Class A-F Funding Account is less
than $10,000 and (ii) August 25, 1998.
Any conveyance of Subsequent Fixed Rate Loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to: (a) each such
Subsequent Fixed Rate Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Fixed Rate
Purchase Agreement; (b) the Seller will select such Subsequent Fixed Rate Loans
in a manner that it reasonably believes is not adverse to the interests of the
Class A-F Noteholders or the Note Insurer; (c) the Seller will deliver certain
opinions of counsel acceptable to the Note Insurer and the Indenture Trustee
with respect to the validity of the conveyance of such Subsequent Fixed Rate
Loans; and (d) as of each Subsequent Cut-off Date, each Subsequent Fixed Rate
Loan will satisfy the following criteria: (i) such Subsequent Fixed Rate Loan
may not be 30 or more days contractually delinquent as of the related Subsequent
Cut-off Date; (ii) the remaining stated term to maturity of such Subsequent
Fixed Rate Loan will not exceed 360 months; (iii) such Subsequent Fixed Rate
Loan must have an outstanding Principal Balance of at least $20,000 and no more
than $500,000 as of the Subsequent Cut-off Date; (iv) such Subsequent Fixed Rate
Loan will be underwritten in accordance with the criteria set forth under
'Description of the Home Equity Loan Pool--Underwriting' herein; (v) such
Subsequent Fixed Rate Loan must have a Loan-to-Value Ratio at origination of no
more than 90.00%; and, if applicable, a Combined Loan-to-Value Ratio at
origination of no more than 90.00%; (vi) the stated maturity of such Subsequent
Fixed Rate Loan will be no later than 360 months; (vii) such Subsequent Fixed
Rate Loan must have a fixed Mortgage Rate of at least 8.00%; and (viii)
following the purchase of such Subsequent Fixed Rate Loans by the related
Issuer, the Fixed Rate Loans included in the related Trust Estate must have a
weighted average interest rate, a weighted average remaining term to maturity
and a weighted average Loan-to-Value Ratio at origination, as of each respective
Subsequent Cut-off Date, which does not vary materially from the Initial Fixed
Rate Loans included initially in the related Trust Estate and the percentage of
Fixed Rate Loans included in the related Trust Estate (by aggregate principal
balance) that are secured by second liens on the related Mortgaged Properties
shall be no greater than the percentage of Initial Fixed Rate Loans which are
secured by second liens and were included initially in the related Trust Estate.
In addition, the Indenture Trustee shall not agree to any transfer of Subsequent
Fixed Rate Loans without a signed certification from the Note Insurer that the
Subsequent Fixed Rate Loans are acceptable to the Note Insurer in its sole
discretion. Subsequent Fixed Rate Loans with
S-25
<PAGE>
characteristics varying from those set forth above may be purchased by the
related Issuer and included in the related Trust Estate in the sole discretion
of the Note Insurer. Upon the end of the Class A-F Funding Period, under certain
circumstances, the Note Insurer may adjust the related Required Subordination
Amount.
ADJUSTABLE RATE LOANS
General. The Home Equity Loan Pool with respect to the Adjustable Rate
Loans will consist of adjustable-rate, monthly payment, first lien mortgage
loans with terms to maturity of not more than 30 years from the date of
origination or modification. As of the Cut-off Date, the principal balance of
the Initial Adjustable Rate Loans was equal to $102,470,524.08. The Depositor
will acquire the Initial Adjustable Rate Loans to be included in the Home Equity
Loan Pool from the Seller, on the Closing Date pursuant to a Adjustable Rate
Loan purchase agreement (the 'Class A-V Purchase Agreement') between the
Depositor and the Seller. The Seller acquired the Initial Adjustable Rate Loans
from its wholly-owned subsidiary Pacific as further described herein. All of the
Adjustable Rate Loans will be master serviced by the Master Servicer and
subserviced by the Sub-Servicer. The Depositor will convey the Initial
Adjustable Rate Loans to the related Issuer on the Closing Date pursuant to the
related Trust Agreement. The Seller and Pacific will make certain
representations and warranties with respect to the Adjustable Rate Loans and, as
more particularly described in the Prospectus, each will have certain repurchase
or substitution obligations in connection with a breach of any such
representation or warranty, or an omission or defect in respect of certain
constituent documents required to be delivered with respect to the Adjustable
Rate Loans, if such breach, omission or defect cannot be cured and it materially
and adversely affects the value of the related Adjustable Rate Loans or the
interests of holders of the Class A-V Notes or the Note Insurer. See
'Description of the Agreements--Representations and Warranties; Repurchases' in
the Prospectus. The Adjustable Rate Loans will have been originated or acquired
by the Seller in accordance with the underwriting criteria described herein. See
'--Underwriting' below.
The representations and warranties made by the Seller and Pacific will be
pledged to the Indenture Trustee for the benefit of the Class A-V Noteholders
and the Note Insurer.
Approximately 25.42% of the Initial Adjustable Rate Loans (by aggregate
principal balance of the Adjustable Rate Loans as of the Cut-off Date), will
have Loan-to-Value Ratios in excess of 80%. Such Initial Adjustable Rate Loans
will not be covered by a primary mortgage insurance policy. See 'Description of
the Agreements--Hazard Insurance Policies' in the Prospectus.
With respect to each Adjustable Rate Loan, the loan-to-value ratio
('Loan-to-Value Ratio') at any given time generally will be the ratio, expressed
as a percentage, the numerator of which is the unpaid principal balance of such
Adjustable Rate Loan, and the denominator of which is the lesser of (i) the
appraised value of the related Mortgaged Property as of the date of the
appraisal used by or on behalf of the Seller to underwrite such Adjustable Rate
Loan or (ii) the sale price of the related Mortgaged Property if such a sale
occurred at origination of the Adjustable Rate Loan. As of the Cut-off Date, the
minimum and maximum Loan-to-Value Ratios at origination for the Adjustable Rate
Loans were approximately 8.85% and 93.00%, respectively, and the weighted
average Loan-to-Value Ratio at origination of the Adjustable Rate Loans was
approximately 74.47%.
The Adjustable Rate Loans will contain a customary 'due-on-sale' clause.
See 'Certain Yield and Prepayment Considerations' herein. Pursuant to the terms
of the related Servicing Agreement, the Master Servicer or the Sub-Servicer, as
the case may be, will be entitled to all late payment charges and prepayment
penalties received on the Loans as additional servicing compensation and such
amounts will not be available for distribution on the Class A-V Notes.
Mortgage Rate Adjustment. The Mortgage Rate (as defined herein) on each
Adjustable Rate Loan will be subject to adjustment, commencing (i) with respect
to approximately 9.44% of the Adjustable Rate Loans, approximately six months
after the date of origination, (ii) with respect to approximately 72.59% of the
Adjustable Rate Loans, approximately two years after origination (each such
Adjustable Rate Loan, a '2/28 or 2/13 Loan'), (iii) with respect to
approximately 15.30% of the Adjustable Rate Loans, approximately three years
after origination (each such Adjustable Rate Loan, a '3/27 Loan') and (iv) with
respect to approximately 2.68% of the Adjustable Rate Loans, approximately five
years after origination (each such Adjustable Rate Loan, a '5/25 Loan'). The
Mortgage Rate on each Adjustable Rate Loan adjusts, on the date set forth in the
related mortgage note (each such date an 'Adjustment Date') to a rate equal to
the sum, generally rounded to the
S-26
<PAGE>
nearest one-eighth of one percentage point (12.5 basis points), of (i) the Index
plus (ii) a fixed percentage (the 'Gross Margin'). In addition, the Mortgage
Rate on each Adjustable Rate Loan is subject on its first Adjustment Date
following its origination to a cap (the 'Initial Periodic Rate Cap') and on each
Adjustment Date thereafter to a periodic rate cap (the 'Periodic Rate Cap'). All
of the Adjustable Rate Loans are also subject to specified maximum and minimum
lifetime Mortgage Rates ('Maximum Mortgage Rate' and 'Minimum Mortgage Rate,'
respectively). The Initial Adjustable Rate Loans were generally originated with
an Initial Mortgage Rate below the sum of the current Index and the Gross
Margin. Due to the application of the Periodic Rate Caps, Maximum Mortgage Rates
and Minimum Mortgage Rates, the Mortgage Rate on any Adjustable Rate Loan, as
adjusted on any related Adjustment Date, may not equal the sum of the Index and
the Gross Margin. The Due Date for substantially all the Adjustable Rate Loans
is the first day of the month.
None of the Initial Adjustable Rate Loans will have reached their first
Adjustment Date as of the Closing Date. The Initial Mortgage Rate is generally
lower than the rate that would have been produced if the applicable Gross Margin
had been added to the Index in effect at origination. Adjustable Rate Loans that
have not reached their first Adjustment Date are, therefore, more likely to be
subject to the Periodic Rate Cap on their first Adjustment Date.
Six-Month LIBOR Index. The Index applicable to the determination of the
Mortgage Rate on all of the Initial Adjustable Rate Loans will be the average of
the interbank offered rates for six-month United States dollar deposits in the
London market based on quotations of major banks, as published in the Western
Edition of The Wall Street Journal ('Six-Month LIBOR') applicable on any
Adjustment Date is the most recent index figure available as of the first
business day of the month immediately preceding the month in which such
Adjustment Date occurs.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from FNMA, which values may differ from
those published in the Western Edition of The Wall Street Journal. Such average
rates may fluctuate significantly from month to month as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. There can be no assurance that levels of Six-Month LIBOR published by
FNMA, or published on a different Reference Date would have been at the same
levels as those set forth below. The following does not purport to be
representative of future levels of Six-Month LIBOR (as published by FNMA). No
assurance can be given as to the level of Six-Month LIBOR on any Adjustment Date
or during the life of any Adjustable Rate Loan based on Six-Month LIBOR.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
MONTH 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January...................................................... 3.44% 3.39% 6.69% 5.34% 5.71% 5.75%
February..................................................... 3.33 4.00 6.44 5.29 5.68 5.78
March........................................................ 3.38 4.25 6.44 5.52 5.96 5.80
April........................................................ 3.31 4.63 6.31 5.42 6.08 5.87
May.......................................................... 3.44 5.00 6.06 5.64 6.01 5.81
June......................................................... 3.56 5.25 5.88 5.84 5.94
July......................................................... 3.56 5.33 5.88 5.92 5.83
August....................................................... 3.44 5.33 5.94 5.74 5.86
September.................................................... 3.38 5.69 5.99 5.75 5.85
October...................................................... 3.50 6.00 5.95 5.58 5.80
November..................................................... 3.52 6.44 5.74 5.55 6.04
December..................................................... 3.50 7.00 5.56 5.62 6.01
</TABLE>
Adjustable Rate Loan Characteristics. All percentages of the Initial
Adjustable Rate Loans described herein are approximate percentages (except as
otherwise indicated) by aggregate principal balance of the Adjustable Rate Loans
as of the Cut-off Date.
The Initial Adjustable Rate Loans generally have original terms to stated
maturity of approximately 30 years.
S-27
<PAGE>
Effective with the first payment due on a Adjustable Rate Loan after each
related Adjustment Date, the Monthly Payment will be adjusted to an amount that
will fully amortize the outstanding principal balance of the Adjustable Rate
Loan over its remaining term. The weighted average number of months from the
Cut-off Date to the next Adjustment Date for the Initial Adjustable Rate Loans
is 24 months.
As of the Cut-off Date, each Initial Adjustable Rate Loan will have an
unpaid principal balance of not less than $19,822 or more than $749,533.83 and
the average unpaid principal balance of the Initial Adjustable Rate Loans will
be approximately $105,422. The latest stated maturity date of any of the Initial
Adjustable Rate Loans will be in July, 2028 however, the actual date on which
any Initial Adjustable Rate Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the Initial
Adjustable Rate Loans will be approximately 357.0 months. The weighted average
original term to maturity of the Initial Adjustable Rate Loans will be
approximately 357.8 months.
The earliest year of origination of any Initial Adjustable Rate Loan is
1997 and the latest month and year of origination is June 1998.
With respect to 20.29% of the Initial Adjustable Rate Loans (by aggregate
principal balance of the Adjustable Rate Loans as of the Cut-off Date), the
related mortgagors have obtained secondary financing from Pacific on the related
Mortgaged Property, which second lien is not included in the related Trust
Estate. There can be no assurance, however, that the mortgagors have not
obtained or will not obtain secondary financing from sources other than the
Seller and its affiliates.
Certain of the Initial Adjustable Rate Loans provide for payment of a
prepayment charge. As to each such Adjustable Rate Loan, the prepayment charge
provisions typically provide for payment of a prepayment charge for partial
prepayments and full prepayments. Prepayments may be payable for a period of
time ranging from one to five years from origination date. Prepayment charges
received on the Adjustable Rate Loans will be available for distribution on the
Notes.
None of the Initial Adjustable Rate Loans are Buydown Mortgage Loans.
Set forth below is a description of certain additional characteristics of
the Initial Adjustable Rate Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
S-28
<PAGE>
ADJUSTABLE RATE LOANS GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Alaska................................................. 1 $ 56,988 0.06%
Arizona................................................ 30 2,440,161 2.38
California............................................. 141 24,191,089 23.61
Colorado............................................... 20 2,251,825 2.20
Connecticut............................................ 31 3,261,438 3.18
Delaware............................................... 5 483,989 0.47
Florida................................................ 57 4,897,568 4.78
Georgia................................................ 11 1,953,838 1.91
Hawaii................................................. 2 622,634 0.61
Iowa................................................... 1 43,460 0.04
Idaho.................................................. 8 497,032 0.49
Illinois............................................... 29 2,194,611 2.14
Indiana................................................ 11 576,050 0.56
Kansas................................................. 15 1,235,183 1.21
Kentucky............................................... 5 319,815 0.31
Louisiana.............................................. 13 802,922 0.78
Massachusetts.......................................... 35 4,459,400 4.35
Maryland............................................... 17 1,338,200 1.31
Maine.................................................. 2 116,934 0.11
Michigan............................................... 15 1,232,209 1.20
Minnesota.............................................. 4 381,302 0.37
Missouri............................................... 11 1,157,150 1.13
Mississippi............................................ 1 25,987 0.03
Montana................................................ 7 591,199 0.58
North Carolina......................................... 7 470,025 0.46
Nebraska............................................... 3 123,548 0.12
New Hampshire.......................................... 9 626,677 0.61
New Jersey............................................. 116 12,752,821 12.45
New Mexico............................................. 5 402,610 0.39
Nevada................................................. 24 1,826,107 1.78
New York............................................... 79 10,304,372 10.06
Ohio................................................... 38 2,281,248 2.23
Oklahoma............................................... 9 582,023 0.57
Oregon................................................. 23 2,422,651 2.36
Pennsylvania........................................... 52 3,219,824 3.14
Rhode Island........................................... 7 573,301 0.56
South Carolina......................................... 1 264,000 0.26
South Dakota........................................... 1 36,387 0.04
Tennessee.............................................. 2 169,100 0.17
Texas.................................................. 65 5,083,076 4.96
Utah................................................... 21 2,268,366 2.21
Virginia............................................... 2 207,175 0.20
Washington............................................. 26 2,946,441 2.88
Wisconsin.............................................. 10 779,791 0.76
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
No more than approximately 0.73% of the Initial Adjustable Rate Loans will
be secured by Mortgaged Properties in any one zip code.
S-29
<PAGE>
INITIAL ADJUSTABLE RATE LOAN TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN TYPE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
2/13 Six Month LIBOR................................... 22 $ 978,803 0.96%
2/28 Six Month LIBOR................................... 714 73,320,382 71.55
3/12 Six Month LIBOR................................... 1 79,560 0.08
3/27 Six Month LIBOR................................... 116 15,673,910 15.30
5/25 Six Month LIBOR................................... 21 2,742,633 2.68
Six Month LIBOR........................................ 98 9,675,237 9.44
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
PRINCIPAL BALANCES OF THE INITIAL ADJUSTABLE RATE LOANS AT ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
ORIGINAL HOME EQUITY NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PRINCIPAL BALANCE ($) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
0.01- 25,000.00.................................. 31 $ 687,206 0.67%
25,000.01- 50,000.00.................................. 171 6,635,451 6.48
50,000.01- 75,000.00.................................. 212 13,120,286 12.80
75,000.01-100,000.00.................................. 180 15,570,557 15.20
100,000.01-125,000.00.................................. 127 14,273,313 13.93
125,000.01-150,000.00.................................. 66 9,120,833 8.90
150,000.01-175,000.00.................................. 57 9,221,774 9.00
175,000.01-200,000.00.................................. 34 6,367,916 6.21
200,000.01-225,000.00.................................. 29 6,167,060 6.02
225,000.01-250,000.00.................................. 16 3,797,739 3.71
250,000.01-275,000.00.................................. 11 2,887,311 2.82
275,000.01-300,000.00.................................. 6 1,741,751 1.70
300,000.01-325,000.00.................................. 11 3,469,577 3.39
325,000.01-350,000.00.................................. 7 2,399,733 2.34
350,000.01-400,000.00.................................. 3 1,145,149 1.12
400,000.01-450,000.00.................................. 3 1,235,955 1.21
450,000.01-500,000.00.................................. 2 951,476 0.93
500,000.01-550,000.00.................................. 1 530,250 0.52
550,000.01-600,000.00.................................. 3 1,747,653 1.71
600,000.01-650,000.00.................................. 1 650,000 0.63
700,000.01-750,000.00.................................. 1 749,534 0.73
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The average principal balance of the Initial Adjustable Rate Loans at
origination will be approximately $105,458.
S-30
<PAGE>
PRINCIPAL BALANCES OF THE INITIAL ADJUSTABLE RATE LOANS
AT THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
CUT-OFF DATE HOME EQUITY NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PRINCIPAL BALANCE ($) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
0.01- 25,000.00.................................. 31 $ 687,206 0.67%
25,000.01- 50,000.00.................................. 171 6,635,451 6.48
50,000.01- 75,000.00.................................. 212 13,120,286 12.80
75,000.01-100,000.00.................................. 180 15,570,557 15.20
100,000.01-125,000.00.................................. 127 14,273,313 13.93
125,000.01-150,000.00.................................. 66 9,120,833 8.90
150,000.01-175,000.00.................................. 57 9,221,774 9.00
175,000.01-200,000.00.................................. 34 6,367,916 6.21
200,000.01-225,000.00.................................. 29 6,167,060 6.02
225,000.01-250,000.00.................................. 16 3,797,739 3.71
250,000.01-275,000.00.................................. 11 2,887,311 2.82
275,000.01-300,000.00.................................. 6 1,741,751 1.70
300,000.01-325,000.00.................................. 11 3,469,577 3.39
325,000.01-350,000.00.................................. 7 2,399,733 2.34
350,000.01-400,000.00.................................. 3 1,145,149 1.12
400,000.01-450,000.00.................................. 3 1,235,955 1.21
450,000.01-500,000.00.................................. 2 951,476 0.93
500,000.01-550,000.00.................................. 1 530,250 0.52
550,000.01-600,000.00.................................. 3 1,747,653 1.71
600,000.01-650,000.00.................................. 1 650,000 0.63
700,000.01-750,000.00.................................. 1 749,534 0.73
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The average Cut-off Date principal balance of the Initial Adjustable Rate Loans
will be approximately $105,422.
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL TERM ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
180.................................................... 28 $ 1,269,382 1.24%
360.................................................... 944 101,201,142 98.76
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Original Term to Maturity at origination of the
Initial Adjustable Rate Loans will be approximately 358 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
REMAINING TERM ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
121-180................................................ 28 $ 1,269,382 1.24%
301-360................................................ 944 101,201,142 98.76%
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Remaining Term to Maturity at origination of the
Initial Adjustable Rate Loans will be approximately 357 months.
S-31
<PAGE>
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
DOCUMENTATION TYPE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Limited................................................ 45 $ 4,629,542 4.52%
Stated................................................. 271 34,185,686 33.36
Full................................................... 656 63,655,297 62.12
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Investor Non-Owner-Occupied............................ 79 $ 6,825,244 6.66%
Owner.................................................. 890 95,070,224 92.78
Secondary.............................................. 3 575,056 0.56
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
RISK CATEGORIES OF INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CATEGORY ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
A...................................................... 223 $ 29,758,909 29.04%
A-..................................................... 224 27,942,850 27.27
B...................................................... 144 14,120,300 13.78
C...................................................... 118 9,908,023 9.67
C-..................................................... 44 3,363,770 3.28
D...................................................... 197 16,280,776 15.89
Other.................................................. 22 1,095,897 1.07
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
See '--Underwriting' below for a description of the credit categories of
the Loans.
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Detached................................. 824 $ 88,998,944 86.85%
Single Family Attached................................. 44 3,629,032 3.54
Three- to Four-Family.................................. 28 3,058,757 2.99
Condominium............................................ 57 5,488,011 5.36
Townhouse.............................................. 18 1,237,680 1.21
Manufactured Housing................................... 1 58,100 0.06
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-32
<PAGE>
PURPOSES OF INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PURPOSE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Refinance-Cashout...................................... 335 $ 36,253,845 35.38%
Rate and Term Refinance................................ 304 31,207,254 30.45
Purchase............................................... 333 35,009,426 34.17
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
See '--Underwriting' below for a description of loan purpose.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
5.01-10.00............................................ 1 $ 27,000 0.03%
15.01-20.00............................................ 2 50,490 0.05
25.01-30.00............................................ 3 85,089 0.08
30.01-35.00............................................ 4 372,722 0.36
35.01-40.00............................................ 4 197,956 0.19
40.01-45.00............................................ 8 439,604 0.43
45.01-50.00............................................ 16 1,771,708 1.73
50.01-55.00............................................ 32 4,111,886 4.01
55.01-60.00............................................ 44 4,724,104 4.61
60.01-65.00............................................ 190 16,693,995 16.29
65.01-70.00............................................ 106 9,294,704 9.07
70.01-75.00............................................ 78 8,541,175 8.34
75.01-80.00............................................ 257 30,116,005 29.39
80.01-85.00............................................ 141 16,186,159 15.80
85.01-90.00............................................ 85 9,825,375 9.59
90.01-95.00............................................ 1 32,550 0.03
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Initial
Adjustable Rate Loans will be approximately 74.47%.
S-33
<PAGE>
MORTGAGE RATES AT ORIGINATION
FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
6.01- 6.50............................................ 2 $ 259,711 0.25%
6.51- 7.00............................................ 2 138,967 0.14
7.01- 7.50............................................ 5 940,777 0.92
7.51- 8.00............................................ 21 4,090,384 3.99
8.01- 8.50............................................ 42 6,621,410 6.46
8.51- 9.00............................................ 88 13,885,350 13.55
9.01- 9.50............................................ 71 10,013,500 9.77
9.51-10.00............................................ 132 15,220,274 14.85
10.01-10.50............................................ 106 10,483,178 10.23
10.51-11.00............................................ 106 9,605,012 9.37
11.01-11.50............................................ 64 5,023,729 4.90
11.51-12.00............................................ 57 4,976,808 4.86
12.01-12.50............................................ 30 2,157,081 2.11
12.51-13.00............................................ 44 2,966,691 2.90
13.01-13.50............................................ 23 2,071,016 2.02
13.51-14.00............................................ 44 3,671,297 3.58
14.01-14.50............................................ 39 3,259,084 3.18
14.51-15.00............................................ 45 3,510,278 3.43
15.01-15.50............................................ 26 1,931,278 1.88
15.51-16.00............................................ 16 1,166,434 1.14
16.01-16.50............................................ 7 399,719 0.39
16.51-17.00............................................ 2........... 78,547 0.08
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Mortgage Rate of the Initial Adjustable Rate Loans at
origination will be approximately 10.605% per annum.
S-34
<PAGE>
MINIMUM MORTGAGE RATES AT CUT-OFF DATE
FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MINIMUM MORTGAGE RATES(%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
6.01- 6.50............................................ 2 $ 259,711 0.25%
6.51- 7.00............................................ 2 138,967 0.14
7.01- 7.50............................................ 5 940,777 0.92
7.51- 8.00............................................ 21 4,090,384 3.99
8.01- 8.50............................................ 42 6,621,410 6.46
8.51- 9.00............................................ 88 13,885,350 13.55
9.01- 9.50............................................ 71 10,013,500 9.77
9.51-10.00............................................ 133 15,272,227 14.90
10.01-10.50............................................ 106 10,483,178 10.23
10.51-11.00............................................ 105 9,553,059 9.32
11.01-11.50............................................ 64 5,023,729 4.90
11.51-12.00............................................ 57 4,976,808 4.86
12.01-12.50............................................ 30 2,157,081 2.11
12.51-13.00............................................ 44 2,966,691 2.90
13.01-13.50............................................ 23 2,071,016 2.02
13.51-14.00............................................ 44 3,671,297 3.58
14.01-14.50............................................ 39 3,259,084 3.18
14.51-15.00............................................ 45 3,510,278 3.43
15.01-15.50............................................ 26 1,931,278 1.88
15.51-16.00............................................ 16 1,166,434 1.14
16.01-16.50............................................ 7 399,719 0.39
16.51-17.00............................................ 2 78,547 0.08
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Minimum Mortgage Rate of the Initial Adjustable Rate
Loans as of Cut-off Date will be approximately 10.605% per annum.
S-35
<PAGE>
NEXT ADJUSTMENT DATE
FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
NEXT ADJUSTMENT DATE ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
September 1, 1998...................................... 4 $ 269,991 0.26%
October 1, 1998........................................ 26 2,915,795 2.85
November 1, 1998....................................... 35 3,139,456 3.06
December 1, 1998....................................... 32 3,192,995 3.12
January 1, 1999........................................ 1 157,000 0.15
November 1, 1999....................................... 1 202,586 0.20
December 1, 1999....................................... 1 272,475 0.27
January 1, 2000........................................ 1 96,174 0.09
February 1, 2000....................................... 4 234,901 0.23
March 1, 2000.......................................... 1 57,961 0.06
April 1, 2000.......................................... 120 11,403,784 11.13
May 1, 2000............................................ 313 32,776,840 31.99
June 1, 2000........................................... 279 28,017,627 27.34
July 1, 2000........................................... 16 1,236,835 1.21
April 1, 2001.......................................... 15 1,849,402 1.80
May 1, 2001............................................ 46 7,150,292 6.98
June 1, 2001........................................... 56 6,753,775 6.59
April 1, 2003.......................................... 4 536,291 0.52
May 1, 2003............................................ 8 970,942 0.95
June 1, 2003........................................... 9 1,235,400 1.21
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average remaining months to the next Adjustment Date of the
Initial Adjustable Rate Loans will be approximately 24 months.
S-36
<PAGE>
MAXIMUM MORTGAGE RATE
FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MAXIMUM MORTGAGE RATES (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
12.51-13.00............................................ 2 $ 259,711 0.25%
13.01-13.50............................................ 2 138,967 0.14
13.51-14.00............................................ 5 940,777 0.92
14.01-14.50............................................ 21 4,090,384 3.99
14.51-15.00............................................ 42 6,621,410 6.46
15.01-15.50............................................ 88 13,885,350 13.55
15.51-16.00............................................ 71 10,013,500 9.77
16.01-16.50............................................ 133 15,272,227 14.90
16.51-17.00............................................ 106 10,483,178 10.23
17.01-17.50............................................ 105 9,553,059 9.32
17.51-18.00............................................ 64 5,023,729 4.90
18.01-18.50............................................ 57 4,976,808 4.86
18.51-19.00............................................ 30 2,157,081 2.11
19.01-19.50............................................ 44 2,966,691 2.90
19.51-20.00............................................ 23 2,071,016 2.02
20.01-20.50............................................ 44 3,671,297 3.58
20.51-21.00............................................ 39 3,259,084 3.18
21.01-21.50............................................ 45 3,510,278 3.43
21.51-22.00............................................ 26 1,931,278 1.88
22.01-22.50............................................ 16 1,166,434 1.14
22.51-23.00............................................ 7 399,719 0.39
23.01-23.50............................................ 2 78,547 0.08
--- ----------------- -------
Total............................................. 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Maximum Mortgage Rate of the Initial Adjustable Rate
Loans will be approximately 17.105% per annum.
GROSS MARGIN FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
GROSS MARGIN (%) ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
4.01- 4.50............................................ 5 $ 990,867 0.97%
4.51- 5.00............................................ 9 649,444 0.63
5.01- 5.50............................................ 27 3,822,733 3.73
5.51- 6.00............................................ 77 9,863,412 9.63
6.01- 6.50............................................ 135 18,555,183 18.11
6.51- 7.00............................................ 153 19,129,581 18.67
7.01- 7.50............................................ 164 16,654,912 16.25
7.51- 8.00............................................ 115 10,402,759 10.15
8.01- 8.50............................................ 81 5,914,499 5.77
8.51- 9.00............................................ 79 6,813,210 6.65
9.01- 9.50............................................ 65 5,193,740 5.07
9.51-10.00............................................ 38 2,887,238 2.82
10.01-10.50............................................ 14 1,045,969 1.02
10.51-11.00............................................ 9 503,428 0.49
11.01-11.50............................................ 1 43,550 0.04
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Gross Margin of the Initial Adjustable Rate Loans will
be approximately 7.192% per annum.
S-37
<PAGE>
INITIAL PERIODIC RATE CAP FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
INITIAL PERIODIC RATE CAP ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
1.500.................................................. 98 $ 9,675,237 9.44%
3.000.................................................. 874 92,795,287 90.56
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Initial Periodic Rate Cap of the Initial Adjustable
Rate Loans will be approximately 2.858%.
PERIODIC RATE CAP FOR INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PERIODIC RATE CAP ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
1.500.................................................. 972 $ 102,470,524 100.00%
--- ----------------- -------
Total................................................ 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
NUMBER OF DAYS DELINQUENT
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
NUMBER OF DAYS DELINQUENT ADJUSTABLE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
0-29 Days.............................................. 968 $ 102,221,317 99.76%
30-59 Days............................................. 4 249,207 0.24
--- ----------------- -------
Total............................................. 972 $ 102,470,524 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
Conveyance of Subsequent Loans and the Pre-Funding Account. Under the
Adjustable Rate Purchase Agreement, following the initial issuance of the Class
A-V Notes, the Series 1998-2V Issuer will be obligated to purchase from the
Seller for inclusion in the related Trust Estate during the Class A-V Funding
Period, subject to the availability thereof, the Subsequent Adjustable Rate
Loans secured by first liens on fee simple interests in one- to four-family
residential real properties. Each Subsequent Adjustable Rate Loan will have been
underwritten in accordance with the criteria set forth herein under 'Description
of the Home Equity Loan Pool Underwriting.' Subsequent Adjustable Rate Loans
will be transferred to the Series 1998-2V Issuer pursuant to Subsequent transfer
instruments (the 'Subsequent Transfer Instruments') between the Seller and the
Series 1998-2V Issuer. In connection with the purchase of Subsequent Adjustable
Rate Loans on such dates of transfer (the 'Subsequent Transfer Dates'), the
Series 1998-2V Issuer will be required to pay to the Seller from amounts on
deposit in the Class A-V Pre-Funding Account (as defined below) a cash purchase
price of 100% of the principal balance thereof. In each instance in which
Subsequent Adjustable Rate Loans are transferred pursuant to a Subsequent
Transfer Instrument, the Series 1998-2V Issuer will designate the cut-off date
(such cut-off date the 'Subsequent Cut-off Date') with respect to the Subsequent
Adjustable Rate Loans acquired on such date. The amount paid from the Class A-V
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the Subsequent Adjustable Rate Loans. Following each Subsequent
Transfer Date, the aggregate Principal Balance of the Adjustable Rate Loans will
increase by an amount equal to the aggregate Principal Balance of the Subsequent
Adjustable Rate Loans so acquired and the amount in the Class A-V Pre-Funding
Account will decrease accordingly.
On the Closing Date, approximately $35,493,597 (the 'Class A-V Original
Pre-Funded Amount') will be deposited in an account (the 'Class A-V Pre-Funding
Account'), which account will be in the name of the Indenture Trustee and shall
be part of the related Trust Estate and which amount will be used to acquire
Subsequent Adjustable Rate Loans. During the Class A-V Funding Period (as
defined herein), the Class A-V
S-38
<PAGE>
Original Pre-Funded Amount will be reduced (on any date of determination, the
related Class A-V Original Pre-Funded Amount as so reduced, the 'Class A-V
Pre-Funded Amount') by the amount thereof used to purchase Subsequent Adjustable
Rate Loans. The 'Class A-V Funding Period' is the period commencing on the
Closing Date and ending on the earlier to occur of (i) the date on which the
amount on deposit in the Class A-V Funding Account is less than $10,000 and (ii)
August 25, 1998.
