As filed with the Securities and Exchange Commission on July 9, 1999
REGISTRATION STATEMENT NO. 333-81429
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
DELAWARE 13-3416059
(State of incorporation) (I.R.S. Employer
Identification No.)
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281-1310
(212) 449-1000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Michael M. McGovern
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281-1310
(212) 449-1000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
With a copy to:
Michael P. Peck
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT* OFFERING PRICE* FEE
===========================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities........................... $5,489,472,767 100% $5,489,472,767 $1,112,000**
===========================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
** This amount relates to the additional $4,000,000,000 registered
hereby, $278 of which has been previously paid. The remaining
$1,489,472,767of Asset Backed Securities relates to registration
statement No. 333-39127, and the registration fee with respect
thereto has been previously paid.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
THE PROSPECTUS INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED
PROSPECTUS AND ALSO RELATES TO REGISTRATION STATEMENT NO. 333-39127 AS
PREVIOUSLY FILED BY THE REGISTRANT ON FORM S-3. THIS REGISTRATION STATEMENT,
WHICH IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES POST-EFFECTIVE
AMENDMENT NO. 2 TO REGISTRATION STATEMENT NO. 333-39127 AND SUCH
POST-EFFECTIVE AMENDMENT NO. 2 SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY
WITH THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT AND IN ACCORDANCE WITH
SECTION 8(C) OF THE SECURITIES ACT OF 1933, AS AMENDED.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
PROSPECTUS SUPPLEMENT
DATED _____ ____, ____ (TO PROSPECTUS DATED _____ _____, ____)
$---------
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SERIES ____-___
Merrill Lynch Mortgage Investors, Inc. is offering to sell the following
Certificates:
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Initial Principal Balance(1) Pass-Through Rate
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Class A Certificates........................ $_______ _______
Class M-1 Certificates...................... $_______ _______
Class M-2 Certificates...................... $_______ _______
Class B Certificates........................ $_______ _______
(1) Plus or minus 5%.
</TABLE>
The Certificates represent interests in a pool of conventional,
adjustable-rate, one- to four-family, first lien mortgage loans having
original terms to maturity of 30 years. _____________ originated or acquired
the mortgage loans in the ordinary course of its business.
The trustee will make distributions on the Certificates to you on the
[20th] day of each month or, if this day is not a business day, on the next
business day, beginning in ____ ____. You will earn interest on your
Certificate from the previous distribution date (or, in the case of the first
distribution date, from the date the Certificates are issued) through the day
before such distribution date. Your interest will be based on a 360-day year
and the actual number of days since you last received interest, and will be
based on the then-outstanding principal balance of your Certificate and the
then-applicable interest rate.
You will receive payments on the Certificates ONLY from payments
received on the mortgage loans. No entity has any obligation to make payments
on the Certificates from its own funds. Neither the Certificates nor the
mortgage loans are insured or guaranteed by any governmental agency or
instrumentality.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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BEFORE BUYING THESE CERTIFICATES, YOU SHOULD CONSIDER THE FACTORS SET
FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE S-__ OF THIS PROSPECTUS
SUPPLEMENT.
The Underwriter will buy the offered Certificates from the Depositor
at a price equal to 100% of their face value. The Depositor incurred expenses
of approximately $_______ in connection with issuing the Certificates. The
Underwriter will sell the offered Certificates from time to time in negotiated
transactions, at varying prices to be determined at the time of sale.
---------------------
MERRILL LYNCH & CO.
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We tell you about the certificates in two separate documents that
progressively provide more detail; (a) the accompanying Prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your series; and (b) this Prospectus
Supplement, which describes the specific terms of your series of securities.
If the terms of your series of certificates vary between this
Prospectus Supplement and the Prospectus, you should rely on the information
in this Prospectus Supplement.
We include cross-references in this Prospectus Supplement and in the
accompanying Prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying Prospectus provide the pages on which
these captions can be found.
You can find a listing of the pages where capitalized terms used in
this Prospectus Supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-__ in this Prospectus Supplement and under
the caption "Index of Principal Definitions" beginning on page __ in the
accompanying Prospectus.