Any conveyance of Subsequent Adjustable Rate Loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
such Subsequent Adjustable Rate Loan must satisfy the representations and
warranties specified in the related Subsequent Transfer Instrument and the
Adjustable Rate Purchase Agreement; (b) the Seller will select such Subsequent
Adjustable Rate Loans in a manner that it reasonably believes is not adverse to
the interests of the Class A-V Noteholders or the Note Insurer; (c) the Seller
will deliver certain opinions of counsel acceptable to the Note Insurer and the
Indenture Trustee with respect to the validity of the conveyance of such
Subsequent Adjustable Rate Loans; and (d) as of each Subsequent Cut-off Date,
each Subsequent Adjustable Rate Loan will satisfy the following criteria: (i)
such Subsequent Adjustable Rate Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-off Date; (ii) the remaining stated
term to maturity of such Subsequent Adjustable Rate Loan will not exceed 360
months; (iii) such Subsequent Adjustable Rate Loan must have an outstanding
Principal Balance of at least $20,000 and no more than $500,000 as of the
Subsequent Cut-off Date; (iv) such Subsequent Adjustable Rate Loan will be
underwritten in accordance with the criteria set forth under 'Description of the
Home Equity Loan Pool--Underwriting' herein; (v) such Subsequent Adjustable
Rate Loan must have a Loan-to-Value Ratio at origination of no more than 93.00%;
(vi) the stated maturity of such Subsequent Adjustable Rate Loan will be no
later than 360 months; (vii) such Subsequent Adjustable Rate Loan shall not
provide for negative amortization; (viii) such Subsequent Adjustable Rate Loan
must have a Gross Margin of at least 4.00%; and (ix) following the purchase of
such Subsequent Adjustable Rate Loans by the related Issuer, the Adjustable Rate
Loans included in the related Trust Estate must have a weighted average interest
rate, a weighted average remaining term to maturity and a weighted average
Loan-to-Value Ratio at origination, as of each respective Subsequent Cut-off
Date, which does not vary materially from the Initial Adjustable Rate Loans
included initially in the related Trust Estate. In addition, the Indenture
Trustee shall not agree to any transfer of Subsequent Adjustable Rate Loans
without a signed certification from the Note Insurer that the Subsequent
Adjustable Rate Loans are acceptable to the Note Insurer in its sole discretion.
Subsequent Adjustable Rate Loans with characteristics varying from those set
forth above may be purchased by related Issuer and included in the Trust Estate
in the sole discretion of the Note Insurer. Upon the end of the Class A-V
Funding Period, under certain circumstances, the Note Insurer may adjust the
related Required Subordination Amount.
UNDERWRITING
All of the Initial Loans were purchased by the Seller from its wholly-owned
subsidiary, Pacific. Pacific originated such Loans in the ordinary course of
business on a loan by loan basis. The Loans purchased from mortgage brokers were
underwritten in accordance with Pacific's underwriting guidelines summarized
below.
The Home Equity Loan program consists of the origination by Pacific of
mortgage loans relating to non-conforming credits (also commonly referred to as
'subprime' mortgage loans). For purposes hereof, 'non-conforming credit' means a
mortgage loan which, based upon standard underwriting guidelines, is ineligible
for purchase by FNMA or FHLMC due to characteristics that do not meet FNMA or
FHLMC guidelines, respectively.
The mortgagors generally will have obtained the related Loans to either
purchase the related mortgaged property, refinance an existing mortgage loan on
more favorable terms, consolidate debt, or obtain cash proceeds by borrowing
against the mortgagor's equity in the related mortgaged property. Pacific
categorizes loan purpose into three categories: 1) Purchase; 2) Rate and Term
Refinance; and 3) Refinance Cash Out. Refinance Cash Out is any loan transaction
with incidental 'cash out' exceeding $1,000. Cash out is defined as any amount
paid out of settlement proceeds that is not applied to valid liens secured by
the subject property, acceptable closing costs and controlled payoff of credit
obligations.
Pacific views its underwriting process as one that begins with the
marketing of its products and includes each function involved in the lending
activity through the ultimate loan funding. As an integral part of this
S-39
<PAGE>
process, Pacific trains its telemarketing representatives, account executives,
account managers, loan processors, and underwriters to evaluate each loan
request relative to Pacific's underwriting guidelines and overall lending
philosophy. Such philosophy is to evaluate the merits of a loan application on a
case-by-case basis in accordance with its underwriting guidelines. On occasion,
such an evaluation leads Pacific to approve a loan application that does not
completely meet the guidelines. Conversely, Pacific occasionally rejects a loan
application that meets the guidelines.
Pacific believes that its underwriting guidelines (which are revised from
time to time) are consistent with those generally used by lenders in the
business of making subprime mortgage loans. The underwriting process is intended
to assess both the prospective borrower's ability to repay and the adequacy of
the real property as collateral for the loan. In general, Pacific's guidelines
require an analysis of the value of and equity in the collateral, the property
type, the payment history of the borrower, and the borrower's ability to repay
debt.
S-40
<PAGE>
As presented in the following table, Pacific's guidelines permit the
origination of mortgage loans with multi-tiered credit characteristics tailored
to individual credit profiles.
<TABLE>
<CAPTION>
CREDIT
CLASSIFICATION A A- B C C- D
- --------------- ------------ ---------- ---------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
*MAXIMUM LTV
O/O N/O/O O/O N/O/O O/O N/O/O O/O N/O/O O/O N/O/O O/O N/O/O
Full Doc
SFR 90% 80% 90% 80% 85% 75% 80% 70% 70% 65% 65% 60%
Condo/PUD 90% 80% 90% 80% 85% 75% 80% 70% 70% 65% 65% 60%
2/3-4 Unit 90% 80% 85% 80%(1) 85%(1)/80% 75%(1) 75% 70% 70% 65% 65% 60%
Alt Doc
SFR 85% 75% 85% 75% 80% 70% 75-77%(5) 70% 70% 65% 65% 60%
Condo/PUD 85% 75% 85% 75% 80% 70% 75% 70% 70% 65% 65% 60%
2/3-4 Unit 85% 75% 85% 75% 80% 70% 75% 70% 70% 65% 65% 60%
No Doc
(1003 Stated 80% 70% 80% 70% 80% 70% 75-77%(5) 65(4) 65(4) 60(4) 65(4) 60%(4)
Income)
</TABLE>
- ------------------
O/O=Owner Occupied N/O/O=Non-Owner Occupied
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
MAXIMUM(2) 42% 45% 50% 55% 55% 60%
DEBT RATIO
12 MONTH 0x30 0x60 0x90 2x30 0x60 0x90 2x30 1x60 0x90 2x60 or 1x90 1x120 1x150 or more
MORTGAGE RATING or
4x30 0x60 0x90
or
3x30 1x60(3)
0x90
CONSUMER CREDIT
General 24 mos. 24 mos. 24 mos. 24 mos. fair 24 mos. poor 24 mos. poor
excellent excellent satisfactory credit. No credit with credit. The
credit. Minimum credit. Minimum credit. 12 mo. Consumer Credit some currently majority of the
of 3 accounts of 3 accounts 'B' or better (Less than 3 delinquent credit is
open/active for open/active for Rental or Mtg. open/active accounts. derogatory.
6 months. 6 months. Rating but no accounts).
consumer credit
(less than 3
open/active
accounts.
Credit Items <25% of Credit <35% of Credit <40% of Credit <50% of Credit <60% of Credit % of Credit
(Accounts with items items items items items items
no activity in derogatory. No derogatory. No derogatory. derogatory. derogatory. derogatory not
the last 24 60 day 90 day a factor.
months are not derogatory derogatory
to be credit. credit.
considered.)
Bankruptcy-Chapter 2 yrs. since 2 yrs. since 1 yr. since BK filed at BK filed within Currently in
7(6) discharge/ discharge/ discharge/ least 12 mos. last 12 months BK. Must be
dismissal with dismissal with dismissal with ago & but discharged/ paid through
a minimum of 3 a minimum of 3 3 'B' re- discharged dismissed prior the loan.
'A' 'A-' established prior to to application
re-established re-established accounts applying for for loan.
accounts accounts (open/active loan. Open BK
(open/active (open/active for at least 6 13 if filed at
for at least 6 for at least 6 mos.) or 18 least 24 mos.
months). months). mos. since ago & evidence
discharge/dismissal provided that
with no plan & mtg.
re-established paid as agreed.
credit. BK must be paid
off thru loan.
Bankruptcy-Chapter 24 months since 24 months since 18 months since 12 months since 12 months since Current BK plan
13(6) filing with BK filing with BK filing with BK filing. If filing. If must be paid
plan paid as plan paid as plan paid as open, BK plan open, BK plan through loan.
agreed. agreed. agreed. must be as must be as
Discharged Discharge prior Discharged agreed and paid agreed and paid
prior to to application. prior to through loan. through loan.
application. application.
</TABLE>
<TABLE>
<S> <C>
Charge-offs, Collections, Charge-offs and Judgments under $500 are not to be considered. All judgments that appear as a
Collections and lien of record against the subject property must be paid through the loan. The date of the original
Judgments occurrence of the collection is to be used in all credit.
</TABLE>
- ------------------
(1) Loan cannot be upgraded to receive maximum LTV.
(2) Will allow 5% increase in D/R (not to exceed 60%) for a corresponding 5%
reduction in LTV.
(3) Max LTV is 80%.
(4) No DOC not available for salaried or other 'fixed' income borrowers.
(5) Over 75% available for SFR only.
(6) Blending not allowed when BK within 24 months.
* For 2nd homes & vacation properties reduce maximum LTV by 5%. Maximum CLTV
for second mortgages may not exceed 85%.
S-41
<PAGE>
The final grade for a loan is determined by blending the mortgage credit
grade and the consumer credit grade using a credit blending table. In addition,
a final grade of B or C (as determined by the credit blending table) is eligible
for a one credit class upgrade through Pacific's upgrade matrix. The upgrade
matrix takes into account such compensating factors as property condition,
length of employment and length of property ownership.
Pacific's guidelines permit the origination of fixed or adjustable rate
loans that either fully amortize over a period not to exceed 30 years or, in the
case of a balloon mortgage loan, are amortized based on a 30-year or less
amortization schedule with a maturity date and a balloon payment due prior to
the end of the amortization. Loan amounts generally range from a minimum of
$20,000 to a maximum of $350,000 unless a higher amount is specifically approved
by senior management of Pacific.
The collateral securing the loans may be either owner occupied one-to-four
family dwellings (which includes condominiums, townhouses, manufactured housing,
and occasionally second and vacation homes) or non-owner occupied properties.
Substantially all of the loans secured by first mortgages are limited to a
maximum loan-to-value ratio of 90% , and substantially all of the loans secured
by second mortgages are limited to a maximum loan-to-value ratio of 85%.
In order to determine the loan-to-value ratio, all Loans require at least
one recent written appraisal on a current FNMA or FHLMC form with certain
supporting information (e.g., location maps, legal descriptions, sale and
listing histories, floor plans, and photographs) from a state licensed
appraiser. Properties with higher appraised values ($650,000 in California and
Hawaii, $500,000 elsewhere) require a second appraisal. All appraisals are
required to contain at least three recently closed sales of comparable
properties located near the subject property. Pacific's appraisal review
departments review each appraisal for reasonableness, completeness, conformity
with Pacific's guidelines and acceptable property condition. A review appraisal
is performed prior to loan funding whenever the loan-to-value ratio is greater
than 70% and the borrower(s) does not meet minimum credit score requirements
and/or the contents of the original appraisal or specific mortgaged property
characteristics dictate that it would be prudent to do so. Pacific's
underwriting guidelines require that any major deferred maintenance on any
property securing a loan be cured either by the applicant prior to loan closing
or, the amount to cure will be withheld from the proceeds of the loan until such
deferred maintenance is completed.
A credit report combining information from two separate independent credit
reporting agencies is required reflecting the applicant's complete credit
history. If the report is obtained more than 60 days prior to the loan closing,
Pacific obtains an updated credit report to determine whether or not the
reported information has changed in a materially negative way, in which case
such loan will be reunderwritten.
Pacific's underwriting guidelines provide for the origination of loans
under three general income documentation programs: (i) full documentation, (ii)
alternate documentation, and (iii) stated income. Under the full documentation
program Pacific obtains one of the following: (i) Verification of Employment
signed by the employer and the most recent paycheck stub showing year-to-date
income; (ii) IRS Form W-2 for the most recent two-year period and the most
recent paycheck stub showing year-to-date income; (iii) tax returns for the most
recent 2 years and the most recent paycheck stub showing year-to-date income; or
(iv) personal bank statements for the most recent 24 month period and the most
recent paycheck stub stating year-to-date income. For each of the above, Pacific
obtains telephone verification of employment. If the applicant is self-employed,
the two most recent years' applicable tax returns (Form 1040, 1120, 1120S or
1065) are required. Under the alternative documentation program, applicants are
required to submit six months of personal bank statements and a recent paycheck
stub showing year-to-date income, and Pacific obtains telephone verification of
employment. For self-employed borrowers, proof that the business has been in
existence for at least one year is required along with six months personal bank
statements and telephone verification of the business. Under the stated income
program, income is taken from the application as stated by the applicant and
employment or business is verified telephonically.
Exceptions to Pacific's underwriting guidelines can only be approved by one
of Pacific's level III underwriters (the highest designation of underwriter), an
underwriting manager or higher level of senior management. Where exceptions are
made in the areas of loan-to-value or debt-to-income ratio, such exceptions are
generally limited to no more than 2%.
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Pacific's guidelines require title insurance coverage issued by an approved
title insurance company on each Loan. Pacific and its assignees are named as the
insured. Title insurance policies guarantee the lien position of the loan and
protect the insured against loss if the title or lien position is not as
indicated.
ADDITIONAL INFORMATION
Prior to the issuance of a Series of Notes, Initial Loans may be removed
from the either Trust Estate as a result of incomplete documentation or
otherwise, if the Depositor deems such removal necessary or appropriate. A
limited number of other Loans may be included in each Loan Group prior to the
issuance of the related Notes. The Depositor believes that the information set
forth herein will be substantially representative of the characteristics of each
Loan Group as it will be constituted at the time the related Notes are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Loans in the related Loan Group may vary, although such
variance will not be material.
THE SELLER
The information set forth in the following paragraphs has been provided by
the Seller. None of the Depositor, the Underwriter, the Owner Trustee, the
Indenture Trustee, the Note Insurer, the Sub-Servicer, the Series 1998-2F
Issuer, the Series 1998-2V Issuer or any of their respective affiliates has made
or will make any representation as to the accuracy or completeness of the
information provided by the Seller.
PacificAmerica Money Center, Inc., a Delaware corporation, became a
publicly traded company in June 1996. The common stock of the Seller is
registered under the Securities Exchange Act of 1934 and traded on the NASDAQ
National Market. The Seller is currently subject to the reporting requirements
of the Securities and Exchange Act of 1934, and in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
'Commission'). Copies of such materials may be obtained at prescribed rates at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549.
The Seller's primary business is the origination and sale of
non-conventional mortgage loans secured by single family residences. The Seller
operates primarily through its wholly-owned subsidiary, Pacific Thrift and Loan.
Loans are originated on a wholesale and retail basis. The company targets
'subprime' borrowers whose credit histories and/or other factors limit their
ability to qualify for financing from conventional sources. Borrowers generally
use the proceeds of mortgage loans to consolidate debt and to lower their
monthly debt payments.
The majority of the Seller's loans are originated through the company's
wholesale division, consisting of a nationwide network of more than 3,000
independent mortgage brokers in approximately 40 states. Approximately 75% of
the Seller's current loan production comes from this division. The Seller's
retail division originates loans directly with borrowers using primarily
telemarketing and direct mail.
During 1997, the Seller originated approximately $768,000,000 in mortgage
loans and through March 31, 1998, the Seller originated approximately
$206,000,000 in mortgage loans. As of March 31, 1998, the Seller's largest
volume of home equity loan originations were in California, New York, New
Jersey, Washington and Florida. At March 31, 1998, the Seller had approximately
590 employees. The Seller's executive offices are located at 21031 Ventura
Boulevard, Woodland Hills, California, and its telephone number is (818)
992-8999.
The Seller will act as Master Servicer for the Loans pursuant to the
Servicing Agreements. See 'Description of the Servicing Agreements--The Master
Servicer' herein.
The Seller has undertaken a full assessment of its operations to determine
all functions which will be impacted by the limitations on existing computer
programs which use only two digits to identify a year in the date field.
Substantially all of the Seller's operating software systems, including loan
origination, loan servicing, financial, human resource and payroll systems, are
outsourced to third party providers. The Seller distributed a written request
for Year 2000 compliance information to all systems providers in the fourth
quarter of 1997 and the first quarter of 1998 and has received responses from
most providers. The loan origination, financial, human resources and payroll
system providers have represented that they will implement upgrades which will
make their systems Year 2000 compliant. The loan servicing and thrift deposit
system provider has indicated that it is
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currently undergoing restructuring and testing needed to become compliant before
the end of 1998. The Seller's PC and computer network operating system providers
have posted representations that they are each compliant on their Internet web
sites. Because its operating systems are outsourced, the Seller does not expect
to incur any material costs in connection with the upgrades necessary to bring
these systems into Year 2000 compliance.
The Seller has also contacted the Master Servicer and the Sub-Servicer to
determine its Year 2000 compliance, and expects that it will become compliant
before 2000. The Seller is similarly awaiting responses from its bank,
investment bank and appraisal service providers. The Seller does not expect to
incur any material cost in connection with the upgrades necessary to bring the
systems of its service providers into Year 2000 compliance.
During 1998, the Seller plans to conduct internal testing of all of its
computer hardware units to determine their compatibility with Year 2000
information. It is anticipated that testing will be completed by the end of
1998.
No person other than the Seller and Pacific is obligated with respect to
the representations and warranties respecting the Loans and the remedies for any
breach thereof that are assigned to the Indenture Trustee for the benefit of the
related Noteholders and the Note Insurer. Moreover, as discussed above, the
Seller and Pacific have only limited assets available to perform its repurchase
obligations in respect of any breach of such representations and warranties,
relative to the potential amount of repurchase liability, and the total
potential amount of repurchase liability is expected to increase over time as
Pacific continues to originate, acquire and sell mortgage loans. There can be no
assurance that the Seller will continue to generate operating earnings, or that
it will be successful under its current business plan. Therefore, prospective
investors in the Notes should consider the possibility that the Seller and
Pacific will not have sufficient assets with which to satisfy its repurchase
obligations in the event that a substantial amount of Loans are required to be
repurchased due to breaches of representations and warranties.
The Seller does not have sufficient historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of mortgage loans similar
to the Loans.
THE SERIES 1998-2F ISSUER
PacificAmerica Home Equity Loan Trust Series 1998-2F is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement,
dated as of June 1, 1998, between the Depositor and Wilmington Trust Company as
the Owner Trustee for the transactions described in this Prospectus Supplement.
The Trust Agreement constitutes the 'governing instrument' under the laws of the
State of Delaware relating to business trusts. After its formation, the Series
1998-2F Issuer will not engage in any activity other than (i) acquiring and
holding the Fixed Rate Loans and the other assets of the Series 1998-2F Issuer
and proceeds therefrom, (ii) issuing the Class A-F Notes and the related
Certificates, (iii) making payments on the Class A-F Notes and the related
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or connected
therewith. The Series 1998-2F Issuer is not expected to have any significant
assets other than those pledged as collateral to secure the Class A-F Notes.
The assets of the Series 1998-2F Issuer will consist of the Fixed Rate
Loans and certain related assets pledged to secure the Class A-F Notes.
The Series 1998-2F Issuer's principal offices are in Wilmington, Delaware,
in care of Wilmington Trust Company, as Owner Trustee.
THE SERIES 1998-2V ISSUER
PacificAmerica Home Equity Loan Trust Series 1998-2V is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement,
dated as of June 1, 1998, between the Depositor and Wilmington Trust Company as
the Owner Trustee for the transactions described in this Prospectus Supplement.
The Trust Agreement constitutes the 'governing instrument' under the laws of the
State of Delaware relating to business trusts. After its formation, the Series
1998-2V Issuer will not engage in any activity other than (i)
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acquiring and holding the Adjustable Rate Loans and the other assets of the
Series 1998-2V Issuer and proceeds therefrom, (ii) issuing the Class A-V Notes
and the related Certificates, (iii) making payments on the Class A-V Notes and
the related Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith. The Series 1998-2V Issuer is not expected to
have any significant assets other than those pledged as collateral to secure the
Class A-V Notes.
The assets of the Series 1998-2V Issuer will consist of the Adjustable Rate
Loans and certain related assets pledged to secure the Class A-V Notes.
The Series 1998-2V Issuer's principal offices are in Wilmington, Delaware,
in care of Wilmington Trust Company, as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under each Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Series 1998-2F Issuer, the
Series 1998-2V Issuer, or the Noteholders under the related Trust Agreement
under any circumstances, except for the Owner Trustee's own misconduct, gross
negligence, bad faith or grossly negligent failure to act or in the case of the
inaccuracy of certain representations made by the Owner Trustee in the related
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the related
Trust Agreement.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association,
will act as Indenture Trustee under each Indenture. A copy of the Indentures
will be provided by the Issuer without charge upon written request. Requests
should be addressed to the Indenture Trustee at 3 Park Plaza, 16th Floor,
Irvine, California 92614, Attention: PacificAmerica Home Equity Loan Trust
Series 1998-2F or Attention: PacificAmerica Home Equity Loan Trust Series
1998-2V, as applicable.
FINANCIAL SECURITY ASSURANCE INC.
The following information has been supplied by Financial Security Assurance
Inc. (the 'Note Insurer') for inclusion in this Prospectus Supplement.
GENERAL
The Note Insurer is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. The Note Insurer is licensed to engage in the
financial guaranty insurance business in all 50 states, the District of Columbia
and Puerto Rico.
The Note Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--in
consideration for the payment of a premium to the insurer. The Note Insurer and
its subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
Note Insurer insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Note
Insurer's underwriting criteria.
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The Note Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ('Holdings'), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of the Note Insurer or
any claim under any insurance policy issued by the Note Insurer or to make any
additional contribution to the capital of the Note Insurer.
The principal executive offices of the Note Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Note Insurer or any of
its domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Note Insurer reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Note
Insurer as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit the Note Insurer
obligations under any financial guaranty insurance policy.
RATING OF CLAIMS-PAYING ABILITY
The Note Insurer's claims-paying ability is rated 'Aaa' by Moody's and
'AAA' by S&P, Fitch IBCA, Inc., Japan Rating and Investment Information, Inc.
and Standard & Poor's (Australia) Pty. Ltd. Such rating reflect only the view of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See 'Ratings.'
CAPITALIZATION
The following table sets forth the capitalization of the Note Insurer and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998
(UNAUDITED)
--------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums).......................... $ 428,157
Shareholder's Equity:
Common Stock.......................................................................... 15,000
Additional Paid-in Capital............................................................ 618,317
Unrealized Gain on Investments (net of deferred income taxes)......................... 24,700
Accumulated Earnings.................................................................. 265,030
--------------
Total Shareholder's Equity.............................................................. 923,047
--------------
Total Deferred Premium Revenue and Shareholder's Equity................................. $1,351,204
--------------
--------------
</TABLE>
For further information concerning the Note Insurer, see the Consolidated
Financial Statements of the Note Insurer and Subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by the
Note Insurer are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under 'Incorporation of Certain
Information by Reference' in the Prospectus, the consolidated financial
statements of the Note Insurer and subsidiaries included in or as exhibits to
the following documents which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement, which together with the Prospectus, forms a part
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of the Depositor's Registration Statement: (a) the Annual Report on Form 10-K
for the year ended December 31, 1997 and (b) the Quarterly Report on Form 10-Q
for the three-month period ended March 31, 1998.
All financial statements of the Note Insurer and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of filing such documents.
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, Merrill
Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial Center, New
York, New York 10281.
INSURANCE REGULATION
The Note Insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Note Insurer and its insurance subsidiaries
are subject to regulations by insurance laws of the various other jurisdictions
in which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of New York, the Note Insurer
is subject to Article 69 of the New York Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policy holders, establishes contingency, loss and unearned premium reserve
requirements for each insurer, and limits the size of individual transactions
('single risks') and the volume of transactions ('aggregate risks') that may be
underwritten by each such insurer. Other provisions of the New York Insurance
Law, applicable to non-life insurance companies such as the Note Insurer,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidation, acquisitions or sale of
assets and incurrence of liability for borrowing.
DESCRIPTION OF THE NOTES
GENERAL
The Class A-F Notes will be issued pursuant to the Indenture dated as of
June 1, 1998, between the Series 1998-2F Issuer and Bankers Trust Company of
California, N.A., as Indenture Trustee. The Class A-F Certificates (together
with the Class A-F Notes, the 'Series 1998-2F Securities') will be issued
pursuant to the Trust Agreement dated as of June 1, 1998, between the Depositor
and Wilmington Trust Company, as Owner Trustee. The Class A-V Notes (together
with the Class A-F Notes, the 'Notes') will be issued pursuant to the Indenture
dated as of June 1, 1998, between the Series 1998-2V Issuer and Bankers Trust
Company of California, N.A., as Indenture Trustee. The Class A-V Certificates
(together with the Class A-V Notes, the 'Series 1998-2V Securities') will be
issued pursuant to the Trust Agreement dated as of June 1, 1998, between the
Depositor and Wilmington Trust Company, as Owner Trustee. The following
summaries describe the material provisions of each of the Class A-F Securities,
the Class A-V Securities, the Indentures, the Trust Agreements and the Servicing
Agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the applicable
agreement. Only the Notes are offered hereby.
The Notes will be secured by the pledge by the related Issuer of its assets
to the Indenture Trustee pursuant to the related Indenture, which assets will
consist of the following (such assets, collectively, the related 'Trust
Estate'): (i) the Fixed Rate Loans or the Adjustable Rate Loans, as applicable;
(ii) collections in respect of principal and interest of the Fixed Rate Loans or
the Adjustable Rate Loans, as applicable, received after the Cut-off Date or
Subsequent Cut-off Date, as applicable (other than payments due on or before the
Cut-off Date or the Subsequent Cut-off Date, as applicable); (iii) the amounts
on deposit in any Collection Account (as defined in the Prospectus), including
the account in which amounts are deposited prior to payment to the Class A-F
Noteholders or the Class A-V Noteholders as applicable (the related 'Payment
Account'), including net earnings thereon; (iv) certain insurance policies
maintained by the Mortgagors or by or on behalf of the Master Servicer or any
related subservicer in respect of the Fixed Rate Loans or the Adjustable Rate
Loans, as applicable; (v) an
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assignment of the Depositor's rights under the related Purchase Agreement; (vi)
an assignment of the related Issuer's rights under the related Servicing
Agreement; (vii) amounts on deposit in the related Interest Coverage Account and
the related Pre-Funding Account and (viii) proceeds of the foregoing. Each
Series of Notes represents the right to receive payments from funds available to
be distributed with respect to the related Loan Group, as described herein;
provided that in the limited circumstances described herein under 'Description
of the Notes,' excess cash flow from the Loan Group related to a Series of Notes
may be available for certain shortfalls on the other Series of Notes.
The Notes will be issued in denominations of $25,000 and integral multiples
of $1,000 in excess thereof. See '--Book-Entry Notes' below.
BOOK-ENTRY NOTES
General. Security Owners may elect to hold their Notes through the
Depository Trust Company ('DTC') in the United States, or Cedel or Euroclear, in
Europe if they are Participants of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry Notes will
be issued in one or more securities which equal the aggregate principal balance
of the Notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries (in such
capacities, individually the 'Relevant Depositary' and collectively the
'European Depositaries') which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Investors
may hold such beneficial interests in the Book-Entry Notes in minimum
denominations representing Security Balances of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no Beneficial
Owner will be entitled to receive a physical certificate representing such
security (a 'Definitive Note'). Unless and until Definitive Notes are issued, it
is anticipated that the only 'Holder' of the Notes will be Cede & Co., as
nominee of DTC. Security Owners will not be Holders as that term is used in the
Indenture.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a 'Financial Intermediary') that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or of
a Participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a DTC Participant and on the records of
Cedel or Euroclear, as appropriate).
Security Owners will receive all payments of principal of, and interest on,
the Notes from the Indenture Trustee through DTC and DTC Participants. While the
Notes are outstanding (except under the circumstances described below), under
the rules, regulations and procedures creating and affecting DTC and its
operations (the 'Rules'), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Notes and is required
to receive and transmit payments of principal of, and interest on, the Notes.
Participants and Indirect Participants with whom Security Owners have
accounts with respect to Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Security Owners. Accordingly, although Security Owners will not possess physical
certificates, the Rules provide a mechanism by which Security Owners will
receive payments and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive Definitive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Security Owners who are not Participants may transfer ownership of Notes only
through Participants and Indirect Participants by instructing such Participants
and Indirect Participants to transfer the Notes, by book-entry transfer, through
DTC for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Security Owners.
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Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. Payments with respect to Notes
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
payments will be subject to tax reporting in accordance with relevant United
States tax laws and regulations. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes to
persons or entities that do not participate in the Depositary system, or
otherwise take actions in respect of such Book-Entry Notes, may be limited due
to the lack of physical certificates for such Book-Entry Notes. In addition,
issuance of the Book-Entry Notes in book-entry form may reduce the liquidity of
such Notes in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by Noteholders under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Notes which conflict with actions taken with
respect to other Notes.
Definitive Notes. Definitive Notes will be issued to Security Owners or
their nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the Prospectus under 'Description of the
Securities--Book-Entry Registration and Definitive Securities.'
Upon the occurrence of an event described in the Prospectus in the seventh
paragraph under 'Description of the Securities--Form of Book-Entry Registration
and Definitive Securities,' the Indenture Trustee is required to notify, through
DTC, Participants who have ownership of Book-Entry Notes as indicated on the
records of DTC of the availability of Definitive Notes for their Book-Entry
Notes. Upon surrender by DTC of the definitive certificates representing the
Book-Entry Notes and upon receipt of instructions from DTC for re-registration,
the Indenture Trustee will reissue the Book-Entry Notes as Definitive Notes
issued in the respective principal amounts owned by individual Security Owners,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Noteholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among Participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time. See Annex I
hereto.
In addition, Security Owners will receive all payments of principal and
interest on the related Book-Entry Notes from the Paying Agent (as defined in
the Prospectus) through DTC and Participants. Accordingly, Security Owners may
experience delays in their receipt of payments. Unless and until Definitive
Notes are issued for the related Book-Entry Notes, it is anticipated that the
only registered Noteholder of such Book-Entry Notes will be Cede & Co., as
nominee of DTC. Security Owners will not be recognized by the Indenture Trustee
or the Master Servicer as Noteholders, as such term is used in the Indenture,
and Security Owners will be permitted to receive information furnished to
Noteholders and to exercise the rights of Noteholders only indirectly through
DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'Rules'), DTC is required to make book-entry transfers of
Book-Entry Notes among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Notes. Participants and
Intermediaries with which Security Owners have accounts with respect to such
Book-Entry Notes similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Security Owners.
Accordingly, although Security Owners will not possess physical certificates
evidencing their interests in the Book-Entry Notes, the Rules provide a
mechanism by which Security Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Notes.
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None of the Depositor, the Master Servicer, the Note Insurer, the Owner
Trustee, the Issuer, the Sub-Servicer or the Indenture Trustee will have any
liability for any actions taken by DTC or its nominee, Cedel or Euroclear,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of Security ownership interests in the Book-Entry
Notes held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
For additional information regarding DTC and the Book-Entry Notes, see
'Description of the Securities--Book-Entry Registration and Definitive
Securities' in the Prospectus.
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in July 1998. Payments on the Notes
will be made to the persons in whose names such Notes are registered at the
close of business on the day prior to each Payment Date or, if the Notes are no
longer Book-Entry Notes, on the Record Date. See 'Description of the
Securities--Distributions' in the Prospectus. Payments will be made by check or
money order mailed (or upon the request, at least five Business Days prior to
the related Record Date, of a holder owning Notes having denominations
aggregating at least $5,000,000, by wire transfer or otherwise) to the address
of the person entitled thereto (which, in the case of Book-Entry Notes, will be
DTC or its nominee) as it appears on the Security Register on the related Record
Date. However, the final payment in respect of the Notes will be made only upon
presentation and surrender thereof at the office or the agency of the Indenture
Trustee specified in the notice to holders of such final payment. A 'Business
Day' is any day other than (i) a Saturday or Sunday or (ii) a day on which
banking institutions in New York City, California or Delaware or in the city in
which the corporate trust offices of the Indenture Trustee or the principal
office of the Note Insurer are located, are required or authorized by law to be
closed.
CLASS A-F NOTES
Available Funds. The 'Available Funds' for the Class A-F Notes for any
Payment Date will equal the amount received by the Indenture Trustee and
available in the Class A-F Payment Account on each Payment Date. The Available
Funds for the Class A-F Notes will generally be equal to the amount on deposit
in the Class A-F Payment Account on such Payment Date and available for
distribution to the Class A-F Noteholders, minus (i) the related Administrative
Fee and the related Indenture Trustee Fee and (ii) if the Class A-F Notes have
been declared due and payable following an Event of Default on such Payment
Date, any amounts owed by the related Issuer to the Indenture Trustee or Note
Insurer pursuant to the related Indenture. In addition, on the Payment Date
relating to the Due Period in which the termination of the related Funding
Period occurred, Available Funds will include the amount on deposit in the Class
A-F Pre-Funding Account at such time, plus on the Payment Dates in July and
August 1998, Available Funds will include the amount, if any, withdrawn from the
Class A-F Interest Coverage Account. With respect to any Payment Date, (i) the
'Due Date' is the first day of the month in which such Payment Date occurs, and
(ii) the 'Determination Date' is the 15th day of the month in which such Payment
Date occurs, or if such day is not a Business Day, the immediately preceding
Business Day.
Interest Payments. On each Payment Date, holders of the Class A-F Notes
will be entitled to receive an amount (the 'Class A-F Interest Payment Amount')
equal to (i) interest accrued on the Class A-F Note Principal Balance thereof
immediately prior to such Payment Date at the Class A-F Note Interest Rate for
the related Interest Period. With respect to each Payment Date, interest payable
on the Class A-F Notes will accrue during the Interest Period. Interest will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Notwithstanding the foregoing, if payments are not made as required under the
related Note Insurance Policy, additional interest shortfalls may be allocated
to the Class A-F Notes as described below. See 'Description of the Notes--Note
Insurance Policies.'
On each Payment Date, the 'Class A-F Note Interest Rate' will be 6.59% per
annum, subject to an increase of 0.50% per annum on or after the Payment Date on
which the aggregate Principal Balance of the Fixed Rate Loans is less than or
equal to 10% of the Class A-F Original Pool Balance.
With respect to each Fixed Rate Loan and each Payment Date, the Master
Servicer will be entitled to a fee (the 'Servicing Fee') equal to 1/12 of the
Servicing Fee Rate times the Principal Balance of such Fixed Rate Loan
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as of such date. With respect to each Fixed Rate Loan and each Payment Date, the
Indenture Trustee will be entitled to a fee (the 'Indenture Trustee Fee') equal
to 1/12 of the Indenture Trustee Fee Rate times the Principal Balance of such
Fixed Rate Loan as of such date. For any Payment Date, the Servicing Fee Rate is
equal to 0.50% per annum, the Indenture Trustee Fee Rate is equal to 0.015% per
annum, the Owner Trustee Fee is a per annum amount as specified in the related
Indenture (payable on the Payment Date in July of each year) and the 'Note
Insurer Premium' is equal to 1/12 of the per annum rate specified pursuant to
the related Insurance Agreement times the Note Principal Balance (the Note
Insurer Premium together with the Owner Trustee Fee, the related 'Administrative
Fee' of the Fixed Rate Loans). The Note Insurance Policy with respect to the
Class A-F Notes does not cover any Prepayment Interest Shortfalls or any Relief
Act Shortfalls (each as defined herein), nor do the ratings assigned to the
Class A-F Notes address the payment of any Prepayment Interest Shortfalls or any
Relief Act Shortfalls. 'Relief Act Shortfalls' for any Payment Date are any
shortfalls relating to the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended or similar legislation or regulations.
As described herein, the Interest Payment Amount is based on the Class A-F
Note Principal Balance. The 'Class A-F Note Principal Balance' as of any date of
determination is equal to the related initial principal balance thereof as of
the Closing Date reduced by all amounts allocable to the Class A-F Principal
Payment Amount and the Subordination Increase Amount previously distributed with
respect to such Class A-F Note.
The 'Principal Balance' of any Loan is, at any given time, the Principal
Balance as of the Cut-off Date or Subsequent Cut-off Date, as applicable, of
such Loan, minus (a) the sum of all amounts paid or advanced with respect to
such Loan with respect to principal and (b) the principal portion of any losses
with respect thereto for any previous Payment Date.
Principal Payments. The 'Class A-F Principal Payment Amount' for the Class
A-F Notes (a) on any Payment Date, other than the Final Scheduled Payment Date,
will be equal to the lesser of (x) the sum of the Available Funds with respect
to the Class A-F Notes remaining after distributions pursuant to clause (i) of
'--Class A-F Notes--Priority of Payment' below and any portion of any Insured
Payment (as defined herein) for such Payment Date representing principal and (y)
the sum of:
(i) the principal portion of all scheduled monthly payments on the
Fixed Rate Loans received on the Fixed Rate Loans with respect to the
related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Fixed Rate Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the related Servicing
Agreement or the Fixed Rate Purchase Agreement received during the
preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received on the Fixed Rate Loans during the related Prepayment Period (or
deemed to be received during the related Prepayment Period) (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors, Liquidation Proceeds and Insurance Proceeds
(excluding proceeds paid in respect of the Note Insurance Policy)), to the
extent not distributed in the preceding month;
(iv) any Insured Payment made with respect to principal plus the
lesser of (a) the Net Monthly Excess Cashflow relating to the Class A-V
Notes (or, if the Class A-V Notes have been retired, the amount in the
Class A-F Escrow Account (as defined in the related Indenture)) minus the
amount by which the Class A-F Interest Payment Amount exceeds the Class A-F
Available Funds and (b) the Realized Losses allocated to the Class A-F
Notes;
(v) with respect to the Payment Date immediately following the end of
the related Funding Period, any amounts in the related Pre-Funding Account
after giving effect to any purchase of Subsequent Fixed Rate Loans;
minus
(vi) the amount of any related Subordination Reduction Amount for such
Payment Date;
and (b) with respect to the Final Scheduled Payment Date, the amount necessary
to reduce the Class A-F Note Principal Balance to zero.
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In no event will the Class A-F Principal Payment Amount with respect to any
Payment Date be (x) less than zero or (y) greater than the then outstanding
Class A-F Note Principal Balance.
Priority of Payment. On each Payment Date, Available Funds with respect to
the Class A-F Notes and, if necessary, any available Net Monthly Excess Cashflow
relating to the other Series of Notes and any Insured Payment with respect to
such Payment Date (provided that Insured Payments will be applied only for the
purposes set forth in clauses (i) and (ii)) will be allocated to the Class A-F
Notes in the following order of priority, in each case to the extent of
Available Funds with respect to the Class A-F Notes remaining:
(i) to the Class A-F Noteholders, the Class A-F Interest Payment
Amount with respect to such Payment Date net of any Prepayment Shortfalls
not covered by the Master Servicer by Compensating Interest and any Relief
Act Shortfalls;
(ii) to the Class A-F Noteholders, the Class A-F Principal Payment
Amount with respect to such Payment Date;
(iii) to the Note Insurer, the sum of (a) all amounts previously paid
by the Note Insurer under the Class A-F Note Insurance Policy which have
not previously been reimbursed, (b) any other amounts due to the Note
Insurer pursuant to the agreement pursuant to which the Class A-F Note
Insurance Policy is issued (the '1998-2F Insurance Agreement') and (c)
interest on the foregoing as set forth in the 1998-2F Insurance Agreement
from the date such amounts became due until paid in full (the
'Reimbursement Amount');
(iv) to the Class A-V Noteholders, if necessary, any amounts required
to pay (x) the amount by which the Class A-V Interest Payment Amount (not
including any Carry-Forward Amount for such Payment Date) exceeds the Class
A-V Available Funds due to Realized Losses or if the Master Servicer or the
Sub-Servicer does not make any Advance with respect to payments of interest
on such Payment Date and (y) any Realized Losses relating to the Class A-V
Notes on such Payment Date or any previous Payment Date;
(v) to the Note Insurer, the sum of (a) all payments previously paid
by the Note Insurer under the Class A-V Note Insurance Policy which have
not previously been reimbursed, (b) any other amounts due to the Note
Insurer pursuant to the Series 1998-2V Insurance Agreement (as defined
herein), to the extent not previously paid or reimbursed and (c) interest
on the foregoing as set forth in the 1998-2V Insurance Agreement from the
date such amounts become due until paid in full;
(vi) to the Class A-F Noteholders, the Subordination Increase Amount
(as defined in '--Class A-F Notes--Overcollateralization Provisions'
below), in reduction of the Class A-F Note Principal Balance thereof, until
the Class A-F Note Principal Balance has been reduced to zero;
(vii) to the Class A-F Noteholders, Prepayment Interest Shortfalls not
covered by the Master Servicer by Compensating Interest and Relief Act
Shortfalls for such Payment Date;
(viii) to the Indenture Trustee, for any amounts owing to the
Indenture Trustee;
(ix) to the Master Servicer, any amounts owing to the Master Servicer
pursuant to the Servicing Agreement in connection with the indemnity by the
Series 1998-2F Issuer thereunder; and
(x) any remaining amounts to the holders of the related Certificates;
provided, however, that if the Class A-F Notes have been retired and the
Class A-V Subordination Amount is less than the Class A-V Required
Subordination Amount, such amounts shall be transferred to the Class A-V
Escrow Account.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. With respect to
any Payment Date, the excess, if any, of (x) the sum of the aggregate Principal
Balances of the Fixed Rate Loans as of the close of business on the last day of
the period commencing on the second day of the month preceding the month of such
Payment Date (or, with respect to the first Payment Date, the day following the
Cut-off Date) and ending on the related Due Date (such period, the 'Due Period')
and the amount of funds in the Class A-F Pre-Funding Account as of such Payment
Date over (y) the Class A-F Note Principal Balance as of such Payment Date (and
following the making of all payments made on such Payment Date) is the
'Subordination Amount' as of such Payment Date.
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The related Indenture requires that, on each Payment Date, the Net Monthly
Excess Cashflow, if any, for the Class A-F Certificates be applied on such
Payment Date as an accelerated payment of principal on the Class A-F Notes, but
only to the limited extent hereafter described. The 'Net Monthly Excess
Cashflow' for the Class A-F Notes for any Payment Date is equal to the amount of
related Available Funds remaining after application to items (i) through (iii)
under '--Class A-F Notes--Priority of Payment' herein. This application has the
effect of accelerating the amortization of the Class A-F Notes relative to the
amortization of the Fixed Rate Loans. The related Indenture requires that the
Net Monthly Excess Cashflow for the Class A-F Notes not used to make payments in
respect of the Class A-V Notes as described below be applied as an accelerated
payment of principal on the Class A-F Notes until the Subordination Amount has
increased to a level equal to the Required Subordination Amount for such Payment
Date.
Any amount of Net Monthly Excess Cashflow for the Class A-F Notes actually
applied as an accelerated payment of principal is a 'Subordination Increase
Amount.' The required level of the Subordination Amount with respect to a
Payment Date is the 'Required Subordination Amount' with respect to such Payment
Date. The related Indenture generally provides that the Required Subordination
Amount may, over time, decrease, or increase, subject to certain floors, caps
and triggers with respect to the Fixed Rate Loans or the Adjustable Rate Loans.
In the event that the Required Subordination Amount is permitted to
decrease or 'step down' on a Payment Date in the future, the related Indenture
provides that a portion of the principal payment which would otherwise be
distributed to the holders of the Class A-F Notes on such Payment Date shall be
distributed to the holders of the related Certificates on such Payment Date
(subject to certain prior applications, as described below under '--Class A-F
Notes--Cross-collateralization'). This has the effect of decelerating the
amortization of the Class A-F Notes relative to the amortization of the Fixed
Rate Loans, and of reducing the Subordination Amount. With respect to any
Payment Date, the difference, if any, between (a) the Subordination Amount that
would result on such Payment Date after taking into account all payments to be
made on such Payment Date (exclusive of any reductions thereto attributable to
Subordination Reduction Amounts (as described below) on such Payment Date) and
(b) the Required Subordination Amount for such Payment Date is the 'Excess
Subordination Amount' with respect to such Payment Date. With respect to any
Payment Date, an amount equal to the lesser of (a) the Excess Subordination
Amount and (b) the principal collections received by the Master Servicer with
respect to the prior Due Period is the 'Subordination Reduction Amount.' In
addition, a Subordination Reduction Amount may result even prior to the
occurrence of any decrease or 'step down' in the Required Subordination Amount.
This is because the holders of the Class A-F Notes will generally be entitled to
receive 100% of collected principal, even though the Class A-F Note Principal
Balance will represent less than 100% of the Fixed Rate Loans' principal
balance. In the absence of the provisions relating to the Subordination
Reduction Amount, the foregoing may otherwise increase the Subordination Amount
above the Required Subordination Amount even without the application of any Net
Monthly Excess Cashflow.
The related Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Loans during the
calendar month preceding the calendar month in which such Payment Date occurs
(the 'Prepayment Period') will be distributed to the holders of the Class A-F
Notes on such Payment Date. If any Loan became a Liquidated Loan (as defined
below) during such Prepayment Period, the net Liquidation Proceeds (as defined
in the Prospectus) related thereto and allocated to principal may be less than
the Principal Balance of the related Loan; the amount of any such insufficiency
is generally defined as a 'Realized Loss.' A 'Liquidated Loan' is, in general, a
defaulted Loan as to which the Master Servicer has determined that all amounts
that it expects to recover on such Loan have been recovered (exclusive of any
possibility of a deficiency judgment). The principal balance of any Loan after
it becomes a Liquidated Loan shall equal zero. The related Indenture does not
contain any provision which requires that the amount of any Realized Loss should
be distributed to the holders of the Class A-F Notes on the Payment Date which
immediately follows the event of loss; i.e., the related Indenture does not
require the current recovery of losses. However, the occurrence of a Realized
Loss will reduce the Subordination Amount, which, to the extent that such
reduction causes the Subordination Amount to be less than the Required
Subordination Amount applicable to the related Payment Date, will require the
payment of a Subordination Increase Amount on such Payment Date (or, if
insufficient funds are available on such Payment Date, on Subsequent Payment
Dates, until the Subordination Amount equals
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the Required Subordination Amount). The effect of the foregoing is to allocate
losses to overcollateralization by reducing, or eliminating entirely, payments
of Net Monthly Excess Cashflow and of Subordination Reduction Amounts which the
holders of the related Certificates would otherwise receive. While the Note
Insurer is not obligated to pay any losses on Liquidated Loans unless such
losses would create an Aggregate Subordination Deficit, the Note Insurer may, at
its sole option, pay any losses on Liquidated Loans in accordance with the
related Note Insurance Policy.
Overcollateralization and the Related Note Insurance Policy. The related
Indenture defines a 'Subordination Deficit' with respect to a Payment Date to be
the amount, if any, by which (x) the aggregate Class A-F Note Principal Balance
as of such Payment Date, and following the making of all payments to be made on
such Payment Date (except for any payment to be made as to principal from
proceeds of the Note Insurance Policy), exceeds (y) the sum of the aggregate
Principal Balances of the Fixed Rate Loans as of the close of business on the
Due Date preceding such Payment Date and the amount of funds in the related
Pre-Funding Account on such Payment Date. The 'Aggregate Subordination Deficit'
is the Class A-F Subordination Deficit, if any, plus the Class A-V Subordination
Deficit, if any, minus the Class A-F Subordination Amount, if any, minus the
Class A-V Subordination Amount, if any. The related Indenture requires the
Indenture Trustee to make a claim for an Insured Payment under the related Note
Insurance Policy not later than the second Business Day prior to any Payment
Date as to which the Indenture Trustee has determined that an Aggregate
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the holders of the Class A-F
Notes on such Payment Date. The amount of the claim will be the lesser of the
Class A-F Subordination Deficit and the Aggregate Subordination Deficit reduced
by any Net Excess Cashflow available to pay such amounts. Investors in the Class
A-F Notes should realize that, under extreme loss or delinquency scenarios, they
may temporarily receive no payments of principal.
Cross-collateralization. On each Payment Date, an amount equal to Net
Monthly Excess Cashflow remaining after application of items (i)-(iii) under
'--Class A-F Notes--Priority of Payment' herein shall be available to cover
certain shortfalls in amounts to pay the Class A-V Interest Payment Amount (not
including any Carry-Forward Amount for such Payment Date) and any Realized
Losses on the Adjustable Rate Loans relating to such Payment Date and to
reimburse the Note Insurer for an Insured Payment and certain other
reimbursements owed to the Insurer. After retirement of the Class A-F Notes, if
the Class A-V Subordination Amount is less than the Class A-V Required
Subordination Amount, amounts payable pursuant to item (x) under '--Class A-F
Notes--Priority of Payment' will be paid to the Class A-V Escrow Account.
Amounts in the Class A-V Escrow Account will be treated, on future Payment
Dates, as Net Monthly Excess Cashflow on the Class A-F Notes and will be
available to make the payments described in the preceding sentence in respect of
the Class A-V Notes.
CLASS A-V NOTES
Available Funds. The 'Available Funds' for the Class A-V Notes for any
Payment Date will equal the amount received by the Indenture Trustee and
available in the related Class A-V Payment Account on each Payment Date. The
Available Funds for the Class A-V Notes will generally be equal to the amount on
deposit in the Class A-V Payment Account on such Payment Date and available for
distribution to the Class A-V Noteholders, minus (i) the related Administrative
Fee and the related Indenture Trustee Fee and (ii) if the Class A-V Notes have
been declared due and payable following an Event of Default on such Payment
Date, any amounts owed by the related Issuer to the Indenture Trustee or Note
Insurer pursuant to the related Indenture. In addition, on the Payment Date
relating to the Due Period in which the termination of the related Funding
Period occurred, Available Funds will include the amount on deposit in the Class
A-V Pre-Funding Account at such time, plus on the Payment Dates in July and
August, 1998, Available Funds will include the amount, if any, withdrawn from
the Class A-V Interest Coverage Account.
Interest Payments. On each Payment Date, holders of the Class A-V Notes
will be entitled to receive an amount (the 'Class A-V Interest Payment Amount')
equal to the lesser of (i) interest accrued on the Class A-V Note Principal
Balance thereof immediately prior to such Payment Date at the Class A-V Note
Interest Rate (as defined below) for the related Interest Period and (ii) the
Guaranteed Interest Payment Amount (as defined below). With respect to each
Payment Date, interest payable on the Class A-V Notes will accrue during the
Interest Period. Interest will be calculated on the basis of the actual number
of days in the Interest Period and a
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360-day year. Notwithstanding the foregoing, if payments are not made as
required under the related Note Insurance Policy, additional interest shortfalls
may be allocated to the Class A-V Notes as described below. See 'Description of
the Notes--Note Insurance Policies.'
On each Payment Date, the 'Class A-V Note Interest Rate' will be a floating
rate equal to the lesser of (i)(a) with respect to each Payment Date up to and
including the Payment Date which occurs on or prior to the date on which the
aggregate Principal Balance of the Adjustable Rate Loans is less than or equal
to 10% of the Class A-V Original Pool Balance, One-Month LIBOR (as defined
herein) plus 0.17%, and (b) with respect to each Payment Date thereafter,
One-Month LIBOR plus 0.34% and (ii) 15.50% per annum (the 'Maximum Interest
Rate').
As further described herein, with respect to the Class A-V Notes and any
Payment Date, to the extent that the amount calculated pursuant to the clause
(i) of the definition of Interest Payment Amount with respect to the Class A-V
Notes exceeds the Guaranteed Interest Payment Amount (as defined herein) (such
excess, the 'Carry-Forward Amount'), the holders of the Class A-V Notes will be
paid the amount of such Carry-Forward Amount with interest thereon (to the
extent permitted by applicable law) at the Note Interest Rate for the Class A-V
Notes applicable from time to time after certain payments to the holders of the
Class A-V Notes, the Class A-F Notes and the Note Insurer to the extent of
available funds. The 'Guaranteed Interest Payment Amount' for any Payment Date
is equal to the amount of interest that accrued on the aggregate outstanding
Principal Balance of the Adjustable Rate Loans payable on the related Due Date
minus the aggregate amount of each related Servicing Fee, the Indenture Trustee
Fee, the Owner Trustee Fee, the Note Insurer Premium and the Minimum Spread
(each as defined below). With respect to each Adjustable Rate Loan and each
Payment Date, the Master Servicer will be entitled to a fee (the 'Servicing
Fee') equal to 1/12 of the Servicing Fee Rate times the Principal Balance of
such Adjustable Rate Loan as of such date. With respect to each Adjustable Rate
Loan and each Payment Date, the Indenture Trustee will be entitled to a fee (the
'Indenture Trustee Fee') equal to 1/12 of the Indenture Trustee Fee Rate times
the Principal Balance of such Adjustable Rate Loan as of such date. For any
Payment Date, the Servicing Fee Rate is equal to 0.50% per annum, the Indenture
Trustee Fee Rate is equal to 0.015% per annum, the Owner Trustee Fee is a per
annum amount as specified in the related Indenture (payable on the Payment Date
in July of each year) and the 'Note Insurer Premium' is equal to 1/12 of the per
annum rate specified pursuant to the related Insurance Agreement times the Note
Principal Balance (the Note Insurer Premium together with the Owner Trustee Fee,
the related 'Administrative Fee'). With respect to each Adjustable Rate Loan and
each Payment Date, the 'Minimum Spread' is equal to 1/12 of 0.75% per annum
times the Principal Balance of such Adjustable Rate Loan as of such. The Note
Insurance Policy with respect to the Class A-V Notes does not cover any
Prepayment Interest Shortfalls, any Relief Act Shortfalls or the Carry-Forward
Amount, nor do the ratings assigned to the Class A-V Notes address the payment
of any Prepayment Interest Shortfalls, any Relief Act Shortfalls or the
Carry-Forward Amount.
As described herein, the Class A-V Interest Payment Amount is based on the
Class A-V Note Principal Balance. The 'Class A-V Note Principal Balance' as of
any date of determination is equal to the initial principal balance thereof as
of the Closing Date reduced by all amounts allocable to the Class A-V Principal
Payment Amount and the related Subordination Increase Amount previously
distributed with respect to such Class A-V Note.
Calculation of One-Month LIBOR. The Indenture Trustee will determine the
London interbank offered rate for one-month United States dollar deposits
('One-Month LIBOR') for each Interest Period for the Class A-V Notes on the
basis of the offered rates of the Reference Banks for one-month United States
dollar deposits, as such rates appear on the Telerate Page 3750, as of 11:00
a.m. (London time) on the related Interest Determination Date. 'Interest
Determination Date' shall mean (i) with respect to the Payment Date occurring in
July 1998, the second business day preceding the Closing Date and, (ii) with
respect to each Payment Date thereafter, on the second business day preceding
the related Interest Period. If such rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on that day to prime banks in the London
interbank market for a period equal to the relevant Interest Period (commencing
on the first day of such Interest Period). The Indenture Trustee will request
the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that day will be the
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arithmetic mean of the rates quoted by major banks in New York City, selected by
the Indenture Trustee, at approximately 11:00 a.m., New York City time, on that
day for loans in United States dollars to leading European banks for a period
equal to the relevant Interest Period (commencing on the first day of such
Interest Period).
'Telerate Page 3750' means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and 'Reference
Banks' means leading banks selected by the Indenture Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Class A-V Notes for the related Interest Period shall
(in the absence of manifest error) be final and binding.
Principal Payments. The 'Class A-V Principal Payment Amount' (a) any
Payment Date, other than the Final Scheduled Payment Date, will be equal to the
lesser of (x) the sum of the Class A-V Available Funds remaining after
distributions pursuant to clause (i) of '--Class A-V Notes--Priority of Payment'
below and any portion of any Insured Payment (as defined herein) for such
Payment Date representing principal and (y) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Adjustable Rate Loans received on the Adjustable Rate Loans with respect to
the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Adjustable Rate Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the related Servicing
Agreement or the Class A-V Purchase Agreement received during the preceding
calendar month;
(iii) the principal portion of all other unscheduled collections
received on the Adjustable Rate Loans during the related Prepayment Period
(or deemed to be received during the related Prepayment Period) (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors, Liquidation Proceeds and Insurance Proceeds
(excluding proceeds paid in respect of the Note Insurance Policy)), to the
extent not distributed in the preceding month;
(iv) any Insured Payment made with respect to principal plus the
lesser of (a) the Net Monthly Excess Cashflow relating to the Class A-F
Notes (or, if the Class A-F Notes have been retired, the amount in the
Class A-V Escrow Account (as defined in the related Indenture)) minus the
amount by which the Class A-V Interest Payment Amount exceeds the Class A-V
Available Funds and (b) the Realized Losses allocated to the Class A-V
Notes;
(v) with respect to the Payment Date immediately following the end of
the related Funding Period, any amounts in the related Pre-Funding Account
after giving effect to any purchase of Subsequent Adjustable Rate Loans;
minus
(vi) the amount of any related Subordination Reduction Amount for such
Payment Date;
and (b) with respect to the Final Scheduled Payment Date, the amount necessary
to reduce the Class A-V Note Principal Balance to zero.
In no event will the Class A-V Principal Payment Amount with respect to any
Payment Date be (x) less than zero or (y) greater than the then outstanding
Class A-V Note Principal Balance.
Priority of Payment. On each Payment Date, Available Funds with respect to
the Class A-V Notes and, if necessary, any available Net Monthly Excess Cashflow
relating to the other Series of Notes and any Insured Payment with respect to
such Payment Date (provided that Insured Payments will be applied only for the
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purposes set forth in clauses (i) and (ii)) will be allocated to the Class A-V
Notes in the following order of priority, in each case to the extent of
Available Funds with respect to the Class A-V Notes remaining:
(i) to the Class A-V Noteholders, the Class A-V Interest Payment
Amount with respect to such Payment Date net of any Prepayment Shortfalls
not covered by the Master Servicer by Compensating Interest and any Relief
Act Shortfalls;
(ii) to the Class A-V Noteholders, the Class A-V Principal Payment
Amount with respect to such Payment Date;
(iii) to the Note Insurer, the sum of (a) all amounts previously paid
by the Note Insurer under the Class A-V Note Insurance Policy which have
not previously been reimbursed, (b) any other amounts due to the Note
Insurer pursuant to the agreement pursuant to which the Class A-V Note
Insurance Policy is issued (the '1998-2V Insurance Agreement') and (c)
interest on the foregoing as set forth in the 1998-2V Insurance Agreement
from the date such amounts became due until paid in full (the
'Reimbursement Amount');
(iv) to the Class A-F Noteholders, if necessary, any amounts required
to pay (x) the amount by which the Class A-F Interest Payment Amount
exceeds Class A-F Available Funds due to Realized Losses or if the Master
Servicer or the Sub-Servicer does not make any Advance with respect to
payments of interest on such Payment Date and (y) any Realized Losses
relating to the Class A-F Notes on such Payment Date or any previous
Payment Date;
(v) to the Note Insurer, the sum of (a) all payments previously paid
by the Note Insurer under the Class A-F Note Insurance Policy which have
not previously been reimbursed, (b) any other amounts due to the Note
Insurer pursuant to the 1998-2F Insurance Agreement to the extent not
previously paid or reimbursed and (c) interest on the foregoing as set
forth in the 1998-2F Insurance Agreement from the date such amounts become
due until paid in full;
(vi) to the Class A-V Noteholders, the Subordination Increase Amount
(as defined in '--Class A-V Notes--Overcollateralization Provisions'
below), in reduction of the Class A-V Note Principal Balance thereof, until
the Class A-V Note Principal Balance has been reduced to zero;
(vii) to the Class A-V Noteholders, Prepayment Interest Shortfalls not
covered by the Master Servicer by Compensating Interest, Relief Act
Shortfalls and Carry Forward Amounts for such Payment Date;
(viii) to the Indenture Trustee, for any amounts owing to the
Indenture Trustee;
(ix) to the Master Servicer, any amounts owing to the Master Servicer
pursuant to the Servicing Agreement in connection with the indemnity by the
Series 1998-2V Issuer thereunder; and
(x) any remaining amounts to the holders of the related Certificates;
provided, however, that if the Class A-V Notes have been retired and the
Class A-F Subordination Amount is less than the Class A-F Required
Subordination Amount, such amounts shall be transferred to the Class A-F
Escrow Account.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. With respect to
any Payment Date, the excess, if any, of (x) the sum of the aggregate Principal
Balances of the Adjustable Rate Loans as of the close of business on the last
day of the period commencing on the second day of the month preceding the month
of such Payment Date (or, with respect to the first Payment Date, the day
following the Cut-off Date) and ending on the related Due Date (such period, the
'Due Period') and the amount of funds in the Class A-V Pre-Funding Account as of
such Payment Date over (y) the Class A-V Note Principal Balance as of such
Payment Date (and following the making of all payments made on such Payment
Date) is the 'Subordination Amount' as of such Payment Date. The related
Indenture requires that, on each Payment Date, the Net Monthly Excess Cashflow,
if any, for the Class A-V Certificates not used to make payments in respect of
the Class A-F Notes as described below be applied on such Payment Date as an
accelerated payment of principal on the Class A-V Notes, but only to the limited
extent hereafter described. The 'Net Monthly Excess Cashflow' for the Class A-V
Notes for any Payment Date is equal to the amount of related Available Funds
remaining after application to items (i) through
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(iii) under '--Class A-V Notes--Priority of Payment' herein. This application
has the effect of accelerating the amortization of the Class A-V Notes relative
to the amortization of the Adjustable Rate Loans. The related Indenture requires
that the Net Monthly Excess Cashflow for the Class A-V Notes be applied as an
accelerated payment of principal on the Class A-V Notes until the Subordination
Amount has increased to a level equal to the Required Subordination Amount for
such Payment Date.
Any amount of Net Monthly Excess Cashflow for the Class A-V Notes actually
applied as an accelerated payment of principal is a 'Subordination Increase
Amount.' The required level of the Subordination Amount with respect to a
Payment Date is the 'Required Subordination Amount' with respect to such Payment
Date. The related Indenture generally provides that the Required Subordination
Amount may, over time, decrease, or increase, subject to certain floors, caps
and triggers with respect to the Adjustable Rate Loans or the Fixed Rate Loans.
In the event that the Required Subordination Amount is permitted to
decrease or 'step down' on a Payment Date in the future, the related Indenture
provides that a portion of the principal payment which would otherwise be
distributed to the holders of the Class A-V Notes on such Payment Date shall be
distributed to the holders of the related Certificates on such Payment Date
(subject to certain prior applications as described under
'Class A-V Notes--Cross-collateralization'). This has the effect of decelerating
the amortization of the Class A-V Notes relative to the amortization of the
Adjustable Rate Loans, and of reducing the Subordination Amount. With respect to
any Payment Date, the difference, if any, between (a) the Subordination Amount
that would result on such Payment Date after taking into account all payments to
be made on such Payment Date (exclusive of any reductions thereto attributable
to Subordination Reduction Amounts (as described below) on such Payment Date)
and (b) the Required Subordination Amount for such Payment Date is the 'Excess
Subordination Amount' with respect to such Payment Date. With respect to any
Payment Date, an amount equal to the lesser of (a) the Excess Subordination
Amount and (b) the principal collections received by the Master Servicer with
respect to the prior Due Period is the 'Subordination Reduction Amount.' In
addition, a Subordination Reduction Amount may result even prior to the
occurrence of any decrease or 'step down' in the Required Subordination Amount.
This is because the holders of the Class A-V Notes will generally be entitled to
receive 100% of collected principal, even though the Class A-V Note Principal
Balance will represent less than 100% of the Adjustable Rate Loans' principal
balance. In the absence of the provisions relating to the Subordination
Reduction Amount, the foregoing may otherwise increase the Subordination Amount
above the Required Subordination Amount even without the application of any Net
Monthly Excess Cashflow.
The related Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Loans during the
calendar month preceding the calendar month in which such Payment Date occurs
(the 'Prepayment Period') will be distributed to the holders of the Class A-V
Notes on such Payment Date. If any Loan became a Liquidated Loan during such
Prepayment Period, the net Liquidation Proceeds (as defined in the Prospectus)
related thereto and allocated to principal may be less than the Principal
Balance of the related Loan; the amount of any such insufficiency is generally
defined as a 'Realized Loss.' The principal balance of any Loan after it becomes
a Liquidated Loan shall equal zero. The related Indenture does not contain any
provision which requires that the amount of any Realized Loss should be
distributed to the holders of the Class A-V Notes on the Payment Date which
immediately follows the event of loss; i.e., the related Indenture does not
require the current recovery of losses. However, the occurrence of a Realized
Loss will reduce the Subordination Amount, which, to the extent that such
reduction causes the Subordination Amount to be less than the Required
Subordination Amount applicable to the related Payment Date, will require the
payment of a Subordination Increase Amount on such Payment Date (or, if
insufficient funds are available on such Payment Date, on Subsequent Payment
Dates, until the Subordination Amount equals the Required Subordination Amount).