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<TABLE>
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TABLE OF CONTENTS
PAGE PAGE
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Summary of Prospectus Supplement.............................. S- The Mortgage Pool...........................................S-
The Certificates......................................... S- General............................................S-
Depositor of Mortgage Loans.............................. S- Statistical Information............................S-
Mortgage Loan Originator................................. S- The Index..........................................S-
Servicer................................................. S- Underwriting Standards; Representation.............S-
Trustee.................................................. S- Yield on the Certificates ..................................S-
Cut-off Date............................................. S- Certain Shortfalls in Collections of Interest......S-
Closing Date............................................. S- General Prepayment Considerations..................S-
Final Scheduled Distribution Date........................ S- Special Yield Considerations with Respect to the
Mortgage Loans.................................S-
The Mortgage Pool........................................ S- The Subordinated Certificates......................S-
Registration of Offered Certificates..................... S- Weighted Average Lives.............................S-
Distributions - General.................................. S- Final Scheduled Distribution Date..................S-
Interest Distributions................................... S- Description of the Certificates.............................S-
Pass-Through Rate........................................ S- General............................................S-
Principal Distributions.................................. S- Book Entry Registration and Definitive
Certificates.......................................S-
Credit Enhancement....................................... S- Calculation of One-Month LIBOR.....................S-
General.............................................. S- Interest Distributions.............................S-
Subordination........................................ S- Pass-Through Rates.................................S-
Application of Realized Losses....................... S- Principal Distributions............................S-
Monthly Excess Cash Flow............................. S- Credit Enhancement.................................S-
Allocation of Losses...............................S-
Optional Termination..................................... S- Application of Monthly Excess Cash Flow Amounts....S-
Certain Federal Income Tax Consequences.................. S- Monthly Advances...................................S-
Ratings.................................................. S- Pooling and Servicing Agreement.............................S-
Legal Investment......................................... S- General............................................S-
ERISA Considerations..................................... S- Assignment of the Mortgage Loans...................S-
Risk Factors.................................................. S- The Servicer.......................................S-
Subordination........................................ S- The Trustee........................................S-
Underwriting Standards and Limited Operating Servicing and Other Compensation and Payment of S-
History.............................................. S- Expenses.............................................
Geographic Concentration............................. S- Certain Rights Related to Foreclosure and the S-
Servicer.............................................
Limited Liquidity.................................... S- Voting Rights......................................S-
Difficulty in Pledging............................... S- Termination........................................S-
Potential Delays in Receipt of Distributions......... S- Certain Federal Income Tax Consequences.....................S-
Additional Risks Associated with the Mortgage General............................................S-
Loans................................................ S-
Limited Obligations.................................. S- Taxation of Regular Interests......................S-
Yield Obligations................................ S- Use of Proceeds.............................................S-
Status of the Mortgage Loans in the Event of Underwriting................................................S-
Insolvency of the Mortgage Loan Originator....... S-
The Mortgage Loan Originator.................................. S- Legal Matters...............................................S-
Ratings.....................................................S-
Legal Investment............................................S-
ERISA Considerations........................................S-
</TABLE>
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire Prospectus and Prospectus
Supplement carefully before you decide to purchase a Certificate. If
capitalized terms are not defined in this Summary, they are defined in the
Prospectus.
<TABLE>
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Title of Series.....................................Mortgage Loan Asset Backed Certificates, Series ____-____.
The Certificates....................................The Class A, Class M-1, Class M-2, Class B, Class BB, Class X and
Class R Certificates are the entire ownership interest in a trust
fund which is composed primarily of first lien mortgage loans.
The trust will issue the Certificates pursuant to a Pooling and
Servicing Agreement among Merrill Lynch Mortgage Investors, Inc.,
_______, and _________. Merrill Lynch Mortgage Investors, Inc.
is offering to sell the Class A, Class M-1, Class M-2 and Class B
Certificates but not the Class BB, Class X and Class R
Certificates. The trust is offering each class of Certificates
as book-entry securities clearing through DTC (in the United
States) or Cedelbank or Euroclear (in Europe). See "Description
of the Certificates - Book-Entry Registration and Definitive
Certificates" in this Prospectus Supplement.
Depositor of Mortgage Loans.........................Merrill.Lynch Mortgage Investors, Inc. will deposit the mortgage
loans in the trust fund. The Depositor is a Delaware corporation
and a wholly-owned, limited purpose subsidiary of Merrill Lynch
Mortgage Capital Inc., which is a wholly owned indirect
subsidiary of Merrill Lynch & Co., Inc. The Depositor is an
affiliate of the Underwriter.
Mortgage Loan Originator............................___________, a __________, originated or acquired the Mortgage
Loans generally in accordance with the underwriting standards
described in "The Mortgage Pool - Underwriting Standards" in this
Prospectus Supplement.
Servicer............................................____________ will service the mortgage loans for an annual
servicing fee, payable monthly, of _____% of the total principal
balance of the mortgage loans. The Servicer must advance
delinquent payments of principal and interest on the mortgage
loans, subject to certain limitations. See "Description of the
Certificates--Monthly Advances" in the Prospectus Supplement and
"Description of the Certificates--Advances in Respect of
Delinquencies" in the Prospectus.
Trustee.............................................___________.
Cut-off Date........................................The.close of business on ________ __, ____.
Closing Date........................................On.or.about _______ __, ____.
Final Scheduled Distribution Dates..................The.Final Scheduled Distribution Date for each Class of offered
Certificates is set forth below:
Class A _______ 20, ____
Class M-1 _______ 20, ____
Class M-2 _______ 20, ____
Class B _______ 20, ____
Each such Final Scheduled
Distribution Date has been
calculated as described
under "Yield on the
Certificates--Final
Scheduled Distribution
Date" in this Prospectus
Supplement.