The effect of the foregoing is to allocate losses to overcollateralization by
reducing, or eliminating entirely, payments of Net Monthly Excess Cashflow and
of Subordination Reduction Amounts which the holders of the related Certificates
would otherwise receive. While the Note Insurer is not obligated to pay any
losses on Liquidated Loans unless such losses would create an Aggregate
Subordination Deficit, the Note Insurer may, at its sole option, pay any losses
on Liquidated Loans in accordance with the related Note Insurance Policy.
Overcollateralization and the Related Note Insurance Policy. The related
Indenture defines a 'Subordination Deficit' with respect to a Payment Date to be
the amount, if any, by which (x) the aggregate
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Class A-V Note Principal Balance of the Class A-V Notes as of such Payment Date,
and following the making of all payments to be made on such Payment Date (except
for any payment to be made as to principal from proceeds of the Note Insurance
Policy), exceeds (y) the sum of the aggregate Principal Balances of the
Adjustable Rate Loans as of the close of business on the Due Date preceding such
Payment Date and the amount of funds in the related Pre-Funding Account on such
Payment Date. The Aggregate Subordination Deficit is defined herein under 'Class
A-F Notes--Overcollateralization and the Related Note Insurance Policy.' The
related Indenture requires the Indenture Trustee to make a claim for an Insured
Payment under the related Note Insurance Policy not later than the second
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Aggregate Subordination Deficit will occur for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
holders of the Class A-V Notes on such Payment Date. The amount of the claim
will be the lesser of the Class A-V Subordination Deficit and the Aggregate
Subordination Deficit reduced by any Net Excess Cashflow available to pay such
amounts. Investors in the Class A-V Notes should realize that, under extreme
loss or delinquency scenarios, they may temporarily receive no payments of
principal.
Cross-collateralization. On each Payment Date, an amount equal to Net
Monthly Excess Cashflow remaining after application of items (i)-(iii) under
'--Class A-V Notes--Priority of Payment' herein shall be available to cover
certain shortfalls in amounts to pay the Class A-F Interest Payment Amount and
any Realized Losses on the Fixed Rate Loans relating to such Payment Date and to
reimburse the Note Insurer for an Insured Payment and certain other
reimbursements owed to the Insurer. After retirement of the Class A-V Notes, if
the Class A-F Subordination Amount is less than the Class A-F Required
Subordination Amount, amounts payable pursuant to item (x) under '--Class A-V
Notes--Priority of Payment' will be paid to the Class A-F Escrow Account.
Amounts in the Class A-F Escrow Account will be treated, on future Payment
Dates, as Net Monthly Excess Cashflow on the Class A-V Notes and will be
available to make the payments described in the preceding sentence in respect of
the Class A-F Notes.
NOTE INSURANCE POLICIES
The following summary of the terms of the Note Insurance Policies does not
purport to be complete and is qualified in its entirety by reference to the Note
Insurance Policies. A form of the Note Insurance Policies may be obtained, upon
request, from the Depositor.
Simultaneously with the issuance of the Notes, the Note Insurer will
deliver a Note Insurance Policy with respect to the Class A-F Notes and a Note
Insurance Policy with respect to the Class A-V Notes to the Indenture Trustee
for the benefit of the related Noteholders. Under each Note Insurance Policy,
the Note Insurer will irrevocably and unconditionally guarantee payment on each
Payment Date to the Indenture Trustee for the benefit of the related Noteholders
the full and complete payment of Insured Payments with respect to the Class A-F
Notes or Class A-V Notes, as applicable, calculated in accordance with the
original terms of the related Notes when issued and without regard to any
amendment or modification of the related Notes or the related Indenture except
amendments or modifications to which the Note Insurer has given its prior
written consent. 'Insured Payments' shall mean with respect to the Class A-F
Notes or Class A-V Notes, as applicable (a) as of any Payment Date (i) the
amount by which related Interest Payment Amount (net of any related Prepayment
Interest Shortfalls, whether or not such shortfalls are covered by the Master
Servicer by Compensating Interest (as defined herein), and any Relief Act
Shortfalls) exceeds the related Available Funds for such Loan Group and any Net
Monthly Excess Cashflow from the other Loan Group available to cover such
shortfall as of such Payment Date, and (ii) the amount by which the lesser of
the Subordination Deficit with respect to the related Loan Group and the
Aggregate Subordination Deficit exceeds the related Available Funds for such
Loan Group and any Net Monthly Excess Cashflow from the other Loan Group
available to cover such amounts and (b) without duplication of the amount
specified in clause (a)(ii), the aggregate Note Principal Balance of the Class
A-F Notes and Class A-V Notes, as applicable, to the extent unpaid on the
Payment Date in June 2028 (after giving effect to all other amounts
distributable and allocable to principal on such Payment Date). The Note
Insurance Policy with respect to the Class A-V Notes does not guarantee the
payment of the Carry-Forward Amount nor does either Note Insurance Policy cover
Prepayment Interest Shortfalls or Relief Act Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Note Insurer will pay
such amount out of funds of the Note Insurer on the later of
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(a) the date when due to be paid pursuant to the Order referred to below or (b)
the first to occur of (i) the fourth Business Day following Receipt by the Note
Insurer from the Indenture Trustee of (A) a certified copy of the order of the
court or other governmental body which exercised jurisdiction to the effect that
a Noteholder is required to return principal or interest distributed with
respect to a Note during the Term of the related Note Insurance Policy because
such distributions were avoidable preferences under applicable bankruptcy law
(the 'Order'), (B) a certificate of such holder of Notes that the Order has been
entered and is not subject to any stay, and (C) an assignment duly executed and
delivered by such Noteholder, in such form as is reasonably required by the Note
Insurer and provided to such Noteholder by the Note Insurer, irrevocably
assigning to the Note Insurer all rights and claims of such Noteholder against
the debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Note Insurer from the
Indenture Trustee of the items referred to in clauses (A), (B) and (C) above if,
at least four Business Days prior to such date of Receipt, the Note Insurer
shall have Received written notice from the Indenture Trustee that such items
were to be delivered on such date and such date was specified in such notice.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Indenture Trustee or Noteholder directly (unless an Noteholder has previously
paid such amount to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order, in which case such payment shall be disbursed
to the Indenture Trustee for distribution to such Noteholder upon proof of such
payment reasonably satisfactory to the Note Insurer). In connection with the
foregoing, the Note Insurer shall have the rights provided pursuant to the
related Indenture.
Payment of claims under either Note Insurance Policy will be made by the
Note Insurer following Receipt by the Note Insurer of the appropriate notice for
payment of the later to occur of (a) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment, and (b) 12:00
noon, New York City time, on the relevant Payment Date.
The terms 'Receipt' and 'Received,' with respect to the Note Insurance
Policies, mean actual delivery to the Note Insurer and to its fiscal agent
appointed by the Note Insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under either Note Insurance Policy by the Indenture Trustee is not in proper
form or is not properly completed, executed or delivered, it shall be deemed not
to have been Received, and the Note Insurer or the fiscal agent shall promptly
so advise the Indenture Trustee and the Indenture Trustee may submit an amended
notice.
Under each Note Insurance Policy, 'Business Day' means any day other than
(i) a Saturday or Sunday or (ii) a day on which banking institutions in the City
of New York, New York, the State of New York or in the city in which the
corporate trust office of the Indenture Trustee is located, are authorized or
obligated by law or executive order to be closed. The Note Insurer's obligations
under each Note Insurance Policy to make Insured Payments shall be discharged to
the extent funds are transferred to the Indenture Trustee as provided in such
Note Insurance Policy, whether or not such funds are properly applied by the
Indenture Trustee.
'Term of the Note Insurance Policy' means, with respect to each Note
Insurance Policy, the period from and including the date of issuance of such
Note Insurance Policy to and including the date on which the Principal Balances
of the related Notes are zero, plus such additional period, to the extent
specified in such Note Insurance Policy, during which any payment on the related
Notes could be avoided in whole or in part as a preference payment.
The Note Insurer shall be subrogated to the rights of the related
Noteholders to receive payments of principal and interest, as applicable, with
respect to distributions on the related Notes to the extent of any payment by
the Note Insurer under each Note Insurance Policy. To the extent the Note
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Indenture Trustee), to the Noteholders, the Note Insurer will be
subrogated to the rights of the Class A-F Noteholders and Class A-V Noteholders,
as applicable, with respect to such Insured Payment and shall be deemed to the
extent of the payments so made to be a registered Noteholder for purposes of
payment.
Claims under the Note Insurance Policies constitute direct unsecured and
unsubordinated obligations of the Note Insurer, and will rank equally with any
other unsecured and unsubordinated obligations of the Note Insurer
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except for certain obligations in respect to tax and other payments to which
preference is or may become afforded by statute. The terms of the Note Insurance
Policies cannot be modified, altered or affected by any other agreement or
instrument, or by the merger, consolidation or dissolution of the Depositor. The
Note Insurance Policies by their terms may not be canceled or revoked prior to
distribution in full of all Insured Payments (as defined therein). The Note
Insurance Policies are governed by the laws of the State of New York. The Note
Insurance Policies are not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Note Insurer agrees
under each Note Insurance Policy not to assert, and waives, for the benefit of
each related Noteholder, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Note Insurer to avoid payment
of its obligations under such Note Insurance Policy in accordance with the
express provisions of such Note Insurance Policy.
Pursuant to the terms of each Indenture, unless a Note Insurer Default
exists, the Note Insurer will be entitled to exercise certain rights of the
related Noteholders, without the consent of such Noteholders, and the
Noteholders may exercise such rights only with the prior written consent of the
Note Insurer.
With respect to the Class A-F Notes and the Class A-V Notes, respectively,
the related Issuer, the Seller and the Note Insurer will enter into a related
Insurance Agreement pursuant to which the related Issuer and the Seller will
agree to reimburse, with interest, the Note Insurer for amounts paid pursuant to
claims under the related Note Insurance Policy. The Depositor and the Seller
will further agree to pay the Note Insurer all reasonable charges and expenses
which the Note Insurer may pay or incur relative to any amounts paid under the
related Note Insurance Policy or otherwise in connection with the transaction
and to indemnify the Note Insurer against certain liabilities. Except to the
extent provided therein, amounts owing under each Insurance Agreement will be
payable solely from the Trust Estates. An event of default by the Master
Servicer under either Insurance Agreement will constitute an Event of Default by
the Master Servicer under the Indentures and allow the Note Insurer, among other
things, to direct the Indenture Trustee to terminate the Master Servicer. An
'event of default' by the Master Servicer under each Insurance Agreement
includes (i) the Master Servicer's failure to pay when due any amount owed under
such Insurance Agreement or certain other documents, (ii) the Master Servicer's
untruth or incorrectness in any material respect of any representation or
warranty of the Master Servicer in such Insurance Agreement, the related
Indenture (in its capacity as Master Servicer) or certain other documents, (iii)
the Master Servicer's failure to perform or to observe any covenant or indenture
in such Insurance Agreement, the related Indenture (in its capacity as Master
Servicer) and certain other documents, (iv) the Master Servicer's failure to pay
its debts in general or the occurrence of certain event of insolvency or
bankruptcy with respect to the Master Servicer, and (v) the occurrence of an
Event of Default under the related Indenture or certain other documents.
ADVANCES
Prior to each Payment Date, the Sub-Servicer is required under each
sub-servicing agreement, and the Master Servicer is required under the related
Servicing Agreement, to make 'Advances' (out of its own funds, advances made by
any subservicer, or funds held in the related Collection Account (as described
in the Prospectus) for future payment or withdrawal) with respect to any
payments of interest (net of the Servicing Fee) which were due on the Fixed Rate
Loans or the Adjustable Rate Loans on the immediately preceding Due Date and
which are delinquent on the business day next preceding the related
Determination Date. With respect to Balloon Loans, the Master Servicer is not
obligated to make Advances with respect to the balloon payment, but shall
advance interest on such Balloon Loan as if such Mortgage Loan was an amortizing
loan.
Such Advances are required to be made by the Master Servicer and
Sub-Servicer only to the extent they are deemed by the Master Servicer and
Sub-Servicer, respectively, to be recoverable from related late collections,
Insurance Proceeds, or Liquidation Proceeds. The purpose of making such Advances
is to maintain a regular cash flow to the Noteholders, rather than to guarantee
or insure against losses. Any failure by the Master Servicer to make an Advance
as required under the related Servicing Agreement will constitute an Event of
Default
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thereunder, in which case the Indenture Trustee, as successor Master Servicer,
will be obligated to make any such Advance, in accordance with the terms of the
related Servicing Agreement.
All Advances will be reimbursable to the Master Servicer or Sub-Servicer,
as the case may be, on a first priority basis from late collections, Insurance
Proceeds or Liquidation Proceeds from the related Loan as to which such
unreimbursed Advance was made. In addition, any Advances previously made which
are deemed by the Master Servicer or Sub-Servicer to be nonrecoverable from
related late collections, Insurance Proceeds and Liquidation Proceeds may be
reimbursed to the Master Servicer or the Sub-Servicer, as the case may be, out
of any funds in the related Collection Account prior to payments on the related
Notes.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the related Payment
Account for the purpose of making payments to the Noteholders.
OPTIONAL REDEMPTION
The Class A-F Notes may be redeemed in whole, but not in part, by the
holder of a majority of the related Certificates on any Payment Date on or after
the Payment Date on which the aggregate Principal Balance of the Fixed Rate
Loans is less than or equal to 10% of the Class A-F Original Pool Balance. The
Class A-V Notes may be redeemed in whole, but not in part, by the holder of a
majority of the related Certificates on any Payment Date on or after the Payment
Date on which the aggregate Principal Balance of the Adjustable Rate Loans is
less than or equal to 10% of the Class A-V Original Pool Balance. The purchase
price will be equal to 100% of the aggregate outstanding Class A-F or Class A-V
Note Principal Balance of the Class A-F Notes or the Class A-V Notes, as
applicable, and accrued and unpaid interest thereon (including any Carry-Forward
Amount with respect to the Class A-V Notes) at the related Note Interest Rate
through the date on which the Class A-F Notes or the Class A-V Notes, as
applicable, are redeemed in full together with all amounts due and owing,
including any such amounts due and owing in connection with such redemption, to
the Note Insurer, the Master Servicer and the Indenture Trustee. The 'Final
Scheduled Payment Date' is the Payment Date occurring in June 2028 with respect
to the Class A-F Notes and the Class A-V Notes.
MANDATORY PREPAYMENTS ON THE NOTES
The Class A-F Notes and the Class A-V Notes, as applicable, will be
partially prepaid on the Payment Date immediately following the end of the
related Funding Period to the extent that any amount remains on deposit in the
related Pre-Funding Account on such Payment Date. Although no assurance can be
given, it is anticipated that the principal amount of Subsequent Fixed Rate
Loans and Subsequent Adjustable Rate Loans sold by the Seller to the related
Issuer and included in the related Trust Estate will require the application of
substantially all of the related Original Pre-Funded Amount and that there
should be no material amount of principal prepaid to the Class A-F Notes and the
Class A-V Notes from the related Pre-Funding Account. However, it is unlikely
that the Seller will be able to deliver Subsequent Fixed Rate Loans and
Subsequent Adjustable Rate Loans with an aggregate principal balance identical
to the related Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Class A-F Notes
and the Class A-V Notes will be deposited in a related account (the related
'Interest Coverage Account') for application by the Indenture Trustee to cover
shortfalls in the related Interest Payment Amount attributable to the
pre-funding feature during the related Funding Period. Such shortfall initially
will exist during the related Funding Period because the aggregate Principal
Balance of the Class A-F Notes and the Class A-V Notes, and interest accrued
thereon, during the related Funding Period will be greater than the aggregate
principal balance of the related Loans, and interest accrued thereon, during
such period. On the first business day following the first Payment Date
following the termination of the related Funding Period, funds remaining on
deposit in the related Interest Coverage Account will be paid to the Seller.
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CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Series of Notes will depend on the price paid by
the holder for such Note, the related Note Interest Rate and the rate and timing
of principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the related Loans
and the allocation thereof. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments on the related Loans and the
amount, if any, distributed from the related Pre-Funding Account at the end of
the related Funding Period. The rate of principal payments on such Loans will in
turn be affected by the amortization schedules of the Loans, the rate and timing
of principal prepayments thereon by the Mortgagors and liquidations of defaulted
Loans, and purchases of Loans due to certain breaches of representations and
warranties and optional repurchases of delinquent loans by the Master Servicer.
The timing of changes in the rate of prepayments, liquidations and repurchases
of the Loans may, and the timing of losses will, significantly affect the yield
to an investor, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation. Since the rate and timing of
principal payments on the Loans will depend on future events and on a variety of
factors (as described more fully herein and in the Prospectus under 'Yield
Considerations'), no assurance can be given as to such rate or the timing of
principal payments on the Notes.
The Loans generally may be prepaid in full or in part at any time; however,
with respect to 68.12% and 58.97% of the Initial Fixed Rate Loans and the
Initial Adjustable Rate Loans, respectively, prepayment will subject the
mortgagor to a prepayment charge. Investors should be aware that 13.67% of the
Fixed Rate Loans are secured by second liens on the related Mortgaged
Properties. Generally, Loans secured by second liens are not viewed by
Mortgagors as permanent financing. Accordingly, such Loans may experience a
higher rate of prepayment than first lien mortgage loans. None of the Adjustable
Rate Loans are secured by second liens. The Fixed Rate Loans and the Adjustable
Rate Loans each contain a customary 'due on sale' provision. The Master Servicer
shall enforce any due-on-sale clause contained in any mortgage note or Mortgage,
to the extent permitted under applicable law and governmental regulations;
provided, however, if the Master Servicer determines that it is reasonably
likely that any Mortgagor will bring, or if any Mortgagor does bring, legal
action to declare invalid or otherwise avoid enforcement of a due-on-sale clause
contained in any mortgage note or Mortgage, the Master Servicer shall not be
required to enforce the due-on-sale clause or to contest such action. The extent
to which the Loans are assumed by purchasers of the Mortgaged Properties rather
than prepaid by the related Mortgagors in connection with the sales of the
Mortgaged Properties will affect the weighted average life of the related Notes
and may result in a prepayment experience on the Loans that differs from that on
other Loans. See 'Yield Considerations' in the Prospectus. Prepayments,
liquidations and purchases of the Loans will result in payments to holders of
the Notes of principal amounts which would otherwise be distributed over the
remaining terms of the Loans. Factors affecting prepayment (including defaults
and liquidations) of Loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest rates
and servicing decisions.
The rate of defaults on the Loans will also affect the rate and timing of
principal payments on the Loans. In general, defaults on Loans are expected to
occur with greater frequency in their early years. Increases in the monthly
payments of the Class A-V Loans to an amount in excess of the monthly payment
required at the time of origination may result in a default rate higher than
that on level payment loans, particularly since the Mortgagor under each
Adjustable Rate Loan was qualified on the basis of the Mortgage Rate in effect
at origination. The repayment of such Adjustable Rate Loans will be dependent on
the ability of the Mortgagor to make larger monthly payments as the Mortgage
Rate increases. With respect to the Fixed Rate Loans that are secured by second
liens on the related Mortgaged Properties, such Loans are subordinate to the
rights of the mortgagee under the related first lien. Accordingly, investors
will be subject to a loss if the holder of a first lien on the related Mortgaged
Property is successful in foreclosure of its mortgage since no second lien or
encumbrances survive such a foreclosure. In addition, the rate of default on
Loans which are refinance or limited documentation Loans, and on Loans with high
Loan-to-Value Ratios, may be higher than for other types of Loans. Furthermore,
the rate and timing of prepayments, defaults and liquidations on the Loans will
be affected by the general economic condition of the region of the country in
which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak
deteriorating economy
S-63
<PAGE>
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See 'Yield Considerations' in the Prospectus.
To the extent that the related Original Pre-Funded Amount has not been
fully applied to the purchase of Subsequent Fixed Rate Loans and Subsequent
Adjustable Rate Loans by the related Issuer by the end of the related Funding
Period, the holders of the Class A-F Notes and the Class A-V Notes, as
applicable, will receive on the first Payment Date following the termination of
the related Funding Period a prepayment of principal in an amount equal to the
lesser of (i) the related Pre-Funded Amount remaining in the related Pre-Funding
Account and (ii) the outstanding Note Principal Balance of the Class A-F Notes
and the Class A-V Notes, as applicable. Although no assurance can be given, it
is anticipated by the Depositor that the principal amount of Subsequent Fixed
Rate Loans and Subsequent Adjustable Rate Loans sold to the related Issuer for
inclusion in the related Trust Estate will require the application of
substantially all amounts on deposit in the related Pre-Funding Account and that
there will be no material amount of principal prepaid to such related
Noteholders. However, it is unlikely that the Seller will be able to deliver
Subsequent Fixed Rate Loans and Subsequent Adjustable Rate Loans with an
aggregate principal balance identical to the related Pre-Funded Amount and
therefore, some prepayment is expected on the Notes.
In addition, the yield to maturity of each Series of Notes will depend on,
among other things, the price paid by the holders of the related Notes and the
then applicable related Note Interest Rate. The extent to which the yield to
maturity of a Note is sensitive to prepayments will depend, in part, upon the
degree to which it is purchased at a discount or premium. In general, if a Note
is purchased at a premium and principal payments thereon occur at a rate faster
than anticipated at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase. Conversely, if
a Note is purchased at a discount and principal payments thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase. For additional
considerations relating to the yield on the Notes, see 'Yield Considerations' in
the Prospectus.
Furthermore, the yield to maturity on the Notes may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the Notes at the related Note Interest Rate is greater than the amount of
interest accrued on the Loans at the related Mortgage Rates less the sum of the
Servicing Fee Rate, the Indenture Trustee Fee Rate and the Administrative Fees.
In such event, the resulting shortfall will only be payable to the extent that
on any future Payment Date interest accrued on the Loans at the related Mortgage
Rates less such rates is greater than the interest accrued on the Notes, and
only to the extent of Available Funds following distributions to the Noteholders
and the Note Insurer pursuant to clauses (i) through (iv) under 'Description of
the Securities-Priority of Payment.'
The Class A-V Note Interest Rate is based upon, among other factors as
described herein under 'Description of the Notes--Class A-V Notes--Interest
Payments,' the value of an index (One-Month LIBOR (as defined herein) which is
different from the value of the Index applicable to the Adjustable Rate Loans,
Six-Month LIBOR ). The Mortgage Rate for each Adjustable Rate Loan adjusts
semi-annually, commencing on the related first Adjustment Date, based upon the
Index, whereas the Class A-V Note Interest Rate on the Class A-V Notes adjusts
monthly based upon One-Month LIBOR plus 0.17% (or after the Payment Date which
occurs on or prior to the date on which the aggregate Principal Balance of the
sum of the Adjustable Rate Loans is less than or equal to 10% of the Class A-V
Original Pool Balance, One-Month LIBOR plus 0.34%), limited by the Maximum
Interest Rate. In addition, One- Month LIBOR and the Index on the Adjustable
Rate Loans may respond differently to economic and market factors, and there is
not necessarily any correlation between them. Moreover, the Adjustable Rate
Loans are subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum
Mortgage Rates (each, as defined herein). Thus, it is possible, for example,
that One-Month LIBOR may rise during periods in which the Index are stable or
falling or that, even if both One-Month LIBOR and the Index rise during the same
period, One-Month LIBOR may rise much more rapidly than the Index.
Although the Mortgage Rates on the Adjustable Rate Loans will adjust
semi-annually, such increases and decreases may be limited by the Periodic Rate
Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate, if applicable, on
each such Adjustable Rate Loan, and will be based on the applicable Index (which
may not rise and fall consistently with prevailing mortgage rates) plus the
related Gross Margin (which may be different from the prevailing margins on
other Adjustable Rate Loans). As a result, the Mortgage Rates on the Adjustable
S-64
<PAGE>
Rate Loans at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
Adjustable Rate Loans have Maximum Mortgage Rates, if prevailing mortgage rates
were to increase above the Maximum Mortgage Rates, the rate of prepayment on the
Adjustable Rate Loans may be slower than would otherwise be the case. In
general, if prevailing mortgage rates fall significantly below the Mortgage
Rates on the Adjustable Rate Loans, the rate of prepayments (including
refinancings) will be expected to increase. Conversely, if prevailing mortgage
rates rise significantly above the Mortgage Rates on the Adjustable Rate Loans,
the rate of prepayment on the Adjustable Rate Loans will be expected to
decrease.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Notes will be influenced by, among
other things, the rate at which principal of the related Loans is paid, which
may be in the form of scheduled amortization, prepayments or liquidations.
Because the amortization schedule of each Class A-V Loan will be recalculated
semi-annually after the Initial Adjustment Date for such Adjustable Rate Loan,
any partial prepayments thereof will not reduce the term to maturity of such
Adjustable Rate Loan. In addition, an increase in the Mortgage Rate on a
Adjustable Rate Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Adjustable Rate Loan will result in a lower monthly payment
and in a larger percentage of each monthly payment being allocated to principal
and a smaller percentage being allocated to interest.
CLASS A-F NOTES
Prepayments on Loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement with respect to
the Class A-F Notes, the Conditional Prepayment Rate model ('CPR'), assumes that
the outstanding principal balance of a pool of Loans prepays each month at a
specified annual rate or CPR. In generating monthly cash flows, this annual rate
is converted to an equivalent monthly rate. With respect to the Fixed Rate
Loans, the prepayment model assumes a CPR of 2% in the first month of the life
of the Fixed Rate Loans and an additional 2% per annum in each month thereafter
until the tenth month; beginning in the tenth month and in each month
thereafter, the prepayment model assumes a CPR of 20% (such model, the 'Fixed
Rate Prepayment Assumption'). The levels of CPR used above in defining the Fixed
Rate Prepayment Assumption represent 100% of the Fixed Rate Prepayment
Assumption. To assume a CPR percentage in either prepayment model is to assume
that the stated percentage of the outstanding principal balance of the pool
would be prepaid over the course of a year. No representation is made that the
Loans will prepay at the percentages of CPR specified in either prepayment
model.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Fixed Rate Loans that are expected to be included in the
S-65
<PAGE>
related Trust Estate as described under 'Description of the Home Equity Loan
Pool' herein and the performance thereof. The table assumes, among other things,
that: (i) the Fixed Rate Loans have the following characteristics:
FIXED RATE LOANS
<TABLE>
<CAPTION>
ORIGINAL REMAINING ORIGINAL
TERM TO TERM TO AMORTIZATION MORTGAGE
PRINCIPAL MATURITY MATURITY TERM INTEREST AMORTIZATION
BALANCE (IN MONTHS) (IN MONTHS) (IN MONTHS) RATE METHOD
-------------- ----------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL LOANS
$ 7,801,238.75 178 177 178 11.385 % Level Pay
512,297.75 240 240 240 10.402 % Level Pay
36,293,520.35 360 359 360 10.549 % Level Pay
1,469,046.61 180 179 360 11.655 % Balloon
SUBSEQUENT LOANS
$ 2,702,182.13 178 178 178 11.385 % Level Pay
177,448.98 240 240 240 10.402 % Level Pay
12,571,298.66 360 360 360 10.549 % Level Pay
508,846.30 180 180 360 11.655 % Balloon
</TABLE>
(ii) payments on the Class A-F Notes are based upon a 360-day year consisting of
twelve 30-day months and are received, in cash, on the 25th day of each month,
commencing in July 1998; (iii) there are no delinquencies or losses on the
Loans, and principal payments on the Loans are timely received together with
prepayments, if any, at the respective constant percentages of CPR or Fixed Rate
Prepayment Assumption set forth in the following table; (iv) there are no
repurchases of the Loans; (v) the scheduled monthly payment for the Fixed Rate
Loan is calculated based on its principal balance, Mortgage Rate and remaining
term to maturity such that such Fixed Rate Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Fixed Rate Loan by
its remaining term to maturity, (vi) payments on the Fixed Rate Loans earn no
reinvestment return; (vii) the Note Insurer Premium is the rate set forth in the
related Insurance Agreement, the Indenture Trustee Fee Rate is 0.015% per annum
and the Servicing Fee Rate is 0.50% per annum; (viii) there are additional
ongoing Trust Estate expenses of approximately $333.33 per month multiplied by a
fraction, the numerator of which is the Principal Balance, as of the beginning
of the month, of the Class A-F Notes, and the denominator of which is the sum of
the Principal Balances of the Class A-F Notes and the Class A-V Notes as of the
beginning of the month payable out of the related Trust Estate; (ix) the Fixed
Rate Loans experience no prepayment penalties; (x) there are no investment
earnings on amounts in any related Collection Account, including the related
Payment Account, and no other miscellaneous servicing fees are passed through to
the Class A-F Noteholders; (xi) the Subsequent Fixed Rate Loans are purchased by
August 1998 and are assumed to have their first scheduled monthly payment due in
July 1998; and (xii) the Notes will be purchased on June 25, 1998.
The actual characteristics and performance of the Fixed Rate Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Fixed Rate Loans will prepay at a
constant level of CPR until maturity or that all of the Fixed Rate Loans will
prepay at the same level of CPR or Fixed Rate Prepayment Assumption. Moreover,
the diverse remaining terms to stated maturity of the Fixed Rate Loans could
produce slower or faster principal payments than indicated in the table at the
various constant percentages of CPR specified, even if the weighted average
remaining term to stated maturity of the Fixed Rate Loans is as assumed. Any
difference between such assumptions and the actual characteristics and
performance of the Fixed Rate Loans, or actual prepayment experience, will
affect the percentages of Initial Note Principal Balance outstanding over time
and the weighted average life of the Class A-F Notes. Subject to the foregoing
discussion and assumptions, the following table indicates the weighted average
life of the Notes, and sets forth the percentages of the Initial Class A-F Note
Principal Balance that would be outstanding after each of the dates shown at
various percentages of CPR.
S-66
<PAGE>
PERCENT OF INITIAL CLASS A-F NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE FIXED RATE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
(TO MATURITY) (TO CALL)
------------------------------------------------------ ----------------------
SCENARIO(1)(4) SCENARIO (1)(5)
------------------------------------------------------ ----------------------
FIXED RATE LOANS(2) 0% 25% 75% 100% 125% 175% 200% 0% 25% 75%
----- ----- ---- ---- ---- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PAYMENT DATE
Initial Percentage....................... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100%
June 25, 1999............................ 96 92 86 82 79 72 69 96 92 86
June 25, 2000............................ 93 85 70 63 56 43 37 93 85 70
June 25, 2001............................ 92 79 58 48 40 28 23 92 79 58
June 25, 2002............................ 90 74 47 38 30 18 13 90 74 47
June 25, 2003............................ 89 69 39 30 22 11 8 89 69 39
June 25, 2004............................ 87 64 33 23 16 7 5 87 64 33
June 25, 2005............................ 86 59 28 18 12 5 3 86 59 28
June 25, 2006............................ 84 55 23 14 9 3 1 84 55 23
June 25, 2007............................ 82 50 19 11 6 2 1 82 50 19
June 25, 2008............................ 79 46 16 9 5 1 0 79 46 16
June 25, 2009............................ 77 42 13 7 3 0 0 77 42 13
June 25, 2010............................ 74 39 11 5 2 0 0 74 39 11
June 25, 2011............................ 70 35 9 4 1 0 0 70 35 0
June 25, 2012............................ 67 32 7 3 1 0 0 67 32 0
June 25, 2013............................ 61 28 5 2 0 0 0 61 28 0
June 25, 2014............................ 58 25 4 1 0 0 0 58 25 0
June 25, 2015............................ 56 23 4 1 0 0 0 56 23 0
June 25, 2016............................ 54 21 3 1 0 0 0 54 21 0
June 25, 2017............................ 51 19 2 0 0 0 0 51 19 0
June 25, 2018............................ 48 17 2 0 0 0 0 48 17 0
June 25, 2019............................ 45 15 1 0 0 0 0 45 15 0
June 25, 2020............................ 42 14 1 0 0 0 0 42 14 0
June 25, 2021............................ 38 12 1 0 0 0 0 38 12 0
June 25, 2022............................ 34 10 0 0 0 0 0 34 10 0
June 25, 2023............................ 30 8 0 0 0 0 0 30 0 0
June 25, 2024............................ 25 7 0 0 0 0 0 25 0 0
June 25, 2025............................ 20 5 0 0 0 0 0 20 0 0
June 25, 2026............................ 14 3 0 0 0 0 0 14 0 0
June 25, 2027............................ 7 1 0 0 0 0 0 0 0 0
June 25, 2028............................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years(3)........ 17.99 10.86 5.34 4.16 3.38 2.44 2.13 17.93 10.63 4.99
<CAPTION>
FIXED RATE LOANS(2) 100% 125% 175% 200%
---- ---- ---- ----
<S> <C> <C> <C> <C>
PAYMENT DATE
Initial Percentage....................... 100 % 100 % 100 % 100 %
June 25, 1999............................ 82 79 72 69
June 25, 2000............................ 63 56 43 37
June 25, 2001............................ 48 40 28 23
June 25, 2002............................ 38 30 18 13
June 25, 2003............................ 30 22 11 0
June 25, 2004............................ 23 16 0 0
June 25, 2005............................ 18 12 0 0
June 25, 2006............................ 14 0 0 0
June 25, 2007............................ 11 0 0 0
June 25, 2008............................ 0 0 0 0
June 25, 2009............................ 0 0 0 0
June 25, 2010............................ 0 0 0 0
June 25, 2011............................ 0 0 0 0
June 25, 2012............................ 0 0 0 0
June 25, 2013............................ 0 0 0 0
June 25, 2014............................ 0 0 0 0
June 25, 2015............................ 0 0 0 0
June 25, 2016............................ 0 0 0 0
June 25, 2017............................ 0 0 0 0
June 25, 2018............................ 0 0 0 0
June 25, 2019............................ 0 0 0 0
June 25, 2020............................ 0 0 0 0
June 25, 2021............................ 0 0 0 0
June 25, 2022............................ 0 0 0 0
June 25, 2023............................ 0 0 0 0
June 25, 2024............................ 0 0 0 0
June 25, 2025............................ 0 0 0 0
June 25, 2026............................ 0 0 0 0
June 25, 2027............................ 0 0 0 0
June 25, 2028............................ 0 0 0 0
Weighted Average Life in Years(3)........ 3.86 3.14 2.27 1.99
</TABLE>
- ------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the Fixed Rate Prepayment Assumption.