The Mortgage Pool........................... The following table shows the characteristics of the
mortgage loans (percentages are based on the aggregate
principal balance as of _________ __, ____)
Aggregate Current Principal Balances $
Average Current Principal Balances $
Range of Current Principal Balances $
Average Original Principal Balances $
Range of Original Principal Balances $
Prepay Penalties
Product
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR %
Mortgage Interest Rates
Weighted Average By Type of Index
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR %
Gross Margin
Weighted Average By Type of Index
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR %
Current Weighted Average Mortgage Interest Rate %
Range of Current Mortgage Interest Rates %
Weighted Average Gross Margin %
Range of Gross Margin %
Weighted Average Maximum Lifetime Mortgage %
Interest Rate %
Range of Maximum Lifetime Mortgage Interest Rates
%
Weighted Average Lifetime Minimum Mortgage %
Interest Rate
Range of Minimum Lifetime Mortgage Interest Rates %
Weighted Average Loan-to-Value Ratio
Weighted Average Original Amortization Term %
Weighted Average Remaining Amortization Term %
Weighted Average Initial Periodic Cap
Range of Initial Periodic Cap %
Weighted Average Periodic Cap
Weighted Average Months to Interest Roll
Range of Months to Interest Roll
Weighted Average Interest Roll Frequency
Weighted Average FICO Score
Range of FICO Score %
Mortgaged Premises %
Single-family dwellings %
Planned unit developments %
Two-to-four family dwellings %
Manufactured Homes %
Condominiums
Max Zip Code Concentration (%) (%),
Max Zip Code Concentration (zip) (%),
Geographic Concentration (above 5% of pool) (%),
(%),
(%)
The interest rate and
monthly payment on each
mortgage loan adjusts
every ___ months. The new
interest rate is the sum
of [six-month] LIBOR and
a fixed margin. None of
the Mortgage Loans will
negatively amortize or
convert from an
adjustable rate to a
fixed rate. See "The
Mortgage Pool" in this
Prospectus Supplement for
more information about
the mortgage loans.
Distributions--General................................The.distribution date will be the [20th] day of each month or,
if such day is not a business day, the next business day,
beginning in _______ ____. Distributions will generally include
payments made on the mortgage loans during the related
Collection Period. The Collection Period for the distribution
date in ______ ____ will be from _______ __to _______ ___.
Interest Distributions...............................On.each distribution date, you will be entitled to receive
interest earned since the previous distribution date on your
Certificate at the Pass-Through Rate and any interest which you
earned previously but which you did not receive. There are
certain circumstances which could reduce the amount of interest
paid to you. See "Description of the Certificates - Interest
Distributions on the Certificates" in this Prospectus Supplement.
Pass-Through Rates...................................The.pass-through rate on your Certificate on each distribution
date will be a per annum rate equal to the lowest of the
following:
o........the sum of
one-month LIBOR,
which is a floating
interest rate, plus
the following fixed
number of basis
points:
Basis
Class Points
A __
M-1 __
M-2 __
B __
o the percentage
obtained by dividing
(A) the total amount
of interest which
should have been
received on the
mortgage loans at
the weighted average
mortgage rate minus
the trustee and
servicer fee rate by
(B) the product of
(1) the total
principal balance of
all the
Certificates, and
(2) the number of
days since the last
distribution date
divided by 360; and
o the weighted average
maximum mortgage
rate on all the
mortgage loans minus
the trustee and
servicer fee rate.
If on any distribution
date, the Pass-Through
Rate is limited by the
second option listed
above, you will be
entitled to receive the
amount of additional
interest that you would
have received but for
this limitation on future
distribution dates when
there is enough money to
pay you. This additional
amount of interest is
called the LIBOR
Shortfall.
Principal Distributions..............................On.each distribution date, you will receive a distribution of
principal if there is cash available on that date for your class
of Certificate. You should review the priority of payments
described under "Description of the Certificates - Principal
Distributions on the Certificates" in this Prospectus Supplement.
Credit Enhancement...................................Credit.enhancements reduce the harm caused holders of
Certificates by shortfalls in payments received on the mortgage
loans. They can reduce the effect of shortfalls on all classes,
or they can allocate shortfalls so they affect some classes
before others. This transaction employs the following four
forms of credit enhancement. See "Description of the
Certificates - Credit Enhancement" in this Prospectus Supplement.
SUBORDINATION. On each
distribution date,
classes that are lower in
order of payment priority
will not receive payments
until the classes that
are higher in order of
payment priority have
been paid. If there is
not enough money on a
distribution date to pay
all classes, the
subordinate classes are
the first to forego
payment.
APPLICATION OF REALIZED
LOSSES. If on any
distribution date, after
the balances of the
Certificates have been
reduced by the amount of
cash paid on that date,
the total principal
balance of the
Certificates is greater
than the total principal
balance of the mortgage
loans, the principal
balance of the
Certificates that are
lower in order of payment
priority will be reduced
by the amount of such
excess.