(3) The weighted average life of a Class A-F Note is determined by (i)
multiplying the amount of each distribution of principal on a Note by the
number of years from the date of issuance of the Class A-F Note to the
related Payment Date, (ii) adding the results, and (iii) dividing the sum by
the Initial Class A-F Note Principal Balance of the Class A-F Note.
(4) Assumes that the Class A-F Notes remain outstanding to their maturity date.
(5) Assumes the Seller exercises its option to redeem the Class A-F Notes when
the aggregate Principal Balance of the Fixed Rate Loans remaining is less
than or equal to 10% of the Class A-F Original Pool Balance. See
'Description of the Notes--Optional Redemption' herein.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE
SECOND PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE FIXED RATE LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
S-67
<PAGE>
CLASS A-V NOTES
Prepayments on Loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement with respect to
the Class A-V Notes, the CPR model, assumes that the outstanding principal
balance of a pool of Loans prepays each month at a specified annual rate or CPR.
In generating monthly cash flows, this annual rate is converted to an equivalent
monthly rate. With respect to the Adjustable Rate Loans, the prepayment model
assumes a constant CPR of 25% (such model, the 'Adjustable Rate Prepayment
Assumption'). The levels of CPR used above in defining the Adjustable Rate
Prepayment Assumption represent 100% of the Adjustable Rate Prepayment
Assumption. To assume a CPR percentage in either prepayment model is to assume
that the stated percentage of the outstanding principal balance of the pool
would be prepaid over the course of a year. No representation is made that the
Loans will prepay at the percentages of CPR specified in either prepayment
model.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Adjustable Rate Loans that are expected to be included in the related Trust
Estate as described under 'Description of the Home Equity Loan Pool' herein and
the performance thereof. The table assumes, among other things, that: (i) the
Adjustable Rate Loans have the following characteristics:
ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO MORTGAGE MONTHS
PRINCIPAL MATURITY MATURITY INTEREST GROSS TO LIFE LIFE PERIODIC INITIAL
BALANCE (IN MONTHS) (IN MONTHS) RATE MARGIN RATE CHANGE CAP FLOOR CAP CAP
------------- ----------- ----------- -------- ------ ----------- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL LOANS
$3,185,785.68 350 348 11.46 7.41 4 17.95 11.45 1.50 1.50
3,139,456.21 358 357 11.75 7.56 5 18.25 11.75 1.50 1.50
3,349,995.00 360 360 10.24 6.81 6 16.74 10.24 1.50 1.50
571,235.99 360 354 11.48 7.04 18 17.98 11.48 1.50 3.00
292,862.09 360 356 12.11 7.93 20 18.61 12.11 1.50 3.00
281,965.69 180 178 10.13 6.94 22 16.63 10.13 1.50 3.00
11,121,818.76 360 358 10.73 7.35 22 17.23 10.73 1.50 3.00
174,336.93 180 179 10.38 6.51 23 16.88 10.38 1.50 3.00
32,602,503.21 360 359 10.71 7.21 23 17.21 10.71 1.50 3.00
28,731,962.05 360 360 10.93 7.41 24 17.43 10.93 1.50 3.00
602,059.73 180 180 9.76 6.20 25 16.26 9.76 1.50 3.00
1,849,402.19 360 358 9.60 6.79 34 16.10 9.60 1.50 3.00
7,070,732.44 360 359 9.43 6.72 35 15.93 9.43 1.50 3.00
6,753,775.00 360 360 9.80 6.78 36 16.30 9.80 1.50 3.00
536,290.72 360 358 9.99 6.96 58 16.49 9.99 1.50 3.00
970,942.39 360 359 9.30 6.92 59 15.80 9.30 1.50 3.00
1,235,400.00 360 360 9.01 6.27 60 15.51 9.01 1.50 3.00
</TABLE>
(Table Continued on Next Page)
S-68
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO MORTGAGE MONTHS
PRINCIPAL MATURITY MATURITY INTEREST GROSS TO LIFE LIFE PERIODIC INITIAL
BALANCE (IN MONTHS) (IN MONTHS) RATE MARGIN RATE CHANGE CAP FLOOR CAP CAP
------------- ----------- ----------- -------- ------ ----------- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUBSEQUENT LOANS 1.50
$1,103,487.98 350 350 11.46 7.41 6 17.95 11.45 1.50 1.50
1,087,440.44 358 358 11.75 7.56 6 18.25 11.75 1.50 1.50
1,160,366.57 360 360 10.24 6.81 6 16.74 10.24 1.50 3.00
197,863.92 360 360 11.48 7.04 24 17.98 11.48 1.50 3.00
101,441.16 360 360 12.11 7.93 24 18.61 12.11 1.50 3.00
97,666.98 180 180 10.13 6.94 24 16.63 10.13 1.50 3.00
3,852,359.98 360 360 10.73 7.35 24 17.23 10.73 1.50 3.00
60,386.58 180 180 10.38 6.51 24 16.88 10.38 1.50 3.00
11,292,809.33 360 360 10.71 7.21 24 17.21 10.71 1.50 3.00
208,540.60 180 180 9.76 6.20 24 16.26 9.76 1.50 3.00
9,952,136.71 360 360 10.93 7.41 24 17.43 10.93 1.50 3.00
640,593.34 360 360 9.60 6.79 36 16.10 9.60 1.50 3.00
2,449,150.38 360 360 9.43 6.72 36 15.93 9.43 1.50 3.00
2,339,363.11 360 360 9.80 6.78 36 16.30 9.80 1.50 3.00
185,759.63 360 360 9.99 6.96 60 16.49 9.99 1.50 3.00
336,313.66 360 360 9.30 6.92 60 15.80 9.30 1.50 3.00
427,916.12 360 360 9.01 6.27 60 15.51 9.01 1.50
</TABLE>
(ii) One-Month LIBOR remains constant at 5.65534%; (iii) payments on the Class
A-V Notes are based upon the actual number of days in the month and a 360-day
year and are received, in cash, on the 25th day of each month, commencing in
July 1998; (iv) there are no delinquencies or losses on the Adjustable Rate
Loans, and principal payments on the Adjustable Rate Loans are timely received
together with prepayments, if any, at the respective constant percentages of CPR
or Adjustable Rate Prepayment Assumption set forth in the following table; (v)
there are no repurchases of the Adjustable Rate Loans; (vi) the scheduled
monthly payment for the Adjustable Rate Loan is calculated based on its
principal balance, Mortgage Rate and remaining term to maturity such that such
Adjustable Rate Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Adjustable Rate Loan by its remaining term to
maturity, (vii) the Index remains constant at 5.74219% and the Mortgage Rate on
each Adjustable Rate Loan is adjusted on the next Adjustment Date (and on
Subsequent Adjustment Dates, as necessary) to equal the Index plus the
applicable Gross Margin, subject to the Maximum Mortgage Rate and Minimum
Mortgage Rate listed below and the related Periodic Rate Cap; (viii) with
respect to each Adjustable Rate Loan, the monthly payment on the Adjustable Rate
Loan is adjusted on the Due Date immediately following the next related
Adjustment Date (and on Subsequent Adjustment Dates, as necessary) to equal a
fully amortizing payment as described in clause (vi) above; (ix) payments on the
Adjustable Rate Loans earn no reinvestment return; (x) the Note Insurer Premium
is the rate set forth in the related Insurance Agreement, the Indenture Trustee
Fee Rate is 0.015% per annum and the Servicing Fee Rate is 0.50% per annum; (xi)
there are additional ongoing Trust Estate expenses of approximately $333.33 per
month multiplied by a fraction, the numerator of which is the Principal Balance,
as of the beginning of the month, of the Class A-V Notes, and the denominator of
which is the sum of the Principal Balances of the Class A-F Notes and the Class
A-V Notes as of the beginning of the month payable out of the related Trust
Estate; (xii) the Adjustable Rate Loans experience no prepayment penalties;
(xiii) there are no investment earnings on amounts in any related Collection
Account, including the related Payment Account, and no other miscellaneous
servicing fees are passed through to the Class A-V Noteholders; (xiv) the
Subsequent Adjustable Rate Loans are purchased by August 1998 and are assumed to
have their first scheduled monthly payment due in July 1998; and (xv) the Class
A-V Notes will be purchased on June 25, 1998.
The actual characteristics and performance of the Adjustable Rate Loans
will differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Adjustable Rate Loans will prepay at a
constant level of CPR until maturity or that all of the Adjustable Rate Loans
will prepay at the same level of CPR or Adjustable Rate Prepayment Assumption.
Moreover, the diverse remaining terms to stated maturity of the Adjustable Rate
Loans could produce slower or faster principal payments than indicated in the
table at the various constant percentages of CPR specified, even if
S-69
<PAGE>
the weighted average remaining term to stated maturity of the Adjustable Rate
Loans is as assumed. Any difference between such assumptions and the actual
characteristics and performance of the Adjustable Rate Loans, or actual
prepayment experience, will affect the percentages of Initial Note Principal
Balance outstanding over time and the weighted average life of the Class A-V
Notes. Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A-V Notes, and sets forth the
percentages of the Initial Class A-V Note Principal Balance that would be
outstanding after each of the dates shown at various percentages of CPR.
S-70
<PAGE>
PERCENT OF INITIAL CLASS A-V NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
(TO MATURITY) (TO CALL)
----------------------------------------------------- -------------
SCENARIO(1)(4) SCENARIO(1)(5)
----------------------------------------------------- -------------
ADJUSTABLE RATE LOANS(2) 0% 10% 20% 25% 30% 40% 50% 0% 10%
----- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PAYMENT DATE
Initial Percentage.............................. 100% 100 % 100 % 100 % 100 % 100 % 100 % 100% 100%
June 25, 1999................................... 95 86 76 72 67 57 47 95 86
June 25, 2000................................... 93 75 58 51 43 31 20 93 75
June 25, 2001................................... 93 66 45 37 30 19 11 93 66
June 25, 2002................................... 92 59 36 28 21 11 6 92 59
June 25, 2003................................... 92 52 29 21 15 7 3 92 52
June 25, 2004................................... 91 46 23 15 10 4 1 91 46
June 25, 2005................................... 91 41 18 11 7 2 0 91 41
June 25, 2006................................... 90 37 14 9 5 1 0 90 37
June 25, 2007................................... 89 33 11 6 3 0 0 89 33
June 25, 2008................................... 88 29 9 5 2 0 0 88 29
June 25, 2009................................... 87 26 7 3 1 0 0 87 26
June 25, 2010................................... 86 23 6 2 1 0 0 86 23
June 25, 2011................................... 84 20 4 2 0 0 0 84 20
June 25, 2012................................... 82 18 3 1 0 0 0 82 18
June 25, 2013................................... 80 16 3 1 0 0 0 80 16
June 25, 2014................................... 78 14 2 0 0 0 0 78 14
June 25, 2015................................... 76 12 1 0 0 0 0 76 12
June 25, 2016................................... 73 11 1 0 0 0 0 73 11
June 25, 2017................................... 71 9 1 0 0 0 0 71 9
June 25, 2018................................... 67 8 0 0 0 0 0 67 0
June 25, 2019................................... 63 7 0 0 0 0 0 63 0
June 25, 2020................................... 59 6 0 0 0 0 0 59 0
June 25, 2021................................... 54 5 0 0 0 0 0 54 0
June 25, 2022................................... 48 4 0 0 0 0 0 48 0
June 25, 2023................................... 42 3 0 0 0 0 0 42 0
June 25, 2024................................... 36 2 0 0 0 0 0 36 0
June 25, 2025................................... 28 1 0 0 0 0 0 28 0
June 25, 2026................................... 20 1 0 0 0 0 0 20 0
June 25, 2027................................... 10 0 0 0 0 0 0 10 0
June 25, 2028................................... 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years(3)............... 21.15 7.61 4.00 3.15 2.58 1.83 1.37 21.11 7.23
<CAPTION>
ADJUSTABLE RATE LOANS(2) 20% 25% 30% 40% 50%
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PAYMENT DATE
Initial Percentage.............................. 100 % 100 % 100 % 100 % 100 %
June 25, 1999................................... 76 72 67 57 47
June 25, 2000................................... 58 51 43 31 20
June 25, 2001................................... 45 37 30 19 11
June 25, 2002................................... 36 28 21 11 0
June 25, 2003................................... 29 21 15 0 0
June 25, 2004................................... 23 15 10 0 0
June 25, 2005................................... 18 11 0 0 0
June 25, 2006................................... 14 0 0 0 0
June 25, 2007................................... 11 0 0 0 0
June 25, 2008................................... 9 0 0 0 0
June 25, 2009................................... 0 0 0 0 0
June 25, 2010................................... 0 0 0 0 0
June 25, 2011................................... 0 0 0 0 0
June 25, 2012................................... 0 0 0 0 0
June 25, 2013................................... 0 0 0 0 0
June 25, 2014................................... 0 0 0 0 0
June 25, 2015................................... 0 0 0 0 0
June 25, 2016................................... 0 0 0 0 0
June 25, 2017................................... 0 0 0 0 0
June 25, 2018................................... 0 0 0 0 0
June 25, 2019................................... 0 0 0 0 0
June 25, 2020................................... 0 0 0 0 0
June 25, 2021................................... 0 0 0 0 0
June 25, 2022................................... 0 0 0 0 0
June 25, 2023................................... 0 0 0 0 0
June 25, 2024................................... 0 0 0 0 0
June 25, 2025................................... 0 0 0 0 0
June 25, 2026................................... 0 0 0 0 0
June 25, 2027................................... 0 0 0 0 0
June 25, 2028................................... 0 0 0 0 0
Weighted Average Life in Years(3)............... 3.68 2.90 2.36 1.68 1.25
</TABLE>
- ------------------
(1) Rounded to the nearest whole percentage.
(2) Conditional Prepayment Rate (CPR).
(3) The weighted average life of a Class A-V Note is determined by (i)
multiplying the amount of each distribution of principal on a Class A-V Note
by the number of years from the date of issuance of the Class A-V Note to
the related Payment Date, (ii) adding the results, and (iii) dividing the
sum by the Initial Class A-V Note Principal Balance of the Class A-V Note.
(4) Assumes that the Class A-V Notes remain outstanding to their maturity date.
(5) Assumes the Seller exercises its option to redeem the Class A-V Notes when
the aggregate Principal Balance of the Adjustable Rate Loans remaining is
less than or equal to 10% of the Class A-V Original Pool Balance. See
'Description of the Notes--Optional Redemption' herein.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE SECOND
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE ADJUSTABLE RATE LOANS WHICH DIFFER FROM
THE ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
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<PAGE>
DESCRIPTION OF THE SERVICING AGREEMENTS
The following summary describes certain terms of the Servicing Agreements,
with respect to the Fixed Rate Loans and the Adjustable Rate Loans, dated as of
June 1, 1998, between the related Issuer, the Indenture Trustee and the Master
Servicer (the related 'Servicing Agreement'). The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Servicing Agreements. Whenever particular sections or defined
terms of the Servicing Agreements are referred to, such sections or defined
terms are thereby incorporated herein by reference.
THE MASTER SERVICER
PacificAmerica Money Center, Inc. (in such capacity, the 'Master Servicer')
will act as Master Servicer for the Fixed Rate Loans and the Adjustable Rate
Loans pursuant to the related Servicing Agreements. The Master Servicer will
initially delegate its servicing obligations to the Sub-Servicer described
below.
Any servicing default, including certain performance test violations, under
one Servicing Agreement will constitute an event of default under the other
Servicing Agreement and as provided in the Servicing Agreements, the Master
Servicer may be then removed thereunder.
The Sub-Servicer will meet certain eligibility requirements, as set forth
in each Servicing Agreement, and each Sub-Servicing Agreement shall require that
the Fixed Rate Loans and the Adjustable Rate Loans be serviced in a manner that
is consistent with the terms of the related Servicing Agreement. The Master
Servicer will not be released of its servicing obligations and duties with
respect to any subserviced Loans, notwithstanding the delegation of duties to
the Sub-Servicer.
THE SUB-SERVICER
The information set forth in the following paragraphs has been provided by
the Sub-Servicer. None of the Depositor, the Master Servicer, the Seller, the
Indenture Trustee, the Note Insurer, the Owner Trustee or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
Advanta Mortgage Corp. USA (the 'Sub-Servicer') will act as Sub-Servicer
for the Fixed Rate Loans and the Adjustable Rate Loans pursuant to the related
Sub-Servicing Agreement. The Sub-Servicer is an indirect subsidiary of Advanta
Corp., a Delaware corporation (the 'Advanta Parent'), a publicly-traded company
based in Springhouse, Pennsylvania with assets as of March 31, 1998 in excess of
$3.5 billion. Advanta Parent, through its subsidiaries (including the
Sub-Servicer) had managed assets (including home equity loans) in excess of $9.9
billion as of March 31, 1998.
As of March 31, 1998, the Sub-Servicer and its subsidiaries were servicing
approximately 83,000 home equity loans in the Owned and Managed Servicing
Portfolio (as defined below) representing an aggregate outstanding principal
balance of approximately $5.5 billion, and approximately 132,000 mortgage loans
in the Third-Party Servicing Portfolio (as defined below) representing an
aggregate outstanding principal balance of approximately $8.8 billion.
On October 28, 1997, Advanta Parent announced that it had reached a
definitive agreement under which Fleet Financial Group, Inc. ('Fleet') would
acquire Advanta Parent's consumer credit card business and would combine it with
Fleet's consumer credit card business (the 'Transaction'). On February 20, 1998,
a special meeting of stockholders of Advanta Parent was held whereby the
stockholders approved the Transaction with Fleet. The Transaction was completed
on the same day. In addition, Advanta Parent completed its cash tender offer
(the 'Tender Offer') to purchase approximately $850 million of its Class A and
Class B common stock at $40 per share net, and its Stock Appreciation Income
Linked Securities Depositary shares at $32.80 per share net. The Tender Offer
commenced on January 20, 1998 and expired at 12:00 midnight, New York City time
on February 20, 1998. Advanta Parent will continue to operate its mortgage and
business services companies, including the Sub-Servicer.
The ability of Advanta Parent's subsidiaries to honor their financial and
other obligations is to some extent influenced by the financial conditions of
Advanta Parent. Such obligations of the Sub-Servicer, insofar as they
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<PAGE>
relate to the Trust Estate with respect to the Home Equity Loans, primarily
consist of the Sub-Servicer's advancing obligation and its obligation to service
the Home Equity Loans.
The Notes will not represent an interest in or obligation of, nor are the
Loans guaranteed by, the Sub-Servicer or the Advanta Parent.
DELINQUENCY AND LOSS EXPERIENCE OF THE SUB-SERVICER
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Sub-Servicer for its Owned and Managed Servicing Portfolio for the quarter
ended March 31, 1998, and for each of the four prior years ended December 31.
The Sub-Servicer's 'Owned and Managed Servicing Portfolio' consists of the
Sub-Servicer's servicing portfolio of fixed and variable rate home equity loans
excluding certain loans serviced by the Sub- Servicer that were not originated
or purchased and reunderwritten by the Sub-Servicer or any affiliate thereof. In
addition to the Owned and Managed Servicing Portfolio, the Sub-Servicer serviced
as of March 31, 1998, approximately 132,000 mortgage loans with an aggregate
principal balance as of such date of approximately $8.8 billion; such loans were
not originated by the Sub-Servicer or any affiliate thereof and are being
serviced for third parties on a contract servicing basis (the 'Third-Party
Servicing Portfolio'). No loans in the Third-Party Servicing Portfolio are
included in the tables set forth below.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
THE SUB-SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
THREE MONTHS -------------------------------------------------------------------------------------
ENDING
MARCH 31, 1998 1997 1996 1995 1994
--------------------- ------------------- ------------------- ------------------- -------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000) LOANS (000) LOANS (000)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio......... 83,415 $5,491,997 74,525 $4,888,936 43,303 $2,595,981 32,592 $1,797,582 26,446 $1,346,100
Delinquency
Percentage(1)
30-59 days....... 2.55% 2.48% 3.13% 2.99% 3.07% 2.90% 2.67% 2.44% 2.01% 1.57
60-89 days....... 0.85 0.88 0.98 0.98 0.85 0.90 0.72 0.71 0.57 0.45
90 days or more.. 1.41 1.38 1.39 1.28 1.45 1.26 1.69 1.23 1.85 1.51
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Total............. 4.81% 4.74% 5.50% 5.25% 5.37% 5.06% 5.08% 4.38% 4.43% 3.53%
Foreclosure
Rate(2).......... 2.28% 2.54% 2.10% 2.32% 1.62% 1.92% 1.29% 1.53% 1.35% 1.38%
REO
Properties(3).... 0.54% -- 0.40% -- 0.42% -- 0.52% -- 0.47% --
</TABLE>
- ------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) 'Foreclosure Rate' is the number of home equity loans or the dollar amount
of home equity loans in foreclosure as a percentage of the total number of
home equity loans or the dollar amount of home equity loans, as the case may
be, as of the date indicated.
(3) REO Properties (i.e., 'real estate owned' properties--properties relating to
mortgage foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Sub-Servicer pending disposition) percentages are
calculated using the number of loans, not the dollar amount.
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<PAGE>
LOAN LOSS EXPERIENCE OF THE SUB-SERVICER'S OWNED AND
MANAGED SERVICING PORTFOLIO OF LOANS*
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDING DECEMBER 31,
ENDING ----------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994
-------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1)............ $5,232,037 $3,677,342 $2,102,643 $1,540,238 $1,225,529
Gross losses(2).......................... $ 6,021 $ 18,897 $ 15,184 $ 13,978 $ 20,886
Recoveries(3)............................ $ 40 $ 45 $ 117 $ 148 $ 179
Net losses(4)............................ $ 5,981 $ 18,852 $ 15,067 $ 13,830 $ 20,707
Net losses as a percentage of average
amount outstanding(5).................. 0.46% 0.51% 0.72% 0.90% 1.69%
</TABLE>
- ------------------
(1) 'Average Amount Outstanding' during the period is the arithmetic average of
the principal balances of the home equity loans outstanding on the last
business day of each month during the period.
(2) 'Gross Losses' are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(3) 'Recoveries' are recoveries from liquidation proceeds and deficiency
judgments.
(4) 'Net Losses' represents 'Gross Losses' minus 'Recoveries'.
(5) March 31, 1998 percentage has been based on annualized net losses.
*Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
The Sub-Servicer experienced an increase in the net loss rate on its Owned
and Managed Servicing Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors: the seasoning of its
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. In addition, the level of
net losses during such period was negatively impacted by the performance on its
Non-Income Verification ('NIV') loan program. The net loss rates as a percentage
of the average amount outstanding on its Owned and Managed Servicing Portfolio,
excluding NIV loans, are 1.42% for the period ending December 31, 1994.
There can be no assurance that the delinquency experience of the Loans will
correspond to the delinquency experience of the Sub-Servicer's servicing
portfolio set forth in the foregoing tables. The statistics shown above
represent the delinquency experience for the Sub-Servicer's servicing portfolio
only for the periods presented, whereas the aggregate delinquency experience on
the Loans will depend on the results obtained over the life of the Loans. The
Sub-Servicer's servicing portfolio includes Loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the Loans. It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the
Sub-Servicer. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Loans.
SERVICER LOAN MODIFICATIONS
Each Servicing Agreement provides that the Master Servicer may approve a
change in the loan rate of a Loan or extend a final maturity date on a Loan if
the Mortgagor requests such modification and the Note Insurer consents thereto;
provided, however, in no event shall the Master Servicer modify such Loan if at
the time the aggregate amount of all such modified Loans equals or exceeds 5% of
the related Original Pool Balance.
SERVICING AND OTHER COMPENSATION
The Servicing Fee for each Loan is payable out of the interest payments on
such Loan. The Servicing Fee Rate in respect of each Loan will be equal to 0.50%
per annum of the outstanding principal balance of such Loan. The Master Servicer
will pay the fees of any Sub-Servicer out of the amounts it receives as the
Servicing Fee. The Master Servicer or the Sub-Servicer will be entitled to
additional servicing compensation in the form of
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<PAGE>
prepayment penalties, late payment charges, modification fees, assumption fees
and certain other miscellaneous fees and such amounts will not be included in
related Available Funds.
With respect to any Payment Date and determined separately for each Series
of Notes, Prepayment Interest Shortfalls in full (as described below) during the
preceding calendar month will be offset by the Sub-Servicer or the Master
Servicer, but only to the extent such Prepayment Interest Shortfalls do not
exceed an amount equal to the Servicing Fee payable to the Master Servicer with
respect to such Payment Date and the related Loan Group (any such payments by
the Sub-Servicer or the Master Servicer, 'Compensating Interest'). Prepayment
Interest Shortfalls resulting from partial prepayments will not be offset by the
Servicing Fee, any other servicing compensation or otherwise. The 'Prepayment
Interest Shortfall' for any Payment Date is equal to the aggregate shortfall, if
any, in collections of interest resulting from Mortgagor prepayments in full or
in part on the Loans during the preceding calendar month. Such shortfalls will
result because interest on prepayments in full is paid only to the date of
prepayment, and because no interest is paid on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
the related Loans as of the Due Date in the month of prepayment. No assurance
can be given that Compensating Interest will be sufficient to cover Prepayment
Interest Shortfalls in full for any Payment Date. The Servicing Fee or any other
servicing compensation shall not be used to offset shortfalls arising from
application of the Relief Act.
THE INDENTURES
The following summary describes certain terms of the Indentures related to
the Series 1998-2F Issuer and the Series 1998-2V Issuer. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Trust Agreements and Indentures. Whenever
particular defined terms of the Indenture are referred to, such defined terms
are thereby incorporated herein by reference. See 'The Agreements' in the
Prospectus.
CONTROL BY NOTE INSURER
Pursuant to each Indenture, unless a Note Insurer Default exists (i) the
Note Insurer shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee, subject to
certain limitation, and (ii) the Indenture Trustee may take actions which would
otherwise be at its option or within its discretion, including the actions
referred to under '--Events of Default' and '--Rights Upon Event of Default,'
only at the direction of the Note Insurer and (iii) the Note Insurer shall be
deemed to be the holder of the related Notes for most purposes (other than with
respect to payment on the related Notes), and will be entitled to exercise all
rights of the Noteholders thereunder, without the consent of such Noteholders,
and the related Noteholders may exercise such rights only with the prior written
consent of the Note Insurer. A 'Note Insurer Default' means the existence and
continuation of (i) a failure of the Note Insurer to make a payment under the
Note Insurance Policy in accordance with its terms or (ii) certain bankruptcy or
insolvency actions by or against the Note Insurer.
EVENTS OF DEFAULT
An 'Event of Default' with respect to the Notes is defined in each
Indenture as follows: (a) the failure of the related Issuer to pay (i) the
Interest Payment Amount or the Principal Payment Amount with respect to a
Payment Date on such Payment Date (provided that for purposes of this clause,
payment by the Indenture Trustee from proceeds of the related Note Insurance
Policy shall not be considered payment by the related Issuer with respect to the
related Notes), or (ii) any Subordination Increase Amount or Carry-Forward
Amount, but only to the extent funds are available to make such payment as
described under 'Description of the Notes--Class A-F Notes--Priority of Payment'
or '--Class A-V Notes--Priority of Payment,' as applicable (provided that for
purposes of this clause, payment by the Indenture Trustee from proceeds of the
related Note Insurance Policy shall not be considered payment by the related
Issuer with respect to the related Notes); (b) the failure by the related Issuer
on the Final Scheduled Payment Date to reduce the Note Principal Balance to
zero; (c) a default in the observance or performance of any covenant or
agreement of the related Issuer in such Indenture, and the continuation of any
such default for a period of thirty days after notice to the related Issuer by
the Indenture Trustee or to the related Issuer and the Indenture Trustee by the
Note Insurer, or if a Note Insurer Default exists,
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<PAGE>
by the holders of at least 25% of the Note Principal Balance of the related
Notes; (d) any representation or warranty made by the related Issuer in such
Indenture or in any certificate or other writing delivered pursuant thereto
having been incorrect in a material respect as of the time made, and the
circumstance in respect of which such representation or warranty is incorrect
not having been cured within thirty days after notice thereof is given to the
related Issuer by the Indenture Trustee or to the related Issuer and the
Indenture Trustee by the Note Insurer, or, if a Note Insurer Default exists, by
Noteholders representing at least 25% of the Note Principal Balance of the
related Notes; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
the Class A-F Notes or Class A-V Notes, the Indenture Trustee may (with the
prior written consent of the Note Insurer) and, upon the written direction of
the Note Insurer or, if a Note Insurer Default exists, related Noteholders
representing more than 50% of the Note Principal Balance of the related Notes
shall, declare the principal of such Notes to be immediately due and payable.
Such declaration may under certain circumstances be rescinded by the Note
Insurer, or if a Note Insurer Default exists, related Noteholders representing
more than 50% of the Note Principal Balance of such Notes.
If, following an Event of Default, the Notes have been declared to be due
and payable, the Indenture Trustee may, in its discretion (provided that the
Note Insurer or, if a Note Insurer Default exists, the Noteholders representing
more than 50% of the Note Principal Balance of such Notes, have not directed the
Indenture Trustee to sell the assets included in the related Trust Estate),
refrain from selling such assets and continue to apply all amounts received on
such assets to payments due on the Notes in accordance with their terms,
notwithstanding the acceleration of the maturity of such Notes. In addition,
upon an Event of Default the Indenture Trustee may, with the consent of the Note
Insurer, sell all or part of the assets included in the related Trust Estate, in
which event the collections on, or the proceeds from the sale of, such assets
will be applied as provided below; provided, however, that any proceeds of a
claim under the related Note Insurance Policy shall be used only to pay interest
and principal on the Notes as provided in clauses (iii) and (iv): (i) to the
payment of the fees of the Indenture Trustee which have not been previously
paid; (ii) to the Note Insurer, any Note Insurer Premium then due, provided no
Note Insurer Default exists; (iii) to the Noteholders, the amount of interest
then due and unpaid on the Notes (but not including any Carry-Forward Amount in
the case of the Class A-V Notes), without preference or priority of any kind;
(iv) to the related Noteholders, the amount of principal then due and unpaid on
such Notes, without preference or priority of any kind; (v) to the payment of
the amounts due and owing to the Note Insurer, to the extent not previously
reimbursed; (vi) to the related Noteholders, the amount of any Carry-Forward
Amount in the case of the Class A-V Notes not previously paid; and (vii) to the
Owner Trustee for distribution to the holders of the Certificates; provided,
however, that if the related Subordination Amount with respect to the other
Series of Notes is less than the related Required Subordination Amount with
respect to such other Series, such amounts shall be transferred to the related
Escrow Account.
Subject to the provisions of each Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under such Indenture at the request or direction of any of the
related Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in such Indenture, the Note Insurer, or if a Note Insurer
Default exists, Noteholders representing more than 50% of the Note Principal
Balance of the related Notes shall have the right to direct the time, method,
and place of conducting any proceeding or any remedy available to the Indenture
Trustee or exercising any trust or power conferred on the Indenture Trustee with
respect to such Notes; and the Note Insurer, or if a Note Insurer Default
exists, Noteholders representing more than 50% of the Note Principal Balance of
the related Notes may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the Indenture that cannot be modified without the
waiver or consent of the holder of each outstanding Note affected thereby.