OVERCOLLATERALIZATION.
Although the total
principal balance of the
mortgage loans is
$_________, the trust is
issuing only
$_________total principal
amount of Certificates.
The remaining ___% of the
total principal balance
of the mortgage loans
will absorb losses on the
mortgage loans before
such losses affect the
Certificates. If the
level of
overcollateralization
falls below what is
required, the excess
interest described in the
next section will be paid
to the Certificates as
principal. This will have
the effect of reducing
the principal balance of
the Certificates faster
than the principal
balance of the mortgage
loans so that the
required level of
overcollateralization is
reached.
MONTHLY EXCESS CASHFLOW.
Because more interest is
paid by the borrowers
than is necessary to pay
the interest earned on
the Certificates, there
will be excess interest
each month. Some of the
excess interest will be
used to pay interest on
Certificates that was
previously earned but not
paid, and some of the
excess interest will be
used to reimburse
Certificates for losses
that they experienced
previously.
Optional
Termination.................................The.owner
of the Class X
Certificate has the
option (or if the owner
of the Class X
Certificate does not
exercise such option, the
Servicer has the option)
to purchase all the
mortgage loans and any
properties that the
trustee acquired in
satisfaction of any of
the mortgage loans. This
option can be exercised
only when the total
principal balance of the
mortgage loans, including
the mortgage loans
related to the properties
which the trustee has
acquired, is [10]% or
less than the total
principal balance of the
mortgage loans on the
cut-off date. If the
option is exercised, your
Certificate will be
retired early and you
will be entitled to the
following amounts:
o the outstanding principal balance of your Certificate;
o one month's interest on such balance at the
Pass-through Rate;
o any interest previously earned but not paid; and
o any LIBOR Shortfall from all previous distribution
dates.
You will receive the last
two items only to the
extent that there is
enough cash to make such
payments. See "Pooling
and Servicing Agreement -
Termination" in this
Prospectus Supplement.
Certain Federal Income Tax
Consequences..................................... The trustee will elect to treat the assets of the Trust Fund as
comprising several real estate mortgage investment conduits, or
REMICs, for federal income tax purposes. In addition, under the
terms of your Certificate, you have the right to receive certain
payments that will not be treated as having been paid by a
REMIC. For federal income tax purposes, that right will be
treated as the right to receive payments under an interest rate
cap contract.
For federal income tax
reporting purposes, the
offered Certificates will
not be treated as having
been issued with original
issue discount.
For further information
regarding the federal
income tax consequences
of investing in the
offered Certificates, see
"Certain Federal Income
Tax Consequences" in this
Prospectus Supplement and
in the Prospectus.
Ratings............................................ The trust will not issue the Certificates unless they receive
the respective ratings set forth below from ________, and _____:
Class _________ _______
----- --------- -------
A___ ___
M-1 ___ ___
M-2 ___ ___
B___ ___
The rating on the
Certificates indicates
the likelihood that you
will receive all funds to
which you are entitled by
the terms of the
Certificate. The rating
agency that issues the
rating reviews the nature
and credit quality of the
mortgage loans and the
soundness of the
structure which the
Depositor has created to
allow the payments on the
mortgage loans to flow to
the holders of the
Certificates. A rating is
not a recommendation to
buy, sell or hold
securities and the rating
agency can revise or
withdraw it at any time.
A rating does not address
the frequency of
prepayments on the
mortgage loans or the
effect of such
prepayments on your
yield. The ratings also
do not address the
likelihood of the payment
of any LIBOR Shortfall.
See "Yield on the
Certificates" and
"Ratings" in this
Prospectus Supplement and
"Yield Considerations" in
the Prospectus.
Legal Investment................................... You should consult with your lawyer to see if you are permitted
to buy the offered Certificates since the legal investment rules
vary depending on what kind of entity you are and who regulates
you. The Class A and Class M-1 Certificates will be "mortgage
related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 so long as they are rated in one
of the two highest rating categories by at least one rating
agency. The Class M-2 and Class B Certificates will NOT be
"mortgage related securities" for purposes of SMMEA. See "Legal
Investment" in this Prospectus Supplement and in the Prospectus.
ERISA Considerations............................... If you are a fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code you should review carefully with your
lawyer whether you can buy or hold an offered Certificate. See
"ERISA Considerations" in this Prospectus Supplement and in the
Prospectus.
</TABLE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, you should carefully consider the following
risk factors before deciding to purchase a Certificate.
SUBORDINATION
If you buy a Class M-1, Class M-2 or Class B Certificate, you will
not receive any payments on your Certificate until the holders of the Class A
Certificates have received all payments to which they are entitled.
Additionally, payments on the Class M-2 Certificates will be subordinate to
payments on the Class M-1 Certificates and payments on the Class B
Certificates will be subordinate to payments on the Class M-1 and Class M-2
Certificates. As a result, the yield on your subordinated Certificate will be
sensitive to losses on the mortgage loans. This sensitivity increases with the
subordination of a Certificate, so that the yield on the Class B Certificate
is the most sensitive. You should carefully consider the risk that you may
lose all or a part of the money that you paid for the subordinated Certificate
if losses are greater than expected.