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<PAGE>
LIMITATION ON SUITS
No Noteholder will have any right to institute any proceedings with respect
to the related Indenture unless (1) such Noteholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Noteholders representing not less than 25% of the Note Principal Balance of the
related Notes have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such Noteholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice of, request and offer of indemnity the Indenture Trustee has failed
to institute any such proceedings; (5) no direction inconsistent with such
written request has been given to the Indenture Trustee during such 60-day
period by the Noteholders representing more than 50% of the Note Principal
Balance of the related Notes; and (6) such Noteholders have the consent of the
Note Insurer, unless a Note Insurer Default exists.
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time under either Indenture, in
which event the related Issuer will be obligated to appoint, with the consent of
the Note Insurer, a successor Indenture Trustee. The Indenture Trustee also may
be removed under either Indenture at any time by the Note Insurer, or if a Note
Insurer Default exists, then by Noteholders representing more than 50% of the
Note Principal Balance of the related Notes. The related Issuer shall, with the
consent of the Note Insurer, so long as no Note Insurer Default exists, remove
the Indenture Trustee if the Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if the Indenture Trustee becomes
incapable of acting, bankrupt, insolvent or if a receiver or public officer
takes charge of the Indenture Trustee or its property. Any resignation or
removal of the Indenture Trustee and appointment of a successor Indenture
Trustee will not become effective until acceptance of the appointment by the
successor Indenture Trustee.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Notes, Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the related Trust
Agreement, for federal income tax purposes (a) the Notes issued by each of the
Series 1998-2F Issuer and the Series 1998-2V Issuer will be characterized as
indebtedness and not as representing an ownership interest in the related Trust
Estate or an equity interest in the related Issuer or the Depositor, and (b)
each of the Series 1998-2F Issuer and the Series 1998-2V Issuer will not be (i)
classified as an association taxable as a corporation for federal income tax
purposes, (ii) a taxable mortgage pool as defined in Section 7701(i) of the
Code, or (iii) a 'publicly traded partnership' as defined in Treasury Regulation
Section 1.7704-1. The Notes will not be treated as having been issued with
'original issue discount' (as defined in the Prospectus). The prepayment
assumption that will be used in determining the rate of amortization of 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 Adjustable
Rate Loans will prepay at a rate equal to 25% CPR and the Fixed Rate Loans will
prepay at a rate equal to 2% CPR in the first month of the life of the Fixed
Rate Loans and an additional 2% CPR per annum in each month thereafter until the
tenth month; beginning in the tenth month and in each month thereafter, the
Fixed Rate Loans will prepay at a rate equal to 20% CPR. No representation is
made that the Loans will prepay at that rate or at any other rate. See 'Material
Federal Income Tax Consequences' in the Prospectus.
The Notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or 'real estate assets' under Section 856(c)(4)(A) of the Code. In
addition, interest on the Notes will not be treated as 'interest on obligations
secured by mortgages on real property' under Section 856(c)(3)(B) of the Code.
The Notes will also not be treated as 'qualified mortgages' under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see 'Material Federal Income Tax
Consequences' and 'State Tax Consequences' in the Prospectus for a discussion of
the application of certain federal income and state and local tax laws to the
Issuer and purchasers of the Notes.
S-77
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
dated June 22, 1998 with respect to the Class A-F Notes and an underwriting
agreement dated June 22, 1998 with respect to the Class A-V Notes (together, the
'Underwriting Agreements') each between the Depositor and Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the 'Underwriter'), the Depositor has agreed to
sell the Notes to the Underwriter and the Underwriter has agreed to purchase the
Notes from the Depositor. It is expected that delivery of the Notes will be made
only in book-entry form through the Same Day Funds Settlement System of DTC, on
or about June 25, 1998, against payment therefor in immediately available funds.
The Notes will be purchased from the Depositor by the Underwriter and will
be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Depositor from the sale of the Class A-F Notes are
expected to be approximately $61,827,491, before deducting expenses plus accrued
interest thereon from the Cut-off Date and the proceeds to the Depositor from
the sale of the Class A-V Notes are expected to be approximately $137,543,210,
before deducting expenses. The Underwriter may effect such transactions by
selling the Notes 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 sale of the Notes, the Underwriter
may be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Notes may be deemed to be
underwriters and any profit on the resale of the Notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreements provide that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act of
1933, or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue or provide the Noteholders
with sufficient liquidity of investment. The primary source of information
available to investors concerning the Notes will be the monthly statements
discussed in the Prospectus under 'Description of the Securities--Reports to
Securityholders,' which will include information as to the outstanding principal
balance of the Notes. There can be no assurance that any additional information
regarding the Notes will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Notes will be generally available on an ongoing basis. The limited nature of
such information regarding the Notes may adversely affect the liquidity of the
Notes, even if a secondary market for the Notes becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Seller and the Master Servicer by Arter & Hadden, LLP, Washington, D.C., and for
the Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New
York.
RATINGS
It is a condition of the issuance of each Series of the Notes that each
Series of Notes be rated 'AAA' by Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ('S&P') and 'Aaa' by Moody's Investors
Service, Inc. ('Moody's').
S&P's ratings on mortgage pass-through certificates address the likelihood
of the receipt by Noteholders of payments required under the Indenture. S&P's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Notes, and the extent to which
the payment stream in the mortgage pool is adequate to make payments required
under the Notes. S&P's rating on the Notes does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. See 'Certain
Yield and Prepayment Considerations' herein. The ratings issued by S&P on
payment of principal and interest do not cover the payment of any Prepayment
Interest Shortfalls, Relief Act Shortfalls or any Carry-Forward Amount.
S-78
<PAGE>
The rating process of Moody's addresses the structural and legal aspects
associated with the Notes, including the nature of the underlying Loans. The
ratings assigned to the Notes do not represent any assessment of the likelihood
or rate of principal prepayments. The ratings do not address the possibility
that Noteholders might suffer a lower than anticipated yield. The ratings do not
address the likelihood that Class A-V Noteholders will be paid the Carry-Forward
Amount.
The Depositor has not requested a rating on the Notes by any rating agency
other than S&P and Moody's. However, there can be no assurance as to whether any
other rating agency will rate the Notes, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Notes by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Notes by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings Initially assigned to the
Notes are Subsequently lowered for any reason, no person or entity is obligated
to provide any additional support or credit enhancement with respect to the
Notes.
LEGAL INVESTMENT
The Notes will not constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended.
The Depositor makes no representations as to the proper characterization of
the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See 'Legal Investment' in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts of insurance
companies in which such plans or arrangements are invested (all of which are
hereinafter referred to as a 'Plan') and on persons who are fiduciaries with
respect to such Plans. ERISA and the Code prohibit certain transactions
involving the assets of a Plan and 'disqualified persons' (within the meaning of
the Code; 'Disqualified Persons') and 'parties in interest' (within the meaning
of ERISA; 'Parties in Interest') who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the Notes, investing Plans
should determine whether the related Issuer, the Depositor, the Seller, the
related Trust Estate, the Underwriter, any other underwriter, the Owner Trustee,
the Indenture Trustee, the Master Servicer, the Sub-Servicer, any other
servicer, any administrator, any provider of credit support, or any insurer or
any of their affiliates is a Party in Interest or Disqualified Person with
respect to such Plan and, if so, whether such transaction is subject to one or
more statutory or administrative exemptions. Additionally, an investment of the
assets of a Plan in securities may cause the assets included in the related
Trust Fund to be deemed 'Plan Assets' of such Plan, and any person with certain
specified relationships to the related Trust Fund to be deemed a Party in
Interest or Disqualified Person. The U.S. Department of Labor (the 'DOL') has
promulgated regulations at 29 C.F.R. Section 2510.3-101 (the 'Plan Asset
Regulations') defining the term 'Plan Assets' for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code. Under the Plan
Asset Regulations, generally, when a Plan acquires an 'equity interest' in
another entity (such as the Trust Fund), the underlying assets of that entity
may be considered to be Plan Assets. The Plan Asset Regulations provide that the
term 'equity interest' means any interest in an entity other than an instrument
which is treated as indebtedness under
S-79
<PAGE>
applicable local law and which has no 'substantial equity features.' Although
not entirely free from doubt, it is believed that, as of the date hereof, the
Notes will be treated as debt obligations without significant equity features
for the purposes of the Plan Asset Regulations. Because of the factual nature of
certain of the above-described provisions of ERISA, the Code and the Plan Asset
Regulations, Plans or persons investing Plan Assets should carefully consider
whether such an investment might constitute or give rise to a prohibited
transaction under ERISA or the Code. Any Plan fiduciary which proposes to cause
a Plan to acquire any of the Notes should consult with its counsel with respect
to the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of such Notes.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
its subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
S-80
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH TERM
IS DEFINED IN THE
TERMS PROSPECTUS SUPPLEMENT
- --------------------------------------------------------------------------------------- ----------------------
<S> <C>
1998-2V Insurance Agreement............................................................ S-57
2/28 or 2/13 Loan...................................................................... S-6, S-26
3/27 Loan.............................................................................. S-6, S-26
5/25 Loan.............................................................................. S-6, S-26
Adjustable Rate Loans.................................................................. Cover Page, S-5
Adjustable Rate Prepayment Assumption.................................................. S-68
Adjustable Rate Subsequent Loans....................................................... Cover Page
Adjustment Date........................................................................ S-26
Administrative Fee..................................................................... S-8, S-51, S-55
Advances............................................................................... S-11, S-61
Advanta Parent......................................................................... S-72
Available Funds........................................................................ S-50, S-54
Average Amount Outstanding............................................................. S-74
Balloon Loan........................................................................... S-15
Balloon Payment........................................................................ S-15
Business Day........................................................................... S-50, S-60
Carry-Forward Amount................................................................... S-8, S-55
Class A-F Funding Period............................................................... S-6, S-25
Class A-F Interest Coverage Account.................................................... S-7
Class A-F Interest Payment Amount...................................................... S-7, S-50
Class A-F Note Interest Rate........................................................... S-50
Class A-F Note Principal Balance....................................................... S-51
Class A-F Notes........................................................................ Cover Page
Class A-F Original Pool Balance........................................................ S-2, S-7
Class A-F Original Pre-Funded Amount................................................... S-6, S-25
Class A-F Pre-Funded Amount............................................................ S-25
Class A-F Pre-Funding Account.......................................................... S-6, S-25
Class A-F Principal Payment Amount..................................................... S-51
Class A-V Funding Period............................................................... S-6, S-39
Class A-V Interest Coverage Account.................................................... S-7
Class A-V Interest Payment Amount...................................................... S-7, S-54
Class A-V Note Interest Rate........................................................... S-7, S-55
Class A-V Notes........................................................................ Cover Page
Class A-V Original Pool Balance........................................................ S-2, S-7
Class A-V Original Pre-Funded Amount................................................... S-6, S-38
Class A-V Pre-Funded Amount............................................................ S-39
Class A-V Pre-Funding Account.......................................................... S-6, S-38
Class A-V Principal Payment Amount..................................................... S-56
Class A-V Purchase Agreement........................................................... S-26
Combined Loan-to-Value Ratio........................................................... S-18
Commission............................................................................. S-43
Compensating Interest.................................................................. S-75
CPR.................................................................................... S-65
Definitive Note........................................................................ S-5, S-48
Depositor.............................................................................. Cover Page, S-4
Determination Date..................................................................... S-50
DTC.................................................................................... S-2, S-48
Due Date............................................................................... S-50
Due Period............................................................................. S-52, S-57
ERISA.................................................................................. S-13, S-79
</TABLE>
S-81
<PAGE>
<TABLE>
<S> <C>
Event of Default....................................................................... S-61, S-75
Excess Subordination Amount............................................................ S-53, S-58
Final Scheduled Payment Date........................................................... S-62
Financial Intermediary................................................................. S-48
Fixed Rate Loans....................................................................... Cover Page, S-5
Fixed Rate Prepayment Assumption....................................................... S-65
Fixed Rate Purchase Agreement.......................................................... S-17
Fixed Rate Subsequent Loans............................................................ Cover Page
Fleet.................................................................................. S-72
Foreclosure Rate....................................................................... S-73
Gross Losses........................................................................... S-74
Gross Margin........................................................................... S-6, S-27
Guaranteed Interest Payment Amount..................................................... S-8, S-55
Holdings............................................................................... S-46
Indenture.............................................................................. S-4
Indenture Trustee...................................................................... Cover Page
Indenture Trustee Fee.................................................................. S-8, S-51, S-55
Initial Adjustable Rate Loans.......................................................... Cover Page, S-17
Initial Fixed Rate Loans............................................................... Cover Page, S-17
Initial Loans.......................................................................... S-17
Initial Periodic Rate Cap.............................................................. S-27
Insured Payments....................................................................... S-59
Interest Coverage Account.............................................................. S-62
Interest Determination Date............................................................ S-55
Interest Period........................................................................ S-8
Liquidated Loan........................................................................ S-53
Loan Group............................................................................. Cover Page, S-5
Loan-to-Value Ratio.................................................................... S-17, S-26
Loans.................................................................................. S-5, S-17
Master Servicer........................................................................ S-4, S-17, S-72
Maximum Interest Rate.................................................................. S-2, S-7, S-55
Maximum Mortgage Rate.................................................................. S-6, S-27
Minimum Mortgage Rate.................................................................. S-6, S-27
Minimum Spread......................................................................... S-8, S-55
Moody's................................................................................ Cover Page, S-2
Mortgaged Property..................................................................... S-5
Net Losses............................................................................. S-74
Net Monthly Excess Cashflow............................................................ S-10, S-53, S-57
NIV.................................................................................... S-74
Note Insurance Policy.................................................................. Cover Page
Note Insurer........................................................................... Cover Page, S-9, S-45
Note Insurer Default................................................................... S-75
Note Insurer Premium................................................................... S-8, S-51, S-55
Note Interest Rate..................................................................... S-2
Note Principal Balance................................................................. S-9
Notes.................................................................................. Cover Page, S-47
One-Month LIBOR........................................................................ S-55
Order.................................................................................. S-60
Owner Trustee.......................................................................... Cover Page
Pacific................................................................................ S-17
Payment Account........................................................................ S-47
Payment Date........................................................................... S-2, S-5
Periodic Rate Cap...................................................................... S-27
Plan................................................................................... S-13, S-79
</TABLE>
S-82
<PAGE>
<TABLE>
<S> <C>
Plan Asset Regulations................................................................. S-13, S-79
Plan Assets............................................................................ S-79
Prepayment Interest Shortfall.......................................................... S-75
Prepayment Period...................................................................... S-53, S-58
Principal Balance...................................................................... S-51
Realized Loss.......................................................................... S-53, S-58
Receipt................................................................................ S-60
Received............................................................................... S-60
Recoveries............................................................................. S-74
Reference Banks........................................................................ S-56
Required Subordination Amount.......................................................... S-53, S-58
Rules.................................................................................. S-48, S-49
S&P.................................................................................... S-2, S-14, S-78
Seller................................................................................. S-4, S-17
Series 1998-2F Issuer.................................................................. Cover Page, S-4
Series 1998-2F Securities.............................................................. S-47
Series 1998-2V Issuer.................................................................. Cover Page, S-4
Series 1998-2V Securities.............................................................. S-47
Servicing Agreement.................................................................... S-72
Servicing Fee.......................................................................... S-8, S-50, S-55
Six-Month LIBOR........................................................................ S-7, S-27
Sub-Servicer........................................................................... S-4, S-17, S-72
Subordination Amount................................................................... S-52, S-57
Subordination Deficit.................................................................. S-54, S-58
Subordination Increase Amount.......................................................... S-9, S-53, S-58
Subordination Reduction Amount......................................................... S-53, S-58
Subsequent Adjustable Rate Loans....................................................... S-17
Subsequent Cut-off Date................................................................ S-25, S-38
Subsequent Fixed Rate Loans............................................................ S-17
Subsequent Transfer Dates.............................................................. S-25, S-38
Subsequent Transfer Instruments........................................................ S-25, S-38
Telerate Page 3750..................................................................... S-56
Term of the Note Insurance Policy...................................................... S-60
Third-Party Servicing Portfolio........................................................ S-73
Trust Agreement........................................................................ S-4
Trust Estate........................................................................... Cover Page, S-4, S-47
Underwriter............................................................................ Cover Page, S-78
Underwriting Agreements................................................................ S-78
</TABLE>
S-83
<PAGE>
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<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
The Asset Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities') offered
hereby and by Supplements to this Prospectus (the 'Offered Securities') will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the 'Trust Fund') consisting of one or
more segregated pools of various types of one- to five-family mortgage loans (or
certain balances thereof) (collectively, the 'Mortgage Loans'), mortgage
pass-through certificates or mortgage-backed securities evidencing interests in
Mortgage Loans or secured thereby ('MBS') or certain direct obligations of the
United States, agencies thereof or agencies created thereby (the 'Government
Securities') (with respect to any series, collectively, 'Assets'). The Mortgage
Loans and MBS are collectively referred to herein as the 'Mortgage Assets.' If a
series of Securities includes Notes, such Notes will be issued and secured
pursuant to an indenture and will represent indebtedness of the Trust Fund. If
so specified in the related Prospectus Supplement, the Trust Fund for a series
of Securities may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof (with
respect to any series, collectively, 'Credit Support'), and currency or interest
rate exchange agreements and other financial assets or derivative instruments,
or any combination thereof (with respect to any series, collectively, 'Cash Flow
Agreements'). See 'Description of the Trust Funds,' 'Description of the
Securities' and 'Description of Credit Support.'
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of two
or more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds, in each case as described in
the related Prospectus Supplement. Any such classes may include classes of
Offered Securities. See 'Description of the Securities.'
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund will
be guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by, among
other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption 'Yield
Considerations' herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION 'RISK FACTORS' HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE
CAPTION 'RISK FACTORS' IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE PURCHASING
ANY OFFERED SECURITY.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
'real estate mortgage investment conduit' for federal income tax purposes. See
also 'Material Federal Income Tax Consequences' herein.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of any
series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Plan of Distribution' herein and in the related Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is June 22, 1998.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the assets included therein, including the Assets
and any Credit Support and Cash Flow Agreements (with respect to the Securities
of any series, the 'Trust Assets'); (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) additional information
with respect to the method of distribution of such Certificates; (vi) whether
one or more REMIC elections will be made and designation of the regular
interests and residual interests; (vii) the aggregate original percentage
ownership interest in the Trust Fund to be evidenced by each class of
Securities; (viii) information as to any Master Servicer, any Sub-Servicer and
the Trustee, as applicable; (ix) information as to the nature and extent of
subordination with respect to any class of Securities that is subordinate in
right of payment to any other class; and (x) whether such Securities will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended (the 'Securities Act'), with
respect to the Offered Securities. This Prospectus and the Prospectus Supplement
relating to each series of Securities contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Chicago Regional Office, Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ('Cede'), as nominee of
The Depository Trust Company ('DTC') and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the 'Securityholders') upon request
to their respective DTC participants. See 'Description of the
Securities--Reports to Securityholders' and 'Description of the
Agreements--Evidence as
2
<PAGE>
to Compliance.' The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), the rules and
regulations of the Commission thereunder, as interpreted by the staff of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, or by telephone at (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT..................................................................................... 2
AVAILABLE INFORMATION..................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................................................... 3
SUMMARY OF PROSPECTUS..................................................................................... 5
DESCRIPTION OF THE TRUST FUNDS............................................................................ 18
USE OF PROCEEDS........................................................................................... 22
YIELD CONSIDERATIONS...................................................................................... 22
THE DEPOSITOR............................................................................................. 26
DESCRIPTION OF THE SECURITIES............................................................................. 26
DESCRIPTION OF THE AGREEMENTS............................................................................. 35
DESCRIPTION OF CREDIT SUPPORT............................................................................. 52
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................................................... 54
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................................................. 63
STATE TAX CONSIDERATIONS.................................................................................. 98
ERISA CONSIDERATIONS...................................................................................... 98
LEGAL INVESTMENT.......................................................................................... 100
PLAN OF DISTRIBUTION...................................................................................... 102
LEGAL MATTERS............................................................................................. 103
FINANCIAL INFORMATION..................................................................................... 103
RATING.................................................................................................... 103
INDEX OF PRINCIPAL DEFINITIONS............................................................................ 104
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
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Title of Securities....................... Asset-Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities'),
issuable in series.
Issuer.................................... With respect to each series, the trust fund (the 'Trust Fund') formed
to issue the Securities of that series.
Depositor................................. Merrill Lynch Mortgage Investors, Inc. (the 'Depositor'), a wholly
owned subsidiary of Merrill Lynch Mortgage Capital, Inc., which is a
wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch & Co., Inc. nor any of its
affiliates, including the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, will insure or guarantee the Securities or the
Mortgage Loans or be otherwise obligated in respect thereof.
Master Servicer........................... The master servicer or master servicers (each, a 'Master Servicer'),
if any, or a servicer for substantially all the Mortgage Loans for
each series of Securities, which servicer or master servicer(s) may
be affiliates of the Depositor, will be named in the related
Prospectus Supplement. See 'Description of the Agreements--General'
and '--Collection and Other Servicing Procedures.'
Trustee................................... The trustee (the 'Trustee') for each series of Certificates will be
named in the related Prospectus Supplement. See 'Description of the
Agreements--The Trustee.'
The Trust Assets.......................... Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will represent indebtedness of
the Trust Fund and will be secured by a security interest in the
Assets of the Trust Fund. A Trust Fund will consist of any of the
following assets (the Mortgage Assets and Government Securities may
be referred to collectively or individually as 'Assets'):
(a) Mortgage Assets..................... The Mortgage Assets with respect to a series of Certificates will
consist of a pool of single family loans (or certain balances
thereof) (collectively, the 'Mortgage Loans'), mortgage pass-through
certificates or other mortgage-backed securities (such as debt
obligations and participation interests or certificates) evidencing
interests in or secured by Mortgage Loans (collectively, the 'MBS')
or a combination of Mortgage Loans and/or MBS. The Mortgage Loans
will not be guaranteed or insured by the Depositor or any of its
affiliates or, unless otherwise provided in the Prospectus
Supplement, by any governmental agency or instrumentality or other
person. The Mortgage Loans will be secured by first and/or junior
liens on one- to five-family residential properties or security
interests in shares issued by cooperative housing corporations
('Single Family Properties'), including mixed residential and
commercial structures. The Mortgage Loans
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may include (i) closed-end and/or revolving home equity loans or
certain balances thereof ('Home Equity Loans') and/or (ii) home
improvement installment sales contracts and installment loan
agreements ('Home Improvement Contracts'). The Mortgaged Properties
may be located in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any other U.S.
jurisdiction specified in the Prospectus Supplement. The Prospectus
Supplement will indicate additional jurisdictions, if any, in which
the Mortgaged Properties may be located. Unless otherwise provided in
the related Prospectus Supplement, all Mortgage Loans will have
individual principal balances at origination of not less than $25,000
and original terms to maturity of not more than 40 years. All
Mortgage Loans will have been originated by persons other than the
Depositor, and all Mortgage Assets will have been purchased, either
directly or indirectly, by the Depositor on or before the date of
initial issuance of the related series of Certificates. The related
Prospectus Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or that
adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the mortgagor's election, in each
case as described in the related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust Fund may be based on
one or more indices. Each Mortgage Loan may provide for scheduled
payments to maturity, payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events, and may provide for negative amortization or
accelerated amortization, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each
case as described in the related Prospectus Supplement. Each Mortgage
Loan may contain prohibitions on prepayment or require payment of a
premium or a yield maintenance penalty in connection with a
prepayment, in each case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly,
semi-annually or at such other interval as is specified in the
related Prospectus Supplement. See 'Description of the Trust
Funds--Assets.'
(b) Government Securities............... If so provided in the related Prospectus Supplement, the Trust Fund
may include, in addition to Mortgage Assets, certain direct
obligations of the United States, agencies thereof or agencies
created thereby which provide for payment of interest and/or
principal (collectively, 'Government Securities').
(c) Collection Accounts................. Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or
persons designated in the related Prospectus Supplement will, to the
extent described herein and in such Prospectus Supplement, deposit
all payments and collections received or advanced with respect to the
Assets and other assets in the Trust Fund. Such an account may
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be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See 'Description of
the Agreements--Collection Account and Related Accounts.'
(d) Credit Support...................... If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more classes of
Securities of the related series in the form of subordination of one
or more other classes of Securities of such series, which other
classes may include one or more classes of Offered Securities, and/or
by one or more of the following types of credit support that has the
effect of covering losses on Assets: a letter of credit, insurance
policy, guarantee, reserve fund or other type of credit support
consistent with the foregoing (any such coverage with respect to the
Securities of any series, 'Credit Support'). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus
Supplement for a series of Securities. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any similar forms of credit support that
are provided by or with respect to, or are included as part of the
trust fund evidenced by or providing security for, such MBS. See
'Risk Factors--Credit Support Limitations' and 'Description of Credit
Support.'
(e) Cash Flow Agreements................ If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys
held in the funds and accounts established for the related series
will be invested at a specified rate. The Trust Fund may also include
one or more of the following agreements: interest rate exchange
agreements, interest rate cap or floor agreements, currency exchange
agreements, other swaps and derivative instruments or other
agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a 'Cash Flow Agreement'),
including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect
to the obligor under any such Cash Flow Agreement. The Prospectus
Supplement for any series of Securities evidencing an interest in a
Trust Fund that includes MBS will describe any cash flow agreements
that are included as part of the trust fund evidenced by or providing
security for such MBS. See 'Description of the Trust Funds--Cash Flow
Agreements.'
(f) Pre-Funding Account................. To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the satisfaction
of certain conditions described in the applicable Agreement),
additional Assets (the 'Subsequent Assets') from time to time (as
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frequently as daily) within the number of months specified in the
Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the 'Pre-Funded
Amount') for such series on date of such issuance.
Description of Securities................. Each series of Certificates will evidence an interest in the related
Trust Fund and will be issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and servicing agreements and
trust agreements are referred to herein as the 'Agreements.' If a
series of Securities includes Notes, such Notes will represent
indebtedness of the related Trust Fund and will be secured by a
security interest in the Assets of the Trust Fund (or a specified
group thereof) pursuant to an indenture.
Each series of Securities will include one or more classes. Each
class of Securities (other than certain Stripped Interest Securities,
as defined below) will have a stated principal amount (a 'Security
Balance') and except for certain Stripped Principal Securities, as
defined below, will accrue interest thereon based on a fixed,
variable or adjustable interest rate (in the case of Certificates, a
'Pass-Through Rate'). The related Prospectus Supplement will specify
the Security Balance, if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the case of a variable or
adjustable Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate.
Distributions on Securities............... Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates; (ii) be senior
(collectively, 'Senior Securities') or subordinate (collectively,
'Subordinate Securities') to one or more other classes of Securities
in respect of certain distributions on the Securities; (iii) be
entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped
Principal Securities'); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, 'Stripped Interest Securities'); (v) provide for
distributions of accrued interest thereon commencing only following
the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively,
'Accrual Securities'); (vi) provide for distributions of principal as
described in the related Prospectus Supplement; and/or (vii) provide
for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this
paragraph, including a Stripped Principal Security component and a
Stripped Interest Security component, to the extent of available
funds, in each case as described in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be
limited to collections from a designated portion of the Mortgage
Loans in the related Mortgage Pool (each such portion of Mortgage
Loans, a 'Mortgage Loan Group.') See 'Description of the
Securities--General.' Any such classes may include classes of Offered
Securities. With respect to Securities with two or more components,
references herein to
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Security Balance, notional amount and Pass-Through Rate or interest
rate refer to the principal balance, if any, notional amount, if any,
and the Pass-Through Rate or interest rate, if any, for any such
component.
The Securities will not be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency or instrumentality
or by any other person, unless otherwise provided in the related
Prospectus Supplement. See 'Risk Factors--Limited Assets' and
'Description of the Securities.'
(a) Interest............................ Interest on each class of Offered Securities (other than Stripped
Principal Securities and certain classes of Stripped Interest
Securities) of each series will accrue at the applicable Pass-Through
Rate or interest rate on the outstanding Security Balance thereof and
will be distributed to Securityholders as provided in the related
Prospectus Supplement. The specified date on which distributions are
to be made is a 'Distribution Date.' Distributions with respect to
interest on Stripped Interest Securities may be made on each
Distribution Date on the basis of a notional amount as described in
the related Prospectus Supplement. Distributions of interest with
respect to one or more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment interest
shortfalls, and other contingencies described herein and in the
related Prospectus Supplement. See 'Risk Factors--Average Life of
Securities; Prepayments; Yields,' 'Yield Considerations' and
'Description of the Securities--Distributions of Interest on the
Securities.'
(b) Principal........................... The Securities of each series initially will have an aggregate
Security Balance no greater than the outstanding principal balance of
the Assets as of, unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of the month of
formation of the related Trust Fund (the 'Cut-off Date'), after
application of scheduled payments due on or before such date, whether
or not received. The Security Balance of a Security outstanding from
time to time represents the maximum amount that the holder thereof is
then entitled to receive in respect of principal from future cash
flow on the assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or
classes of Securities entitled thereto until the Security Balances of
such Securities have been reduced to zero. Unless otherwise specified
in the related Prospectus Supplement, distributions of principal of
any class of Securities will be made on a pro rata basis among all of
the Securities of such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the
related Trustee. Stripped Interest Securities with no Security
Balance will not receive distributions in respect of principal. See
'Description of the Securities--Distributions of Principal of the
Securities.'
Risk Factors.............................. There are material risks to be considered in investing in the
Securities. See 'Risk Factors' herein and, if applicable, in the
related Prospectus Supplement.
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Advances.................................. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be obligated as part of its servicing
responsibilities to make certain advances that in its good faith
judgment it deems recoverable with respect to delinquent scheduled
payments on the Whole Loans in such Trust Fund. Neither the Depositor
nor any of its affiliates will have any responsibility to make such
advances. Advances made by a Master Servicer are reimbursable
generally from subsequent recoveries in respect of such Whole Loans
and otherwise to the extent described herein and in the related
Prospectus Supplement. If and to the extent provided in the
Prospectus Supplement for any series, the Master Servicer will be
entitled to receive interest on its outstanding advances, payable
from amounts in the related Trust Fund. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any corresponding advancing obligation of
any person in connection with such MBS. See 'Description of the
Securities--Advances in Respect of Delinquencies.'
Termination............................... If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in the manner set
forth therein. If so provided in the related Prospectus Supplement,
upon the reduction of the Security Balance of a specified class or
classes of Securities to a specified percentage or amount or on and
after a date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient portion of such Assets
to retire such class or classes, or purchase such Assets at a price
set forth in the related Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement, certain classes of
Securities may be purchased subject to similar conditions. See
'Description of the Securities--Termination.'
Registration of Securities................ If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities will initially be represented by
one or more certificates or notes, as applicable, registered in the
name of Cede & Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be entitled to
receive a definitive certificate or note, as applicable, representing
such person's interest except in the event that definitive
certificates or notes, as applicable, are issued under the limited
circumstances described herein. See 'Risk Factors--Book-Entry
Registration' and 'Description of the Securities--Book-Entry
Registration and Definitive Securities.'
Tax Status of the Certificates............ The Certificates of each series will constitute, as specified in the
related Prospectus Supplement, either (i) 'regular interests' ('REMIC
Regular Certificates') and 'residual interests' ('REMIC Residual
Certificates') in a Trust Fund treated as a real estate mortgage
investment conduit ('REMIC') under Sections 860A through 860G of the
Internal Revenue Code of 1986, as amended (the 'Code'), (ii)
interests ('Grantor Trust Certificates') in a Trust Fund treated as a
grantor trust under
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applicable provisions of the Code, (iii) an interest in a Trust Fund
treated as a partnership for purposes of federal and state income tax
or (iv) indebtedness of the Trust Fund for federal income tax
purposes.
(a) REMIC............................... REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax purposes.
Certain REMIC Regular Certificates may be issued with original issue
discount for federal income tax purposes. See 'Material Federal
Income Tax Consequences' herein and in the related Prospectus
Supplement.
The Offered Certificates evidencing an interest in a Trust Fund
containing Mortgage Loans will be treated as (i) assets described in
section 7701(a)(19)(C) of the Code and (ii) 'real estate assets'
within the meaning of section 856(c)(5)(A) of the Code, in each case
to the extent described herein and in the Prospectus. See 'Material
Federal Income Tax Consequences' herein and in the related Prospectus
Supplement.
(b) Grantor Trust....................... If the related Prospectus Supplement specifies that the related Trust
Fund will be a grantor trust, the Trust Fund will be classified as a
grantor trust and not as an association taxable as a corporation for
federal income tax purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro rata interests in the
Assets held by the Trust Fund.
(c) Partnership......................... If so specified in a Prospectus Supplement, the related Trust Fund
will be treated as a partnership for purposes of federal and state
income tax, and each Certificateholder, by the acceptance of a
Certificate of such Trust Fund, will agree to treat the Trust Fund as
a partnership in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative characterizations
of such Trust Fund and such Certificates are possible, but would not
result in materially adverse tax consequences to Certificateholders.