If you buy a subordinated Certificate you will not receive any
principal distributions until _______ ____ at the earliest, unless the Class A
Certificates have been paid down to zero before that date. As a result, your
subordinated Certificate will be outstanding longer than would be the case if
principal were distributed on a proportionate basis among the Class A
Certificates and the subordinated Certificates. Because your subordinated
Certificate is outstanding longer, there is a greater period of time during
which losses on the mortgage loans will affect your subordinated Certificate.
Therefore the risk that you will lose all or part of the money you paid for
the Certificate also increases.
GEOGRAPHIC CONCENTRATION
Mortgaged Properties located in the State of _____ secure
approximately _____% of the mortgage loans by aggregate principal balance as
of the Cut-off Date. This geographic concentration might magnify the effect on
the mortgage pool of adverse economic conditions in _______ and might increase
the rate of delinquencies, defaults and losses on the mortgage loans more than
would be the case if the Mortgaged Properties were more geographically
diversified. See "The Mortgage Pool--Underwriting Standards; Representations"
in this Prospectus Supplement.
LIMITED MARKET IN WHICH TO RESELL CERTIFICATES
The underwriter may assist in resales of the Certificates, but it is
under no obligation to do so. A secondary market for the Certificates may not
develop. If a secondary market does develop, it might not continue or it might
not be sufficiently liquid to allow you to resell your Certificate.
LIMITED ABILITY TO RESELL BOOK-ENTRY REGISTRATION CERTIFICATES
Since the Certificates are being offered as book-entry securities,
you may have difficulty selling, pledging or otherwise taking action with your
Certificate since some potential buyers may not want to buy a security for
which they cannot receive a physical Certificate and some potential buyers may
not participate in the DTC, Cedelbank or Euroclear systems. See "Description
of the Certificates--Book-Entry Registration and Definitive Certificates" in
this Prospectus Supplement.
RECEIPT OF DISTRIBUTIONS MAY BE DELAYED BECAUSE OF BOOK-ENTRY REGISTRATION
You may experience some delay in your receipt of distributions of
interest and principal on Certificates since such distributions will be
forwarded by the Trustee to DTC and DTC will credit such distributions to the
accounts of its participants which will thereafter credit them to your
account. See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates" in this Prospectus Supplement.
RISKS POSED BY HIGH LOAN-TO-VALUE RATIOS
Approximately ____% of the mortgage loans, by aggregate principal
balance as of the Cut-off Date, had a Loan-to-Value Ratio at origination in
excess of __% but less than or equal to __%, and such mortgage loans will not
be covered by a primary mortgage insurance policy. Because the weighted
average remaining term to maturity of the mortgage loans as of the Cut-off
Date is approximately ___ months, most of the monthly payment made by the
borrowers for a substantial period of time after the issuance of the
Certificates will be applied as interest and will not significantly reduce the
balance of the loan. Therefore, mortgage loans with higher Loan-to-Value
Ratios will be more sensitive to declining property values than would those
with lower Loan-to-Value Ratios and may present a greater risk of loss. See
"The Mortgage Pool--General" in this Prospectus Supplement.
CERTIFICATES ARE NOT OBLIGATIONS OF ANY ENTITY
The offered Certificates will not represent an interest in or
obligation of any entity except for the obligations of the Depositor and of
the Mortgage Loan Originator pursuant to certain limited representations and
warranties made with respect to the mortgage loans and of the Servicer with
respect to its servicing obligations under the Pooling and Servicing Agreement
(including the limited obligation to make certain monthly advances). Neither
the Certificates nor the underlying mortgage loans will be guaranteed or
insured by any governmental agency or instrumentality. Proceeds of the assets
included in the Trust Fund (including the mortgage loans) will be the sole
source of payments on the offered Certificates. You will not be able to
receive money from any entity in the event that such proceeds are not enough
to make all payments provided for under the offered Certificates.
YIELD CONSIDERATIONS
Because the interest rates on the mortgage loans are based on the
Index while the Pass-Through Rates on the offered Certificates are based in
part on One-Month LIBOR and because the first adjustment date of many of the
loans is more than six months after origination, one or more Pass-Through
Rates may be limited by the Available Funds Pass-Through Rate. Although you
are entitled to receive, to the extent funds are available, any related LIBOR
Shortfall, such funds might not be available or, if available, might not be
sufficient. The ratings of the Offered Certificates do not address the
likelihood of the payment of any LIBOR Shortfall.
Also, because the interest rates on the mortgage loans are based on
the addition of a fixed number of basis points to the Index, the resulting
rates could be higher than market interest rates. If they are higher,
prepayments may increase as borrowers refinance their mortgage loans at the
lower rate.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF INSOLVENCY OF THE MORTGAGE
LOAN ORIGINATOR
The Depositor believes that the transfer of the mortgage loans by the
Mortgage Loan Originator to it constituted an absolute and unconditional sale.