(d) Indebtedness........................ If so specified in the related Prospectus Supplement, the
Certificates of a series will be treated as indebtedness for federal
income tax purposes and the Certificateholder, in accepting the
Certificate, will agree to treat such Certificate as indebtedness.
Investors are advised to consult their tax advisors and to review
'Material Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
Tax Status of Notes....................... Unless otherwise specified in the related Prospectus Supplement,
Notes of a series will be treated as indebtedness for federal and
state income tax purposes and the Noteholder, in accepting the Note,
will agree to treat such Note as indebtedness. See 'Material Federal
Income Tax Consequences' herein and in such Prospectus Supplement.
Investors are advised to consult their tax advisors and to review
'Material Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other retirement
plans and arrangements, including individual retirement accounts,
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annuities, Keogh plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase or
holding of Offered Securities could give rise to a transaction that
is prohibited or is not otherwise permissible either under ERISA or
Section 4975 of the Code. See 'ERISA Considerations' herein and in
the related Prospectus Supplement. Certain classes of Securities may
not be transferred unless the Trustee and the Depositor are furnished
with a letter of representations or an opinion of counsel to the
effect that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master Servicer to
additional obligations. See 'Description of the Securities--General'
and 'ERISA Considerations'.
Legal Investment.......................... Each Prospectus Supplement will specify which class or classes of
Offered Securities, if any, will constitute 'mortgage-related
securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ('SMMEA'). Institutions whose investment activities are
subject to legal investment laws and regulations or review by certain
regulatory authorities may be subject to restrictions on investment
in certain classes of the Offered Securities. See 'Legal Investment'
herein and in the related Prospectus Supplement.
Rating.................................... At the date of issuance, as to each series, each class of Offered
Securities will be rated not lower than investment grade by one or
more nationally recognized statistical rating agencies (each, a
'Rating Agency'). See 'Rating' herein and in the related Prospectus
Supplement.
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under 'Risk Factors' in the related Prospectus
Supplement.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS AND RISK THAT SUCH ASSETS WILL NOT BE SUFFICIENT TO PAY
SECURITIES IN FULL
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Master Servicer's and any Sub-Servicer's servicing obligations under the related
Agreement (including the limited obligation to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable) and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Master Servicer in
connection with an agreement to purchase or act as remarketing agent with
respect to a convertible ARM Loan (as defined herein) upon conversion to a fixed
rate or a different index. Since certain representations and warranties with
respect to the Mortgage Assets may have been made and/or assigned in connection
with transfers of such Mortgage Assets prior to the Closing Date, the rights of
the Trustee and the Securityholders with respect to such representations or
warranties will be limited to their rights as an assignee thereof. Unless
otherwise specified in the related Prospectus Supplement, none of the Depositor,
the Master Servicer or any affiliate thereof will have any obligation with
respect to representations or warranties made by any other entity. Unless
otherwise specified in the related Prospectus Supplement, neither the Securities
nor the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each series of Securities (including the Assets and any
form of credit enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Depositor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See 'Description of the Trust Funds.'
RISK THAT PREPAYMENTS WILL ADVERSELY AFFECT AVERAGE LIFE AND YIELDS OF
SECURITIES
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans varies between pools and from
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time to time is influenced by a variety of economic, demographic, geographic,
social, tax, legal and other factors. There can be no assurance as to the rate
of prepayment on the Assets in any Trust Fund or that the rate of payments will
conform to any model described herein or in any Prospectus Supplement. If
prevailing interest rates fall significantly below the applicable mortgage
interest rates, principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by the Mortgage Loans underlying or
comprising the Mortgage Assets in any Trust Fund. As a result, the actual
maturity of any class of Securities evidencing an interest in a Trust Fund
containing Mortgage Assets could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate.
See 'Yield Considerations' herein and, if applicable, in the related
Prospectus Supplement.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL--RISK THAT DEFAULTS BY
OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED PROPERTIES WILL RESULT IN LOSSES
TO INVESTORS
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the relevant residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the related Mortgage Loans, and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry in
that market. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest, the principal balances of such Mortgage Loans could be increased to an
amount equal to or in excess of the value of the underlying Mortgaged
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Support, if any, holders of
Securities of the series evidencing interests in the related Mortgage Loans will
bear all risk of loss resulting from default by mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of Mortgage Loans may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis of
the initial payment amount. In some instances the Mortgagor's income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase. In addition
to the foregoing, certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will
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increase the risk of loss particularly with respect to any related junior
Mortgage Loans. See '--Junior Mortgage Loans.'
In addition, a Prospectus Supplement may specify that the Loan-to-Value
Ratios for the Mortgage Loans in the related Trust will be in excess of 100%.
The related Mortgaged Properties, therefore, will be highly unlikely to provide
adequate security for such Mortgage Loans. To the extent specified in such
Prospectus Supplement, the assessment of the credit history of a borrower and
such borrower's capacity to make payments on the related Mortgage Loan will have
been the primary considerations in underwriting the Mortgage Loans included in
such Trust. The evaluation of the adequacy of the Loan-to-Value Ratio, if so
specified in the related Prospectus Supplement, will have been given less
consideration, and in certain cases no consideration, in underwriting such
Mortgage Loans.
JUNIOR MORTGAGE LOANS--RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE
TO HOLDERS OF JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the 'senior lien'),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien and the Mortgage Loan. In the event that a
holder of the senior lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage. See 'Certain Legal Aspects of the Mortgage
Loans--Junior Mortgages.'
CREDIT SUPPORT LIMITATIONS--RISK THAT CREDIT SUPPORT WILL NOT COVER ALL LOSSES
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a 'Covered
Trust'),
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holders of Securities evidencing an interest in a Covered Trust will be subject
to the risk that such Credit Support will be exhausted by the claims of other
Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
See '--Limited Nature of Ratings,' 'Description of the Securities' and
'Description of Credit Support.'
SUBORDINATION OF THE SUBORDINATE SECURITIES; EFFECT OF LOSSES ON THE SUBORDINATE
SECURITIES
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See 'Description of the Securities--General' and
'--Allocation of Losses and Shortfalls.'
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
BALLOON PAYMENTS--RISK THAT OBLIGOR WILL NOT BE ABLE TO MAKE BALLOON PAYMENT
Certain of the Mortgage Loans (the 'Balloon Mortgage Loans') as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
OPTIONAL TERMINATION OF A TRUST FUND--POSSIBILITY, IF PROSPECTUS SUPPLEMENT SO
PROVIDES, THAT AMOUNT RECEIVED MAY BE LESS THAN OUTSTANDING PRINCIPAL AMOUNT
PLUS ACCRUED INTEREST
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities to a specified percentage or amount,
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the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
In either such case, if the related Prospectus Supplement so provides, the
proceeds available for distribution to Securityholders may be less than the
outstanding principal balance of their Securities plus accrued interest thereon,
in which event such Securityholders could incur a loss on their investment.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in 'Material Federal Income Tax
Consequences--REMICs.' Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain 'negative value' REMIC residual interests. See
'Material Federal Income Tax Consequences--REMICs.'
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating. See 'Rating.'
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as 'Securityholders' (as that term is to be used in the related
Agreement). Hence, until such time, Securityholders will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See 'Description of the Securities--Book-Entry Registration and
Definitive Securities.
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the 'Assets') will include (i) one-
to five-family mortgage loans (or certain balances thereof) (collectively, the
'Mortgage Loans'), including without limitation, Home Equity Loans and Home
Improvement Contracts, (ii) pass-through certificates or other mortgage-backed
securities (such as debt obligations or participation interests or certificates)
evidencing interests in or secured by one or more Mortgage Loans or other
similar participations, certificates or securities ('MBS') or (iii) direct
obligations of the United States, agencies thereof or agencies created thereby
which are (a) interest-bearing securities, (b) non-interest-bearing securities,
(c) originally interest-bearing securities from which coupons representing the
right to payment of interest have been removed, or (d) interest-bearing
securities from which the right to payment of principal has been removed (the
'Government Securities'). As used herein, 'Mortgage Loans' refers to both whole
Mortgage Loans (or certain balances thereof) and Mortgage Loans underlying MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as 'Underlying Mortgage Loans.' Mortgage Loans (or
certain balances thereof) that are not Underlying Mortgage Loans are sometimes
referred to as 'Whole Loans.' Any pass-through certificates or other
asset-backed certificates in which an MBS evidences an interest or which secure
an MBS are sometimes referred to herein also as MBS or as 'Underlying MBS.'
Mortgage Loans and MBS are sometimes referred to herein as 'Mortgage Assets.'
The Mortgage Assets will not be guaranteed or insured by Merrill Lynch Mortgage
Investors, Inc. (the 'Depositor') or any of its affiliates or, unless otherwise
provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an 'Asset Seller'), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to five-family residential property (a 'Single Family Property' and
the related Mortgage Loan a 'Single Family Mortgage Loan') or (ii) a security
interests in shares issued by private cooperative housing corporations
('Cooperatives'). If so specified in the related Prospectus Supplement, a
Mortgaged Property may include some commercial use. Mortgaged Properties will be
located, unless otherwise specified in the related Prospectus Supplement, in any
one of the fifty states, the District of Columbia, the Commonwealth of Puerto
Rico or any U.S. possession. To the extent specified in the related Prospectus
Supplement, the Mortgage Loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by Cooperatives and leasehold interests in properties, the
title to which is held by third party lessors. Unless otherwise specified in the
Prospectus Supplement, the term of any such leasehold shall exceed the term of
the related mortgage note by at least five years. Each Mortgage Loan will have
been originated by a person (the 'Originator') other than the Depositor. The
related Prospectus Supplement will indicate if any Originator is an affiliate of
the Depositor. The Mortgage Loans will be evidenced by promissory notes (the
'Mortgage Notes') secured by mortgages, deeds of trust or other security
instruments (the 'Mortgages') creating a lien on the Mortgaged Properties. No
more than 20% of the Mortgage Loans (by principal balance) in a Trust Fund will
be, as of the related Cut-off Date, 30 days or more past their most recent
contractually scheduled payment date.
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Loan-to-Value Ratio
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan plus the principal balance of any senior mortgage loan to the
Value of the related Mortgaged Property. The 'Value' of a Mortgaged Property,
other than with respect to Refinance Loans, is generally the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such loan and (b) the sales price for such property. 'Refinance
Loans' are loans made to refinance existing loans. Unless otherwise set forth in
the related Prospectus Supplement, the Value of the Mortgaged Property securing
a Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan. The Value of a
Mortgaged Property as of the date of initial issuance of the related series of
Certificates may be less than the value at origination and will fluctuate from
time to time based upon changes in economic conditions and the real estate
market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ('ARM Loans'), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ('Home Equity Loans'), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the 'Home
Improvement Contracts') originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by borrowers
under the revolving Home Equity Loans will, during a specified period of time,
automatically become part of the Trust Fund for a series. As a result, the
aggregate balance of the revolving Home Equity Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal
collections are applied to purchase such balances. Such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions may
be made to the extent that such additions could be made in connection with a
Trust Fund with respect to which a REMIC election has been made. The related
Prospectus Supplement will set forth the characteristics that such additional
Mortgage Loans will be required to meet. Such characteristics will be specified
in terms of the categories described in the second preceding paragraph.
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Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of not
less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an 'MBS Agreement'). A seller (the 'MBS Issuer') and/or servicer (the
'MBS Servicer') of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the 'MBS Trustee'), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under 'Description
of Credit Support' may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under '--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements' above, and the type of information in respect of the Underlying MBS
described in this paragraph, (xii) the characteristics of any cash flow
agreements that are included as part of the trust fund evidenced or secured by
the MBS and (xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company.
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Each MBS will be either (i) a security exempted from the registration
requirements of the Securities Act, (ii) a security that has been previously
registered under the Securities Act or (iii) a security that is eligible for
sale under Rule 144(k) under the Securities Act. In the case of clauses (ii) and
(iii), such security will be acquired in a secondary market transaction not from
the issuer thereof or an affiliate of such issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the 'Subsequent Assets') from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the 'Pre-Funded Amount') for such series on
date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See 'Description of the Agreement--Collection
Account and Related Accounts.'
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, 'Credit Support'). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See 'Risk Factors--Credit Support Limitations' and
'Description of Credit Support.'
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a 'Cash Flow Agreement'), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See 'Risk Factors.'
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under '--Pass-Through Rate and Interest Rate,' if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans. The rate of principal payments on some or all of
the classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the
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extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical Mortgage Loans without such
provisions or with lower Prepayment Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Securities entitled to payments of interest because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans comprising or underlying the Assets in
a particular Trust Fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans comprising or underlying the Assets is paid to such class, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term 'prepayment' includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans comprising or underlying the Assets
in a Trust Fund. If any Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates and maturities
of the Mortgage Loans comprising or underlying such Assets. See 'Description of
the Trust Funds.'
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Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ('CPR') prepayment model
or the Standard Prepayment Assumption ('SPA') prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Mortgage Loans having balloon payments may default at
maturity. In the case of defaults, recovery of proceeds may be delayed by, among
other things, bankruptcy of the mortgagor or adverse conditions in the market
where the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be permitted to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Securities, thereby
lengthening the period of time elapsed from the date of issuance of a Security
until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the mortgagor under each Mortgage Loan generally will be
qualified on the basis of the Mortgage Rate in effect at origination. The
repayment of any such Mortgage Loan may thus be dependent on the ability of the
mortgagor or obligor to make larger level monthly payments following the
adjustment of the Mortgage Rate. In addition, certain Mortgage Loans may be
subject to temporary buydown plans ('Buydown Mortgage Loans') pursuant to which
the monthly payments made by the mortgagor during the early years of the
Mortgage Loan will be less than the scheduled monthly payments thereon (the
'Buydown Period'). The periodic increase in the amount paid by the mortgagor of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the mortgagor, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
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balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted average
life of the Mortgage Loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Sub-Servicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, Sub-Servicers may encourage the
refinancing of Mortgage Loans, including defaulted Mortgage Loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include 'due-on-sale' clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See 'Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses' and
'Description of the Agreements--Due-on-Sale Provisions.'
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THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an 'Indenture'). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, 'Senior Securities') or
subordinate (collectively, 'Subordinate Securities') to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped Principal
Securities'); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
'Stripped Interest Securities'); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, 'Accrual Securities'); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, a Trust Fund may include (i)
additional Mortgage Loans (or certain balances thereof) that will be transferred
to the Trust from time to time and/or (ii) in the case of revolving Home Equity
loans or certain balances thereof, any additional balances advanced to the
borrowers under the revolving Home Equity loans during certain periods. If so
specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a 'Mortgage Loan Group'). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
('Definitive Securities') or in book-entry form ('Book-Entry Securities'), as
provided in the related Prospectus Supplement. See 'Risk Factors--Book-Entry
Registration' and 'Description of the Securities--Book-Entry Registration and
Definitive Securities.' Definitive Securities will be exchangeable for other
Securities of the same class and series of a like aggregate Security Balance,
notional amount or percentage interest but of different authorized
denominations. See 'Risk Factors--Limited Liquidity' and '--Limited Assets.'
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DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the 'Record Date'), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the 'Determination Date'). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the 'Available
Distribution Amount' for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a 'Due Period' with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period, and will end
on the first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
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As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the 'Pass-Through Rate' in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
'Accrued Security Interest' will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans comprising or underlying the Assets in the Trust Fund for such
series. The particular manner in which such shortfalls are to be allocated among
some or all of the classes of Securities of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Securities may
be reduced as a result of any other contingencies, including delinquencies,
losses and deferred interest on or in respect of the Mortgage Loans comprising
or underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a class of Securities by reason of
the allocation to such class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the Security Balance of such class.
See 'Risk Factors--Average Life of Securities; Prepayments; Yields' and 'Yield
Considerations.'
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a 'Security Balance' which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of
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losses incurred in respect of the related Assets, may be increased in respect of
deferred interest on the related Mortgage Loans to the extent provided in the
related Prospectus Supplement and, in the case of Accrual Securities prior to
the Distribution Date on which distributions of interest are required to
commence, will be increased by any related Accrued Security Interest. Unless
otherwise provided in the related Prospectus Supplement, the initial aggregate
Security Balance of all classes of Securities of a series will not be greater
than the outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series and
each class thereof will be specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or classes of
Securities entitled thereto in accordance with the provisions described in such
Prospectus Supplement until the Security Balance of such class has been reduced
to zero. Stripped Interest Securities with no Security Balance are not entitled
to any distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under '--General' above. To such extent, the
descriptions set forth under '--Distributions of Interests on the Securities'
and '--Distributions of Principal of the Securities' above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See 'Description of Credit
Support' for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See 'Description of Credit Support.'
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Mortgage Loan,
'Related Proceeds') and, if so provided in the Prospectus Supplement, out of any
amounts otherwise distributable on one or more classes of Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Collection Account prior to any distributions being made
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on the Securities to the extent that the Master Servicer (or such other entity)
shall determine in good faith that such advance (a 'Nonrecoverable Advance') is
not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess funds
in the Collection Account, the Master Servicer is required to replace such funds
in the Collection Account on any future Distribution Date to the extent that
funds in the Collection Account on such Distribution Date are less than payments
required to be made to Securityholders on such date. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
loan number of the related Mortgage Loan and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
book value, (b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as if such
Mortgage Loan were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement), (c) the
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aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (d) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan and (c) the amount of any
loss to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See 'Description of the Securities--
Registration and Definitive Securities.'
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TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ('DTC').
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the Uniform Commercial Code ('UCC') and a
'clearing agency' registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ('Participants') and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ('Indirect Participants').
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ('Security Owners') will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
('Cede'), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only 'Securityholder' (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement, Trust
Agreement or Indenture, as applicable, only indirectly through the Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the
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Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Security
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedel Bank, societe anonyme ('CEDEL') is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ('CEDEL Participants') and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ('Euroclear Participants') and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the 'Euroclear Operator' or 'Euroclear'), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the 'Cooperative').
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in
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accordance with relevant United States tax laws and regulations. See 'Material
Federal Income Tax Consequences' in this Prospectus and 'Global Clearance,
Settlement and Tax Documentation Procedures' in Annex I to the related
Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Security under the Indenture,
Trust Agreement or Pooling and Servicing Agreement, as applicable, on behalf of
a CEDEL Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to its Depositary's ability to effect
such actions on its behalf through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and Euroclear
will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the 'Depositaries'), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
Transfers between DTC's participating organizations (the 'Participants')
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, Cedel or Euroclear should discontinue its
services, the Administrator would seek an alternative depository (if available)
or cause the issuance of Definitive Securities to the owners thereof or their
nominees in the manner described in the Prospectus under 'Description of the
Securities--Book Entry Registration and Definitive Securities'.
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ('Definitive
Securities'), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
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DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a 'Pooling and Servicing Agreement') among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance and servicing of the related Assets, the Pooling and Servicing
Agreement may be referred to herein as the 'Agreement'. Notwithstanding the
foregoing, if the Assets of the Trust Fund for such a series consists only of
Government Securities or MBS, such Assets will be conveyed to the Trust Fund and
administered pursuant to a trust agreement between the Depositor and the Trustee
(a 'Trust Agreement'), which may also be referred to herein as the 'Agreement'.
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related Trust
Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a 'Servicing Agreement') between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the 'Agreement'.
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the 'Indenture') between the related Trust Fund and an indenture
trustee (the 'Indenture Trustee') named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term 'Security' refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
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ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in respect of each Whole Loan included in the related
Trust Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and Loan-to-Value Ratio as of the
date indicated and payment and prepayment provisions, if applicable; and (ii) in
respect of each MBS included in the related Trust Fund, including without
limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the pass-through or
bond rate or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
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Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans and Home Improvement Contracts will not be delivered to the Trustee (or a
custodian), but will be retained by the Master Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will not be recorded, unless otherwise provided in the related Prospectus
Supplement.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a 'clearing corporation'
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name of
the Trustee for the benefit of the Securityholders. Unless otherwise provided in
the related Prospectus Supplement, the related Agreement will require that
either the Depositor or the Trustee promptly cause any MBS and Government
Securities in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the 'Warranting Party') covering, by way of example, the
following types of matters: (i) the accuracy of the information set forth for
such Whole Loan on the schedule of Assets appearing as an exhibit to the related
Agreement; (ii) the existence of title insurance insuring the lien priority of
the Whole Loan; (iii) the authority of the Warranting Party to sell the Whole
Loan; (iv) the payment status of the Whole Loan; (v) in the case of a Whole
Loan, the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Whole Loan or the interests therein of
the Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Whole
Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor. As
to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the 'Purchase Price' is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Rate from
the date as to which interest was last paid to the due date in the Due Period in
which the relevant
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purchase is to occur, plus certain servicing expenses that are reimbursable to
the Master Servicer. If so provided in the Prospectus Supplement for a series, a
Warranting Party, rather than repurchase a Whole Loan as to which a breach has
occurred, will have the option, within a specified period after initial issuance
of such series of Certificates, to cause the removal of such Whole Loan from the
Trust Fund and substitute in its place one or more other Whole Loans in
accordance with the standards described in the related Prospectus Supplement. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan as to which a breach has
occurred, will have the option to reimburse the Trust Fund or the
Securityholders for any losses caused by such breach. Unless otherwise specified
in the related Prospectus Supplement, this reimbursement, repurchase or
substitution obligation will constitute the sole remedy available to holders of
Securities or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See 'Events of Default' and 'Rights Upon Event of
Default.'
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the 'Collection Account'), which must be either (i) an account or
accounts the deposits in which are insured by the Federal Deposit Insurance
Corporation ('FDIC') (to the limits established by the FDIC) and, if so
specified in the related Prospectus Supplement, the uninsured deposits in which
are otherwise secured such that the Trustee have a claim with respect to the
funds in the Collection Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Collection Account is maintained or (ii) otherwise maintained with a bank or
trust company, and in a manner, satisfactory to the Rating Agency or Agencies
rating any class of Securities of such series. The collateral eligible to secure
amounts in the Collection Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
('Permitted Investments'). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
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Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust
Fund (to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and Mortgage
Note) (collectively, 'Insurance Proceeds') and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans
in the Trust Fund, by foreclosure or otherwise ('Liquidation Proceeds'),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under 'Description of Credit Support';
(v) any advances made as described under 'Description of the
Securities--Advances in Respect of Delinquencies';
(vi) any amounts paid under any Cash Flow Agreement, as described
under 'Description of the Trust Funds--Cash Flow Agreements';
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under 'Assignment of
Assets; Repurchases' and 'Representations and Warranties; Repurchases,' all
proceeds of any defaulted Mortgage Loan purchased as described under
'Realization Upon Defaulted Whole Loans,' and all proceeds of any Asset
purchased as described under 'Description of the Securities--Termination'
(also, 'Liquidation Proceeds');
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans in the Trust Fund
as described under 'Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses';
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or prepayment
premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under 'Hazard Insurance Policies';
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
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Withdrawals
A Master Servicer or the Trustee may, from time to time, unless otherwise
specified in the related Prospectus Supplement or the related Agreement, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under 'Description of the Securities--Advances in Respect of
Delinquencies,' such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Whole Loans and properties, and net
income collected on the particular properties, with respect to which such
fees were earned or such expenses were incurred or out of amounts drawn
under any form of Credit Support with respect to such Whole Loans and
properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii)
above which, in the Master Servicer's good faith judgment, will not be
recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the related Agreement and
described in the related Prospectus Supplement, just from that portion of
amounts collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under 'Certain Matters Regarding a Master Servicer and the
Depositor';
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under 'Certain
Matters Regarding the Trustee';
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under 'Material Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes';
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(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by 'Assignment of Assets; Repurchase' and
'Representations and Warranties; Repurchases' or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under '--Deposits' above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under '--Withdrawals' above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans and
held for its own account, provided such procedures are consistent with (i) the
terms of the related Agreement and any related hazard insurance policy or
instrument of Credit Support, if any, included in the related Trust Fund
described herein or under 'Description of Credit Support,' (ii) applicable law
and (iii) the general servicing standard specified in the related Prospectus
Supplement or, if no such standard is so specified, its normal servicing
practices (in either case, the 'Servicing Standard'). In connection therewith,
the Master Servicer will be permitted in its discretion to waive any late
payment charge or penalty interest in respect of a late payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See 'Description of Credit Support.'
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The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or (ii) in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and (ii)
in its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans to third-party servicers (each, a 'Sub-Servicer'), but such Master
Servicer will remain obligated under the related Agreement. Each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a 'Sub-Servicing
Agreement') must be consistent with the terms of the related Agreement and must
provide that, if for any reason the Master Servicer for the related series of
Securities is no longer acting in such capacity, the Trustee or any successor
Master Servicer may assume the Master Servicer's rights and obligations under
such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under an
Agreement. See 'Retained Interest; Servicing Compensation and Payment of
Expenses.'
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under 'Representations and Warranties; Repurchases.'
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Master Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation through foreclosure, repossession or
similar proceedings. The related Agreement will provide that any such offering
be made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
'Representations and Warranties; Repurchases' will in all cases be deemed fair.
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The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within three years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to three
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See 'Certain Legal Aspects of Mortgage
Loans--Foreclosure.'
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Master Servicer will
be entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Whole Loan, prior to the
distribution of such Liquidation Proceeds to Securityholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See 'Hazard Insurance Policies' and 'Description of
Credit Support.'
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if
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any Mortgage permits the holder thereof to dictate to the mortgagor the
insurance coverage to be maintained on the related Mortgaged Property, then such
coverage as is consistent with the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, such coverage will be in general
in an amount equal to the lesser of the principal balance owing on such Whole
Loan and the amount necessary to fully compensate for any damage or loss to the
improvements on the Mortgaged Property on a replacement cost basis, but in
either case not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy. The ability of the
Master Servicer to assure that hazard insurance proceeds are appropriately
applied may be dependent upon its being named as an additional insured under any
hazard insurance policy and under any other insurance policy referred to below,
or upon the extent to which information in this regard is furnished by
mortgagors. All amounts collected by the Master Servicer under any such policy
(except for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the mortgagor in accordance with the Master Servicer's
normal servicing procedures, subject to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the Collection Account. The
Agreement will provide that the Master Servicer may satisfy its obligation to
cause each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
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FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A 'Retained
Interest' in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
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EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ('FHLMC') or such other audit or attestation program used
by the Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other audit or attestation program requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC or such other audit or attestation program used by
such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans under each Agreement will be named in the related Prospectus Supplement.
The entity serving as Master Servicer (or as such servicer) may be an affiliate
of the Depositor and may have other normal business relationships with the
Depositor or the Depositor's affiliates. Reference herein to the Master Servicer
shall be deemed to be to the servicer of substantially all of the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense
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(i) specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to such Agreement); (ii)
incurred in connection with any breach of a representation, warranty or covenant
made in such Agreement; (iii) incurred by reason of misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder, or by
reason of reckless disregard of such obligations or duties; (iv) incurred in
connection with any violation of any state or federal securities law; or (v)
imposed by any taxing authority if such loss, liability or expense is not
specifically reimbursable pursuant to the terms of the related Agreement. In
addition, each Agreement will provide that neither any Master Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Securityholders, and the Master Servicer
or the Depositor, as the case may be, will be entitled to be reimbursed therefor
and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement, Events of
Default under the related Agreement will include (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee or Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the Agreement
which continues unremedied for thirty days (or such other period specified in
the related Prospectus Supplement) after written notice of such failure has been
given to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Securities evidencing
not less than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Master Servicer under the Agreement which materially and
adversely affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in the related
Prospectus Supplement) after written notice of such breach has been given to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights; and (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to shorten cure periods or eliminate notice requirements)
will be specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the Trustee shall, not later
than the later of 60 days after the occurrence of any event which constitutes
or, with notice or lapse of time or both, would constitute an Event of Default
and five days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless such
default shall have been cured or waived.
The manner of determining the 'Voting Rights' of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and
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obligations of the Master Servicer under the Agreement and in and to the
Mortgage Loans (other than as a Securityholder or as the owner of any Retained
Interest), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Master Servicer under the Agreement (except that
if the Trustee is prohibited by law from obligating itself to make advances
regarding delinquent Mortgage Loans, or if the related Prospectus Supplement so
specifies, then the Trustee will not be obligated to make such advances) and
will be entitled to similar compensation arrangements. Unless otherwise
specified in the related Prospectus Supplement, in the event that the Trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, it shall appoint, or
petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the Rating Agency with a net worth at the
time of such appointment of at least $15,000,000 (or such other amount specified
in the related Prospectus Supplement) to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under 'Events of Default' may be waived only by all of
the Securityholders. Upon any such waiver of an Event of Default, such Event of
Default shall cease to exist and shall be deemed to have been remedied for every
purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for sixty days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of Securities covered by the Agreement, (i) to cure any
ambiguity or correct any mistake, (ii) to correct, modify or supplement any
provision therein which may be inconsistent with any other provision therein or
with the related Prospectus Supplement, (iii) to make any other provisions with
respect to matters or questions arising under the Agreement which are not
materially inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not (as evidenced by an opinion of counsel to such effect or
a letter from the applicable Rating Agency that such amendment will not result
in a reduction or withdrawal of its rating of the related Security) adversely
affect in any material respect the interests of any holder of Securities covered
by the Agreement. Unless otherwise specified in the related Prospectus
Supplement, each Agreement may also be amended by the Depositor, the Master
Servicer, if any, and the Trustee, with the consent of the holders of Securities
affected thereby evidencing not less than 51% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights, for any
purpose; provided, however, that unless otherwise specified in the related
Prospectus Supplement, no such amendment may (i) reduce in any manner the amount
of or delay the timing of, payments received or advanced on Mortgage Loans which
are required to be distributed on any Security without the consent of the holder
of such Security or (ii) reduce the consent percentages described in this
paragraph without the consent of the holders of all Securities covered by such
Agreement then outstanding. However, with respect to any series of Securities as
to which a REMIC election is to be made, the Trustee will not consent to any
amendment of the
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Agreement unless it shall first have received an opinion of counsel to the
effect that such amendment will not result in the imposition of a tax on the
related Trust Fund or cause the related Trust Fund to fail to qualify as a REMIC
at any time that the related Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the
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Securities, then the Depositor may remove the Trustee and appoint a successor
trustee acceptable to the Master Servicer, if any. Holders of the Securities of
any series entitled to at least 51% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights for such series may at any
time remove the Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any principal
of or interest on any Note of such series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a majority in aggregate outstanding amount of the Notes of such
series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the holders of 100% (or such
other percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the holders of 662/3% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Notes of
such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders would be less than would otherwise be the case.
However, the Indenture Trustee may not
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institute a proceeding for the enforcement of its lien except in connection with
a proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with respect
to a series of Notes (except with respect to certain continuing rights specified
in the Indenture) upon the delivery to the Indenture Trustee for cancellation of
all the Notes of such series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series
of Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities the Credit Support will not provide protection against all risks
of loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
'Covered Trust'), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See 'Risk Factors--Credit Support Limitations--Risk That
Credit Support Will Not Cover All Losses.'
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Assets prior to
distributions on Subordinate Securities evidencing interests in a different
group of Assets within the Trust Fund. The Prospectus Supplement for a series
that includes a cross-support provision will describe the manner and conditions
for applying such provisions.
INSURANCE OR GUARANTEES
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans in the related Trust Fund will be covered for various default risks
by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the 'L/C Bank').
Under a letter of credit,
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the L/C Bank will be obligated to honor draws thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, generally equal to a
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Assets on the related Cut-off Date or of the initial
aggregate Security Balance of one or more classes of Securities. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws in
the event of only certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of the
date specified in the related Prospectus Supplement or the termination of the
Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See 'Description
of the Trust Funds--Assets.'
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as 'mortgages.' Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, 'mortgagor' includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
('Cooperative Loans') secured by security interests in shares issued by a
cooperative housing corporation (a 'Cooperative') and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant- stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See 'Foreclosure--Cooperatives'
below.
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FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by
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paying the entire actual amount in arrears (without acceleration) plus the
expenses incurred in enforcing the obligation. In other states, the mortgagor or
the junior lienholder is not provided a period to reinstate the loan, but has
only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a deed
of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the deed
to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a 'due-on-sale' clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their 'equity of redemption.' The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be
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distinguished from the post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
mortgagor and foreclosed junior lienors are given a statutory period in which to
redeem the property from the foreclosure sale. In some states, statutory
redemption may occur only upon payment of the foreclosure sale price. In other
states, redemption may be authorized if the former mortgagor pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser from a foreclosure
sale or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant- stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a 'commercially reasonable' manner. Whether a foreclosure sale has
been conducted in a 'commercially reasonable' manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds
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remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See '--Foreclosure' herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based
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on the particular facts of the reorganization case, that effected the curing of
a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an 'owner' or 'operator' of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, 'due-on-sale' clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
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The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a 'due-on-sale' clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a 'due-on-sale' clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting
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the mortgagor to cancel the recorded mortgage or deed of trust without any
payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ('Title VIII'). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'Crime
Control Act'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties 'known to have an alleged interest in the property,' including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on laws, regulations, including
the REMIC regulations promulgated by the Treasury Department (the 'REMIC
Regulations'), rulings and decisions now in effect or (with respect to
regulations) proposed, all of which are subject to change either prospectively
or retroactively. This summary does not address the federal income tax
consequences of an investment in Securities applicable to all categories of
investors, some of which (for example, banks and insurance companies) may be
subject to special rules. Prospective investors should consult their tax
advisors regarding the federal, state, local and any other tax consequences to
them of the purchase, ownership and disposition of Securities.