However, in the event of a bankruptcy of the Mortgage Loan Originator at a
time when it or any affiliate holds Certificates, the trustee in bankruptcy
could attempt to recharacterize the sale of the mortgage loans by the Mortgage
Loan Originator as a borrowing by the Mortgage Loan Originator or such
affiliate from the Depositor, secured by a pledge of the mortgage loans. Such
an attempt, even if unsuccessful, could result in delays in payments on the
Certificates. If such an attempt were successful, the trustee in bankruptcy
could elect to liquidate the mortgage loans and pay down the Certificates
early. Thus, you could lose the right to future payments of interest, and
might suffer reinvestment loss in a lower interest rate environment. Brown &
Wood LLP will deliver a legal opinion in connection with the issuance of the
Certificates to the effect that, in the event of the bankruptcy of the
Mortgage Loan Originator, a court would not hold that the transfer of the
mortgage loans by the Mortgage Loan Originator to the Depositor is a loan
secured by the mortgage loans rather than a sale of the ownership interest in
the mortgage loans evidenced by the offered Certificates.
THE MORTGAGE LOAN ORIGINATOR
_________ is a ______________ headquartered in _______, ______ (the
"Mortgage Loan Originator"). The information set forth in the following
paragraphs has been provided by the Mortgage Loan Originator and neither the
Depositor nor any other party makes any representation as to the accuracy or
completeness of such information.
[Specific information provided by the Mortgage Loan Originator.]
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of conventional, one- to four-family,
adjustable-rate Mortgage Loans secured by first liens on residential real
properties (the "Mortgaged Properties"). The Mortgage Loans have original
terms to maturity of __ years. The Mortgage Loans will consist of
approximately _____ Mortgage Loans having an aggregate principal balance as of
the Cut-off Date of approximately $________, after application of payments of
principal due on or before the Cut-off Date (whether or not received).
The Mortgage Loans are secured by mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments and manufactured housing. [The
Mortgage Loans to be included in the Mortgage Pool were acquired by the
Depositor from Merrill Lynch Mortgage Capital, Inc., an affiliate, which
acquired them from the Mortgage Loan Originator.] See "--Underwriting
Standards; Representations" herein.
All of the Mortgage Loans have scheduled monthly payments due on the
first day of the month (with respect to each Mortgage Loan, a "Due Date").
Each Mortgage Loan is assumable upon transfer or sale of the Mortgaged
Property by the related mortgagor if the purchaser or transferee meets the
then current credit requirements of the Mortgage Loan Originator.
Approximately ____% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years, four years or five years from
the date of origination of such Mortgage Loan. The amount of the prepayment
charge is as provided in the related Mortgage Note and generally equals six
months' interest on the amount of the prepayment in excess of __% of the
original principal amount of the loan. Any prepayment charges received on the
Mortgage Loans will not be available for distribution on the Offered
Certificates.
Each Mortgage Loan provides for semiannual adjustment to the Mortgage
Rate thereon and for corresponding adjustments to the monthly payment amount
due thereon, in each case on each adjustment date applicable thereto (each
such date, an "Adjustment Date"); [provided, however, that in the case of
approximately ____% of the Mortgage Loans (each a "two year Delayed First
Adjustment Date Mortgage Loan"), the first Adjustment Date for each such
Mortgage Loan will occur after an initial period of two years from the
origination thereof; and in the case of approximately ____% of the Mortgage
Loans (each a "one year Delayed First Adjustment Date Mortgage Loan"), the
first Adjustment Date for each such Mortgage Loan will occur after an initial
period of one year from the origination thereof]. On each Adjustment Date for
each Mortgage Loan, the Mortgage Rate thereon will be adjusted to equal the
sum, rounded to the nearest multiple of ____%, of the Index (as described
below) and a fixed percentage amount (the "Gross Margin"); provided, however,
that the Mortgage Rate on each such Mortgage Loan generally will not increase
or decrease by more than ___basis points on any related Adjustment Date other
than on the first Adjustment Date (the "Periodic Rate Cap") and will not
exceed a specified maximum Mortgage Rate over the life of such Mortgage Loan
(the "Maximum Mortgage Rate") or be less than a specified minimum Mortgage
Rate over the life of such Mortgage Loan (the "Minimum Mortgage Rate"). In
general, the two year Delayed First Adjustment Date Mortgage Loans have a
Periodic Rate Cap of ___ basis points for their first Adjustment Date and the
one year Delayed First Adjustment Date Mortgage Loans have a Periodic Rate Cap
of ___ basis points for their First Adjustment Date, while both have
subsequent Periodic Rate Caps of ___ basis points for each Adjustment Date
thereafter and have a Minimum Mortgage Rate equal to the related initial
Mortgage Rate. Effective with the first monthly payment due on each Adjustable
Rate Mortgage Loan after each related Adjustment Date, the monthly payment
amount will be adjusted to an amount that will amortize fully the outstanding
principal balance of the related Mortgage Loan over its remaining term, and
pay interest at the Mortgage Rate as so adjusted. None of the Mortgage Loans
permits the related mortgagor to convert the adjustable Mortgage Rate thereon
to a fixed Mortgage Rate.