The term 'U.S. Person' means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), or an estate whose income is subject to U.S. federal
income tax regardless of its source of income, or a trust if a court within the
United States is able to exercise primary supervision of the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. persons
as well.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will be
treated as a grantor trust, then Brown & Wood LLP will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ('OID'), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the
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taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount and (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. A Grantor Trust Certificateholder using the
cash method of accounting must take into account its pro rata share of income
and deductions as and when collected by or paid to the Master Servicer. A
Grantor Trust Certificateholder using an accrual method of accounting must take
into account its pro rata share of income and deductions as they become due or
are paid to the Master Servicer, whichever is earlier. If the servicing fees
paid to the Master Servicer are deemed to exceed reasonable servicing
compensation, the amount of such excess could be considered as an ownership
interest retained by the Master Servicer (or any person to whom the Master
Servicer assigned for value all or a portion of the servicing fees) in a portion
of the interest payments on the Mortgage Assets. The Mortgage Assets would then
be subject to the 'coupon stripping' rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent 'loans . . . secured by an interest in real property which is
. . . residential property' within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code
section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent 'real estate assets' within the meaning of Code Section
856(c)(4)(A), and interest income on the Mortgage Assets will be considered
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
'obligation[s] . . . which [are] principally secured by an interest in real
property' within the meaning of Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of Government
Securities which constitute 'stripped bonds' or 'stripped coupons' as those
terms are defined in section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having original issue discount based
on the purchase price and the stated redemption price at maturity of each
Security. As such, Grantor Trust Certificateholders would be required to include
in income their pro rata share of the original issue discount on each Government
Security recognized in any given year on an economic accrual basis even if the
Grantor Trust Certificateholder is a cash method taxpayer. Accordingly, the sum
of the income includible to the Grantor Trust Certificateholder in any taxable
year may exceed amounts actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that
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such holder's undivided interest in each Mortgage Asset will have its own tax
basis. A Grantor Trust Certificateholder that acquires an interest in Mortgage
Assets at a premium may elect to amortize such premium under a constant interest
method, provided that the underlying mortgage loans with respect to such
Mortgage Assets were originated after September 27, 1985. Premium allocable to
mortgage loans originated on or before September 27, 1985 should be allocated
among the principal payments on such mortgage loans and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Grantor Trust Certificate. The
basis for such Grantor Trust Certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments. It is not clear
whether a reasonable prepayment assumption should be used in computing
amortization of premium allowable under Code Section 171. A Certificateholder
that makes this election for a Certificate that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On June 27, 1996 the IRS issued proposed regulations (the 'Amortizable Bond
Premium Regulations') dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ('OID') (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the 'OID Regulations'), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See '--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount'
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a 'market discount.'
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
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The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See '--Regular Certificates--Premium'
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is
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created with two classes of Grantor Trust Certificates, one class of Grantor
Trust Certificates may represent the right to principal and interest, or
principal only, on all or a portion of the Mortgage Assets (the 'Stripped Bond
Certificates'), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
'Stripped Coupon Certificates').
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See '--Non-REMIC Certificates' and 'Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons' herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
'--Non-REMIC Certificates' and '--Single Class of Grantor Trust
Certificates--Original Issue Discount' herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable servicing
fees) is stripped off of the Trust Fund's Mortgage Assets. Pursuant to Revenue
Procedure 91-49, issued on August 8, 1991, purchasers of Stripped Bond
Certificates using an inconsistent method of accounting must change their method
of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return filed
after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent 'real estate assets' within the meaning of Code Section 856(c)(4)(A)
and 'loans . . . secured by, an interest in real property which is . . .
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residential real property' within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates should be
considered to represent 'interest on obligations secured by mortgages on real
property' within the meaning of Code Section 856(c)(3)(B), provided that in each
case the underlying Mortgage Assets and interest on such Mortgage Assets qualify
for such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be 'obligation[s] . . . which [are]
principally secured, directly or indirectly, by an interest in real property'
within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans
The original issue discount rules of Code Sections 1271 through 1275 will
be applicable to a Certificateholder's interest in those Mortgage Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of 'teaser' rates on the Mortgage Assets. OID on each Grantor
Trust Certificate must be included in the owner's ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash attributable to such income. The amount of OID required to be included
in an owner's income in any taxable year with respect to a Grantor Trust
Certificate representing an interest in Mortgage Assets other than Mortgage
Assets with interest rates that adjust periodically ('ARM Loans') likely will be
computed as described below under '--Accrual of Original Issue Discount.' The
following discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the '1986 Act'). The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments, such as
the Grantor Trust Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to April
4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may be
treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issued date of the Mortgage Assets should be used, or,
in the case of Stripped Bond Certificates or Stripped Coupon Certificates, the
date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
'--Accrual of Original Issue Discount,' will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
'Prepayment Assumption'), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the 'Legislative History') provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to
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prepayment, and, until further guidance is issued, the Master Servicer intends
to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the 'daily portions,'
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the 'adjusted issue price' of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Assets acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Asset, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Asset (i.e. points) will be
includible by such holder. Other original issue discount on the Mortgage Assets
(e.g., that arising from a 'teaser' rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ('Stripped ARM Obligations') to holders in a manner it believes is
consistent with the rules described above under the heading '--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans' and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ('Deferred Interest') to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
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C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a 'capital asset' within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(generally more than one year).
The Taxpayer Relief Act of 1997 (the 'Act') reduces the maximum rates on
long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition (and would
further reduce the maximum rates on such gains in the year 2001 and thereafter
for certain individual taxpayers who meed specified conditions). The capital
gains rate for capital assets held by individual taxpayers for more than twelve
months but less than eighteen months was not changed by the Act ('mid-term
rate'). The Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning these tax
law changes.
Grantor Trust Certificates will be 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Grantor Trust Certificate evidences ownership
in Mortgage Assets issued after July 18, 1984, by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to Mortgage
Assets of where the mortgagor is not a natural person in order to qualify for
the exemption from withholding.
As used herein, a 'U.S. Person' means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof, an estate, the income of
which from sources outside the United States is includible in gross income for
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States, or a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States trustees have authority to control all
substantial decisions of the trust.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with
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respect to any payments. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
'New Regulations') which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however '--Taxation of Owners of REMIC Residual Certificates' and
'--Prohibited Transactions' below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under 'Taxation of Owners of REMIC
Residual Certificates,' the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the 'REMIC
Certificates') may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ('REMIC Regular Certificates') or a sole class of residual
interests ('REMIC Residual Certificates') in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) such Certificates held by a thrift institution taxed as a
'domestic building and loan association' will constitute assets described in
Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute 'real estate assets' within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered 'interest on obligations secured by
mortgages on real property' within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c). The
Small Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code Section
593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in '--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates' above. REMIC Certificates held by a real estate investment
trust will not constitute 'Government Securities' within the meaning of Code
Section 856(c)(4)(A), and REMIC Certificates held by a regulated investment
company will not constitute 'Government Securities' within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1).
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A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
'single family residences' under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the 'Subsidiary REMIC' and the 'Master REMIC') for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) 'real estate assets'
within the meaning of Section 856(c)(4)(A) of the Code; (ii) 'loans secured by
an interest in real property' under Section 7701(a)(19)(C) of the Code; and
(iii) whether the income on such Certificates is interest described in Section
856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the 'stated redemption price at maturity' of a REMIC Regular Certificate and its
'issue price.' Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
'1986 Act'). Holders of REMIC Regular Certificates (the 'REMIC Regular
Certificateholders') should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
'stated redemption price at maturity' over its 'issue price.' The issue
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price of a REMIC Regular Certificate is the first price at which a substantial
amount of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the 'Closing Date'),
the issue price for such class will be treated as the fair market value of such
class on the Closing Date. The issue price of a REMIC Regular Certificate also
includes the amount paid by an initial Certificateholder for accrued interest
that relates to a period prior to the issue date of the REMIC Regular
Certificate. The stated redemption price at maturity of a REMIC Regular
Certificate includes the original principal amount of the REMIC Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute 'qualified stated interest.' Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
'Super-Premium Certificates'). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to original issue discount, should apply to such
Certificates. Although such
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rules are not applicable to instruments governed by Code Section 1272(a)(6),
they represent the only guidance regarding the current views of the IRS with
respect to contingent payment instruments. In the alternative, the IRS could
assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under '--Accrued Interest Certificates'), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under '--Taxation of Owners of REMIC Regular Certificates--Premium' would
apply. It is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under '--REMIC Regular Certificates--Premium' should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the 'daily portions,' as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period ('an accrual period') that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificates as calculated under
the Prepayment Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments
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included in the stated redemption price at maturity, and the denominator of
which is the sum of the daily portions for that REMIC Regular Certificate for
all days beginning on the date after the purchase date and ending on the
maturity date computed under the Prepayment Assumption. A holder who pays an
acquisition premium instead may elect to accrue OID by treating the purchase as
a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a 'qualified floating rate,'
an 'objective rate,' a combination of a single fixed rate and one or more
'qualified floating rates,' one 'qualified inverse floating rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
'--Original Issue Discount and Premium' by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
'--REMIC Regular Certificates--Premium' herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, 'market discount' equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the
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corresponding principal payment is made. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. For purposes of calculating market discount
under any of the above methods in the case of instruments (such as the REMIC
Regular Certificates) that provide for payments that may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Certificate purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On June 27, 1996,
the IRS published in the Federal Register proposed regulations on the
amortization of bond premium. The foregoing discussion is based in part on such
proposed regulations. The proposed regulations generally would be effective for
Certificates acquired on or after the date 60 days after the date they are
published as final regulations in the Federal Register. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
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Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in '--REMIC Regular Certificates--Treatment of Realized
Losses' below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under '--Market Discount' above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a 'capital asset' (generally, property held for
investment) within the meaning of Code Section 1221.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. The Taxpayer Relief Act of 1997 (the
'Act') reduces the maximum rates on long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as of
the date of disposition (and would further reduce the maximum rates on such
gains in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). The capital gains rate for capital assets held by
individual taxpayers for more than twelve months but less than eighteen months
was not changed by the Act ('mid-term rate'). The Act does not change the
capital gain rates for corporations. Prospective investors should consult their
own tax advisors concerning these tax law changes.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
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The Certificates will be 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a statement
of the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
('Payment Lag Certificates') may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
('pre-issuance accrued interest') and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a 'single-class REMIC,' a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
'pass-through interest holders.' Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See 'Pass-Through of
Non-Interest Expenses of the REMIC' under 'Taxation of Owners of REMIC Residual
Certificates' below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
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Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the 'REMIC Residual Certificateholder')
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the 'New Regulations') which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See '--Prohibited Transactions and Other Taxes' below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be 'portfolio income' for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of 'passive losses.'
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described
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below, that differ from those that would apply if the REMIC Residual
Certificates were treated for federal income tax purposes as direct ownership
interests in the Certificates or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, 'phantom income'). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See '--Sale or Exchange of REMIC
Residual Certificates' below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under '--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC,' other expenses. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized losses
to the REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and original issue discount expense on the REMIC Regular Certificates, servicing
fees on the Mortgage Loans, other administrative expenses of the REMIC and
realized losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC will continue until there are no Certificates of any class of the
related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this
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purpose based on scheduled payments or taking account of the Prepayment
Assumption. Additionally, such an election would not apply to the yield with
respect to any underlying mortgage loan originated on or before September 27,
1985. Instead, premium with respect to such a mortgage loan would be allocated
among the principal payments thereon and would be deductible by the REMIC as
those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See '--Sale or Exchange of REMIC Residual
Certificates' below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see '--Allocation of the Income of
the REMIC to the REMIC Residual Certificates' above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently finalized regulations (the
'Mark-to-Market Regulations') which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-Market
Regulations replaced the temporary regulations which allowed a Residual
Certificate to be marked to market provided that it was not a 'negative value'
residual interest and did not have the same economic effect as a 'negative
value' residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other 'miscellaneous
itemized deductions' of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the 'Applicable Amount') will be reduced by the lesser
of (i) 3% of the excess of the
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individual's adjusted gross income over the Applicable Amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income recognized by REMIC Residual
Certificateholders who are subject to the limitations of either Code Section 67
or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term 'pass-through interest holder' generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. REMIC Residual
Certificateholders that are pass-through interest holders should consult their
own tax advisors about the impact of these rules on an investment in the REMIC
Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an 'excess inclusion') for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as 'unrelated business taxable income' within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see '--Tax-Exempt Investors' below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See '--Non-U.S. Persons' below.
The exception for thrift institutions is available only to the institution
holding the REMIC Residual Certificate and not to any affiliate of the
institution, unless the affiliate is a subsidiary all the stock of which, and
substantially all the indebtedness of which, is held by the institution, and
which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the 'daily accruals' (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the 'adjusted issue price' (as
defined below) of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the 'Federal long-term rate' in effect at
the time the REMIC Residual Certificate is issued. For this purpose, the
'adjusted issue price' of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters, and decreased
(but not below zero) by the aggregate amount of payments made on the REMIC
Residual Certificate before the beginning of such quarter. The 'federal
long-term rate' is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income
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cannot be less than excess inclusions. Second, the amount of any alternative
minimum tax net operating loss deductions must be computed without regard to any
excess inclusions. Third, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. The effect of
this last statutory amendment is to prevent the use of nonrefundable tax credits
to reduce a taxpayer's income tax below its tentative minimum tax computed only
on excess inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual holder elects to have such rules apply only
to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the 'wash sale' rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be 'evidences of indebtedness' within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a 'taxable mortgage pool' (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the 'wash
sale' rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from 'prohibited transactions' (the 'Prohibited Transactions Tax'). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the 'Contributions Tax'). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on 'net income from foreclosure property,' determined by
reference to the rules applicable to real estate investment trusts. 'Net income
from foreclosure property' generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
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Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Asset Seller,
as the case may be, out of its own funds or (ii) the Asset Seller's obligation
to repurchase a Mortgage Loan, such tax will be borne by the Asset Seller. In
the event that such Master Servicer, Trustee or Asset Seller, as the case may
be, fails to pay or is not required to pay any such tax as provided above, such
tax will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its 'unrelated business
taxable income' within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See '--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions' above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see '--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons'
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as 'portfolio interest,' subject to the conditions
described in '--Taxation of Owners of REMIC Regular Certificates' above, but
only to the extent that the underlying mortgage loans were originated after
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July 18, 1984. Furthermore, the rate of withholding on any income on a REMIC
Residual Certificate that is excess inclusion income will not be subject to
reduction under any applicable tax treaties. See '--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions' above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the REMIC Residual
Certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See '--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions' above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see '--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates' below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization.' The amount of the tax equals the product of (A) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated 'excess inclusions' with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A 'disqualified
organization' means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on 'unrelated business taxable income' and
(C) a rural electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a 'pass-through entity' means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under proposed legislation,
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large partnerships (generally with 250 or more partners) will be taxable on
excess inclusion income as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a 'U.S. Person,' as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a 'tax avoidance potential' to a 'foreign
person' will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess inclusion,
and that such amounts will be distributed at or after the time the excess
inclusion accrues and not later than the end of the calendar year following the
year of accrual. If the non-U.S. Person transfers the REMIC Residual Certificate
to a U.S. Person, the transfer will be disregarded, and the foreign transferor
will continue to be treated as the owner, if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions. The
provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed IRS Form 4224 and the Trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a pass-
through entity.
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TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for 'qualified stated interest'
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., 1/4% of their principal amount multiplied by the number of
full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note.
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The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. The Taxpayer Relief Act of 1997 (the
'Act') reduces the maximum rates on long-term capital gains recognized on
capital assets held by individual taxpayers for more than eighteen months as of
the date of disposition (and would further reduce the maximum rates on such
gains in the year 2001 and thereafter for certain individual taxpayers who meet
specified conditions). The capital gains rate for capital assets held by
individual taxpayers for more than twelve months but less than eighteen months
was not changed by the Act ('mid-term rate'). The Act does not change the
capital gain rates for corporations. Prospective investors should consult their
own tax advisors concerning these tax law changes.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest', and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust Fund or the Asset Seller is a 'related person' within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund would likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income', income to foreign holders
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generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be permissible under applicable treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
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All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. Pursuant to formal Treasury regulations issued May 8, 1997
under section 708 of the Code, if such a termination occurs, the Trust Fund (the
'old partnership') would be deemed to contribute its assets to a new partnership
(the 'new partnership') in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
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Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged
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in a trade or business in the United States for such purposes, the Trust Fund
will withhold as if it were so engaged in order to protect the Trust Fund from
possible adverse consequences of a failure to withhold. The Trust Fund expects
to withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust Fund to change its
withholding procedures. In determining a holder's withholding status, the Trust
Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the 'New Regulations') which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates will
be treated as indebtedness for federal income tax purposes, then based on the
application of existing law to the facts as set forth in the Trust Agreement and
other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ('Tax Counsel'), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related Trust
Agreement their intent that, for applicable tax purposes, the Certificates will
be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon
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the economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as 'unconditionally payable' under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be treated
as indebtedness in the hands of the Certificateholders for U.S. federal income
tax purposes and that the entity constituted by the Trust will not be a publicly
traded partnership treated as a corporation or an association taxable as a
corporation, the Depositor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
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D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
portion of an entity) that is a 'taxable mortgage pool' will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that all
of the provisions of the Trust Agreement, as in effect on the date of issuance,
will be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under Section
7701(i) of the Code because only one class of indebtedness secured by the
Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Trust Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax,. provided
that such interest is not effectively connected with a trade or business of the
recipient in the United sates and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of 'effectively connected' income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other 'reportable payments' (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only 'Certificateholder' of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide,
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under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not to subject to backup withholding. Should a non-exempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
'New Regulations') which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the 'regular interests' and the 'ownership
interests,' respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of 'permitted assets' as of the close of the third month beginning after
the closing date and at all times thereafter (the 'FASIT Qualification Test').
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ('IO') type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
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A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See 'Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Variable
Rate REMIC Regulation Certificate.
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a 'High-Yield
Interest.' In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ('Eligible
Corporations'), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See 'Material Federal Income Tax Consequences--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests.'
Consequences of Disqualification. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
'Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates' '--Original Issue Discount and Premium' and '--Market
Discount' and '--Premium' above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See 'Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption.' In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct the
loss sustained (or alternatively be able to report a lesser amount of income).
See 'Material Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Regular Certificates', '--Effects of Default and Delinquencies' and '--
Treatment of Realized Losses.'
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FASIT Regular Securities held by a REIT will qualify as 'real estate
assets' within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a 'domestic building and loan association' will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See 'Material Federal Income Tax Consequences--REMICs.' In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not qualify as
'Government Securities' for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular Federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See 'Material Federal Income Tax Consequences--Treatment of High-
Yield Interests.'
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any 'prohibited transactions.'
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of
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any income derived from any loan originated by a FASIT, and (iv) in certain
cases, the receipt of income representing a servicing fee or other compensation.
Any Series for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See 'Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding.' For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Material
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans') and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to Section 502(i) of ERISA) on parties in interest which
engage in non-exempt prohibited transactions.
The United States Department of Labor ('Labor') has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and
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certain other entities in which a Plan makes an 'equity investment' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master Servicer,
the Trustee, any insurer of the Assets and other persons, in providing services
with respect to the assets of the Trust Fund, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, 'benefit plan investors' in the aggregate, own at
least 25% of the value of any class of equity interest. 'Benefit plan investors'
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interest' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the 'Exemption') which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Inc., Fitch Investors Service,
Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Group.
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the 'Restricted Group');
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(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Asset Seller pursuant to the sale
of the Assets to the Trust Fund represents not more than the fair market
value of such Assets; the sum of all payments made to and retained by the
Master Servicer represent not more than reasonable compensation for the
Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute 'certificates' for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ('PTCE 83-1') for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not applicable to
manufactured housing contract pool investment trusts or multifamily mortgage
pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be 'plan assets' for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider the exemptive relief granted by Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute 'mortgage related securities' ('SMMEA Securities') for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation before
the October 4, 1991 cutoff established by SMMEA for such enactments, limiting to
varying extents the ability of
100
<PAGE>
certain entities (in particular, insurance companies) to invest in mortgage
related securities, in most cases by requiring the affected investors to rely
solely upon existing state law, and not SMMEA. Investors affected by such
legislation will be authorized to invest in SMMEA Certificates only to the
extent provided in such legislation. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in 'mortgage related
securities,' or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ('NCUA') Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation 'Investment
and Deposit Activities' (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ('FDIC'), the Office of Thrift Supervision
('OTS'), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the 'Policy Statement') setting forth
guidelines for and significant restrictions on investments in 'high-risk
mortgage securities.' The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, 'Mortgage
Derivative Products and Mortgage Swaps', which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain 'high-risk' mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise 'troubled' institutions. According to the
bulletin, such 'high-risk' mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the 'Model Law') which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute 'mortgage
related securities' under SMMEA. The appropriate characterization of
101
<PAGE>
this Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying.'
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch') acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch or
any other Underwriter in connection with offers and sales related to market
making transactions.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
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In the ordinary course of business, Merrill Lynch and its affiliates may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood LLP, New York, New York. Certain matters with respect to Delaware law
will be passed upon for the Depositor by Richards, Layton & Finger, P.A.,
Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, securityholders might suffer a lower than anticipated yield, and,
in addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
<S> <C>
1986 Act..................................................................................... 68, 72
Accrual Securities........................................................................... 8, 26
Accrued Security Interest.................................................................... 28
Act.......................................................................................... 70, 77, 88
adjusted issue price......................................................................... 69, 82
Agreement.................................................................................... 35
Agreements................................................................................... 8
Amortizable Bond Premium Regulations......................................................... 65
an accrual period............................................................................ 74
Applicable Amount............................................................................ 81
ARM Loans.................................................................................... 19, 68
Asset Seller................................................................................. 18
Assets....................................................................................... 1, 5, 18
Available Distribution Amount................................................................ 27, 29
Balloon Mortgage Loans....................................................................... 16
benefit plan investors....................................................................... 99
Book-Entry Securities........................................................................ 26
Buydown Mortgage Loans....................................................................... 24
Buydown Period............................................................................... 24
capital asset................................................................................ 70, 77
Cash Flow Agreement.......................................................................... 7, 21
Cash Flow Agreements......................................................................... 1
Cede......................................................................................... 2, 32
CEDEL........................................................................................ 33
CEDEL Participants........................................................................... 33
Certificateholder............................................................................ 94
Certificates................................................................................. 1, 5, 100
clearing agency.............................................................................. 32
clearing corporation......................................................................... 32, 37
Closing Date................................................................................. 73
Code......................................................................................... 10
Collection Account........................................................................... 38
Commission................................................................................... 2
Contributions Tax............................................................................ 83
Cooperative.................................................................................. 33, 55
Cooperative Loans............................................................................ 55
Cooperatives................................................................................. 18
Covered Trust................................................................................ 15, 52
CPR.......................................................................................... 24
Credit Support............................................................................... 1, 7, 21
Crime Control Act............................................................................ 62
Cut-off Date................................................................................. 9
daily accruals............................................................................... 82
Daily portions............................................................................... 69, 74
Deferred Interest............................................................................ 69
Definitive Securities........................................................................ 26, 34
Depositor.................................................................................... 5, 18
Depositories................................................................................. 34
Determination Date........................................................................... 27
disqualified organization.................................................................... 85
disqualified organizations................................................................... 85
</TABLE>
104
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<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
Distribution Date............................................................................ 9
<S> <C>
DTC.......................................................................................... 2, 32
Due Period................................................................................... 27
Eligible Corporations........................................................................ 96
equity of redemption......................................................................... 57
ERISA........................................................................................ 12, 98
Euroclear.................................................................................... 33
Euroclear operator........................................................................... 33
Euroclear Participants....................................................................... 33
Events of Default............................................................................ 48
Evidences of indebtedness.................................................................... 70, 71, 78, 83
Excess inclusion............................................................................. 82
excess inclusions............................................................................ 85
excess servicing............................................................................. 67
Exchange Act................................................................................. 3
Exemption.................................................................................... 99
FASIT Qualification Test..................................................................... 95
FDIC......................................................................................... 38, 101
Federal long-term rate....................................................................... 82
FHLMC........................................................................................ 46
foreign person............................................................................... 86, 88, 94
Government Securities........................................................................ 1, 6, 18, 71, 97
Grantor Trust Certificates................................................................... 10
High-Yield Interest.......................................................................... 96
Home Equity Loans............................................................................ 6, 19
Home Improvement Contracts................................................................... 6, 19
Indenture.................................................................................... 26, 35
Indenture Trustee............................................................................ 35
Indirect Participants........................................................................ 32
Insurance Proceeds........................................................................... 38
L/C Bank..................................................................................... 52
Labor........................................................................................ 98
Legislative History.......................................................................... 68
Liquidation Proceeds......................................................................... 38
Loan-to-Value Ratio.......................................................................... 19
Mark-to-Market Regulations................................................................... 81
Master REMIC................................................................................. 72
Master Servicer.............................................................................. 5
MBS.......................................................................................... 1, 5, 18
MBS Agreement................................................................................ 20
MBS Issuer................................................................................... 20
MBS Servicer................................................................................. 20
MBS Trustee.................................................................................. 20
Merrill Lynch................................................................................ 102
Mid-term rate................................................................................ 77, 88
Model Law.................................................................................... 101
Mortgage Assets.............................................................................. 1, 18
Mortgage Loan Group.......................................................................... 8, 26
Mortgage Loans............................................................................... 1, 5, 18
Mortgage Notes............................................................................... 18
Mortgage Rate................................................................................ 6, 20
Mortgage related securities.................................................................. 12, 100-101
</TABLE>
105
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<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
Mortgages.................................................................................... 18, 54
<S> <C>
mortgagor.................................................................................... 54
NCUA......................................................................................... 101
new partnership.............................................................................. 90
New Regulations.............................................................................. 71, 79, 92, 95
Nonrecoverable Advance....................................................................... 30
Notes........................................................................................ 1, 5
Offered Securities........................................................................... 1
OID.......................................................................................... 63, 65, 70
OID Regulations.............................................................................. 65
Old partnership.............................................................................. 90
Originator................................................................................... 18
OTS.......................................................................................... 101
Ownership interests.......................................................................... 95
Participants................................................................................. 32, 34
Parties in interest.......................................................................... 98
pass-through entity.......................................................................... 85
pass-through interest holder................................................................. 82
pass-through interest holders................................................................ 78
Pass-Through Rate............................................................................ 8, 28
passive losses............................................................................... 79
Payment Lag Certificates..................................................................... 78
Permitted Investments........................................................................ 38
phantom income............................................................................... 80
plan assets.................................................................................. 100
Plans........................................................................................ 98
Policy Statement............................................................................. 101
Pooling and Servicing Agreement.............................................................. 35
portfolio income............................................................................. 79
portfolio interest........................................................................... 84, 88, 92
Pre-Funded Amount............................................................................ 8, 21
pre-issuance accrued interest................................................................ 78
prepayment................................................................................... 23
Prepayment Assumption........................................................................ 68
Prohibited Transactions...................................................................... 71, 83, 97
Prohibited Transactions Tax.................................................................. 83
PTCE 83-1.................................................................................... 100
Purchase Price............................................................................... 37
qualified mortgage........................................................................... 72
qualified stated interest.................................................................... 73, 87
Rating Agency................................................................................ 12
real estate assets........................................................................... 11, 67, 71, 72, 97
Record Date.................................................................................. 27
Refinance Loans.............................................................................. 19
Regular interests............................................................................ 10, 95
Related Proceeds............................................................................. 29
Relief Act................................................................................... 62
REMIC........................................................................................ 10
REMIC Certificates........................................................................... 71
REMIC Regular Certificateholders............................................................. 72
REMIC Regular Certificates................................................................... 10, 71
REMIC Regulations............................................................................ 63
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
REMIC Residual Certificateholder............................................................. 79
<S> <C>
REMIC Residual Certificates.................................................................. 10, 71
Restricted Group............................................................................. 99
Retained Interest............................................................................ 45
RICO......................................................................................... 62
Securities................................................................................... 1, 5
Securities Act............................................................................... 2
Security..................................................................................... 35
Security Balance............................................................................. 8, 28
Security Owners.............................................................................. 32
Securityholder............................................................................... 32
Securityholders.............................................................................. 2, 17
senior lien.................................................................................. 15
Senior Securities............................................................................ 8, 26
Servicing Agreement.......................................................................... 35
Servicing Standard........................................................................... 41
Short-Term Note.............................................................................. 87
Single Family Mortgage Loan.................................................................. 18
Single Family Properties..................................................................... 5
Single Family Property....................................................................... 18
single family residences..................................................................... 72
single-class REMIC........................................................................... 78
SMMEA........................................................................................ 12, 100
SMMEA Securities............................................................................. 100
SPA.......................................................................................... 24
Stripped ARM Obligations..................................................................... 69
Stripped Bond Certificates................................................................... 67
stripped bonds............................................................................... 64, 66
Stripped Coupon Certificates................................................................. 67
stripped coupons............................................................................. 64, 66
Stripped Interest Securities................................................................. 8, 26
Stripped Principal Securities................................................................ 8, 26
Sub-Servicer................................................................................. 42
Sub-Servicing Agreement...................................................................... 42
Subordinate Securities....................................................................... 8, 26
Subsequent Assets............................................................................ 7, 21
Subsidiary REMIC............................................................................. 72
Super-Premium Certificates................................................................... 73
tax avoidance potential...................................................................... 86
Tax Counsel.................................................................................. 92
taxable mortgage pool........................................................................ 83, 94
Terms and Conditions......................................................................... 33
thrift institutions.......................................................................... 82
Title V...................................................................................... 61
Title VIII................................................................................... 62
Trust Agreement.............................................................................. 35
Trust Assets................................................................................. 2
Trust Fund................................................................................... 1, 5
Trustee...................................................................................... 5
U.S. Person.................................................................................. 63, 70, 86
UCC.......................................................................................... 32
Underlying MBS............................................................................... 18, 20
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
Underlying Mortgage Loans.................................................................... 18
<S> <C>
Value........................................................................................ 19
Voting Rights................................................................................ 47
Warranting Party............................................................................. 37
Whole Loans.................................................................................. 18
</TABLE>
108
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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 PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE 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 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 PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary........................................ S-4
Risk Factors................................... S-15
Description of the Home Equity Loan Pool....... S-17
The Seller..................................... S-43
The Series 1998-2F Issuer...................... S-44
The Series 1998-2V Issuer...................... S-44
The Owner Trustee.............................. S-45
The Indenture Trustee.......................... S-45
Financial Security Assurance Inc............... S-45
Description of the Notes....................... S-47
Certain Yield and Prepayment Considerations.... S-63
Description of the Servicing Agreements........ S-72
The Indentures................................. S-75
Material Federal Income Tax Consequences....... S-77
Method of Distribution......................... S-78
Legal Opinions................................. S-78
Ratings........................................ S-78
Legal Investment............................... S-79
ERISA Considerations........................... S-79
Experts........................................ S-80
Index.......................................... S-81
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information.......................... 2
Incorporation of Certain Information by
Reference.................................... 3
Summary of Prospectus.......................... 5
Risk Factors................................... 13
Description of the Trust Funds................. 18
Use of Proceeds................................ 22
Yield Considerations........................... 22
The Depositor.................................. 26
Description of the Securities.................. 26
Description of the Agreements.................. 35
Description of Credit Support.................. 52
Certain Legal Aspects of Mortgage Loans........ 54
Material Federal Income Tax Consequences....... 63
State Tax Considerations....................... 98
ERISA Considerations........................... 98
Legal Investment............................... 100
Plan of Distribution........................... 102
Legal Matters.................................. 103
Financial Information.......................... 103
Rating......................................... 103
</TABLE>
$62,036,000
PACIFICAMERICA
HOME EQUITY LOAN
ASSET-BACKED NOTES,
SERIES 1998-2F, CLASS A-F
$137,964,000
PACIFICAMERICA
HOME EQUITY LOAN
ASSET-BACKED NOTES,
SERIES 1998-2V, CLASS A-V
PACIFICAMERICA MONEY CENTER, INC.
SELLER AND MASTER SEVICER
MERRILL LYNCH
MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
JUNE 22, 1998
================================================================================