STATISTICAL INFORMATION
Set forth below is certain summary statistical information regarding
the Mortgage Loans expected to be included in the Trust Fund as of the Closing
Date. All such information is approximate and is given as of the Cut-off Date.
Prior to the Closing Date, Mortgage Loans may be removed from the Trust Fund
and other Mortgage Loans may be substituted therefor. In addition, Mortgage
Loans may be prepaid at any time. As a result, certain characteristics of the
Mortgage Loans in the Trust Fund may vary from the characteristics set forth
below as of the Cut-off Date.
PRINCIPAL BALANCES AT ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL BALANCE % OF
NUMBER OUTSTANDING AS OF AGGREGATE CURRENT
RANGE OF ORIGINATION DATE PRINCIPAL BALANCES OF LOANS THE CUT-OFF DATE PRINCIPAL BALANCE
<S> <C> <C> <C> <C>
$0.01- $25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
350,000.01- 375,000.00
375,000.01- 400,000.00
400,000.01- 425,000.00
425,000.01- 450,000.00
450,000.01- 500,000.00
500,000.01- 550,000.00
550,000.01- 600,000.00
700,000.01- 750,000.00 ___________ ________
Totals $ 100.00%
</TABLE>
--------------------------------------------------
The average principal balance of the Mortgage Loans at origination was
approximately $__________. No Mortgage Loan had a principal balance at
origination greater than $_____________ or less than $______________.
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
$0.01- $25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
350,000.01- 375,000.00
375,000.01- 400,000.00
400,000.01- 425,000.00
425,000.01- 450,000.00
450,000.01- 500,000.00
500,000.01- 550,000.00
550,000.01- 600,000.00
700,000.01- 750,000.00 __________ _________ _______
Totals $ 100.00%
</TABLE>
The average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $_________. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than $________ or less than $________.
PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- -------- ---------------- ----------------
<S> <C> <C>
Single Family $ %
Planned Unit Development
Condo
Two- to Four-Family
Manufactured Housing _______ ______________ _______
Total $ 100.00%
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C>
Owner - Occupied $ %
Non-owner - Occupied __________ _____________ ________
Total $ 100.00%
</TABLE>
The occupancy status of a Mortgaged Property is as represented by
the Mortgagor in its loan application.
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF MORTGAGE RATES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C> <C> <C>
6.500- 6.999 $ %
7.000- 7.499
7.500- 7.999
8.000- 8.499
8.500- 8.999
9.000- 9.499
9.500- 9.999
10.000- 10.499
10.500- 10.999
11.000- 11.499
11.500- 11.999
12.000- 12.499
12.500- 12.999 ______________ ______________ _________
Total $ 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans was approximately ______% per annum and ranged from ____% to
_________%.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINAL LOAN-TO-VALUE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------------------------------- -------- ---------------- ----------------
RATIOS
<S> <C> <C> <C> <C> <C>
10.01 - 20.00 $ %
20.01 - 30.00
30.01 - 40.00
40.01 - 50.00
50.01 - 60.00
60.01 - 70.00
70.01 - 80.00
80.01 - 90.00
90.01 - 99.99 ___________ _____________ _________
Total $ 100.00%
</TABLE>
The weighted average Loan-to-Value
Ratio at origination of the Mortgage
Loans was approximately ____%. No
Mortgage Loan had a Loan-to-Value
Ratio at origination greater than
____% or less than ____%
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
STATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----- -------- ---------------- ----------------
[Alabama $ %
Arizona
California
Colorado
Connecticut
Florida
Georgia
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
New Hampshire
New Jersey
New Mexico
Nevada
Ohio
Oregon
Pennsylvania
Rhode Island
Texas
Utah
Vermont
Washington
Wisconsin
Wyoming] ___________ _____________ _________
Total $ 100%
PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ ----- ---------------- ----------------
Purchase $ %
Cashout
Refinance _________ ____________ ____________
Total $ 100.00%
MORTGAGE LOAN PROGRAMS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation Program $ %
No Income Verification
Limited Income Verification
Unknown _________ ____________ __________
Total $ 100.00%
</TABLE>
MORTGAGE LOAN RISK CATEGORIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
Direct Access $ %
B
A-
C
A1
D __________ ____________ __________
Total $ 100.00%
CREDIT BUREAU RISK SCORE
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT BUREAU RISK SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C> <C>
541- 560 $ %
561- 580
581- 600
601- 620
621- 640
641- 660
661- 680
681- 700
701- 720
721- 740
741- 760
761- 780
781- 800 ___________ ____________ ___________
Totals $ %
</TABLE>
The weighted average Credit Bureau Risk Score as of the Cut-off Date was
approximately ____.
MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RAT LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C> <C>
9.500- 9.999 $ %
12.500- 12.999
13.000- 13.499
13.500- 13.999
14.000- 14.499
14.500- 14.999
15.000- 15.499
15.500- 15.999
16.000- 16.499
16.500-16.999
17.000- 17.499
17.500- 17.999
18.000- 18.499
18.500- 18.999 ___________ _____________ __________
Total $ 100.00%
</TABLE>
The weighted average Maximum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately ______% per annum and ranged from _______% to
_____%.
MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C> <C>
6.500- 6.999 $ %
7.000- 7.499
7.500- 7.999
8.000- 8.499
8.500- 8.999
9.000- 9.499
9.500- 9.999
10.000- 10.499
10.500- 10.999
11.000- 11.499
11.500- 11.999
12.000- 12.499
12.500- 12.999 __________ ______________ __________
Total $ 100.00%
</TABLE>
GROSS MARGIN
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN LOANS THE CUT-OFF DATE THE CUT-OFF DATE
<S> <C> <C> <C> <C>
3.250- 3.499 $ %
3.500- 3.749
3.750- 3.999
4.000- 4.249
4.250- 4.499
4.500- 4.749
4.750- 4.999
5.000- 5.249
5.250- 5.499
5.500- 5.749
5.750- 5.999
6.000- 6.249
6.250- 6.499
6.500- 6.749
6.750- 6.999
7.000- 7.249
7.250- 7.499
7.500- 7.749
7.750- 7.999
8.000- 8.249 __________ _____________ ____________
Total $ 100.00%
</TABLE>
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
-/--/-- $ %
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/---- ---------- -------------- -----------
Totals $ 100.00%
</TABLE>
As of the Cut-off Date, the weighted average next Adjustment Date of the
Mortgage Loans was ________ __, _____.
THE INDEX
As of any Adjustment Date, the Index applicable to the determination
of the Mortgage Rate on each Mortgage Loan will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market ("Six-Month LIBOR") as published in The Wall Street Journal and
as most recently available as of the first business day of the month preceding
the month of such Adjustment Date, as specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise
unpublished, the Servicer will select a comparable alternative index over
which it has no direct control and which is readily verifiable.
The table below sets forth historical average rates of Six-Month
LIBOR for the months indicated as made available from FNMA, which rates may
differ from the rates of the Index, which is six-month LIBOR as published in
The Wall Street Journal as described above. The table does not purport to be
representative of the subsequent rates of the Index which will be used to
determine the Mortgage Rate on each Mortgage Loan.
<TABLE>
<CAPTION>
YEAR
________________________________________________________________________________________
MONTH ______ ______ ______ ______ ______ ______ ______ ______ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January % % % % % % % % %
February
March
April
May
June
July
August
September
October
November
December
</TABLE>
UNDERWRITING STANDARDS; REPRESENTATIONS
The Depositor acquired the Mortgage Loans from [Merrill Lynch
Mortgage Capital Inc., an affiliate, which acquired the Mortgage Loans from]
the Mortgage Loan Originator pursuant to a Master Mortgage Loan Purchase and
Interim Servicing Agreement, dated as of _____ __, ____. All of the Mortgage
Loans were originated or acquired by the Mortgage Loan Originator, generally
in accordance with the underwriting criteria described herein. The information
set forth in the following paragraphs has been provided by the Mortgage Loan
Originator and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
[Mortgage Loan Originator's underwriting standards.]
The Mortgage Loan Originator will make representations and warranties
with respect to the Mortgage Loans as of the Closing Date. The Mortgage Loan
Originator will be obligated to repurchase or substitute for Mortgage Loans in
respect of which a material breach of the representations and warranties it
has made has occurred (other than those breaches which have been cured). For a
discussion of the representations and warranties made and the repurchase
obligation, see "Description of the Agreements--Representations and
Warranties; Repurchases" in the Prospectus.
YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan,
the mortgagor is charged interest on the amount of such prepayment up to the
date of such prepayment and not for the balance of the month in which such
prepayment is made. Principal prepayments in full received, and partial
principal prepayments applied, from the first day of a month through the
Determination Date in such month (other than the month of the Cut-off Date)
will be distributed on the Distribution Date in the same month thereby
eliminating any shortfall to Certificateholders. Principal prepayments in full
received and partial principal prepayments applied after the Determination
Date in a month (or, in the case of the first Distribution Date, from the
Cut-off Date through the thirtieth day of the month preceding such
Distribution Date) will be distributed on the Distribution Date in the
following month. Regarding the interest shortfalls attributable to the latter
full and partial prepayments by the mortgagors on the Mortgage Loans
("Prepayment Interest Shortfalls"), the Servicer will be obligated to pay from
its own funds such shortfalls, but only to the extent of its Servicing Fee for
the related Collection Period. See "Pooling and Servicing Agreement--Servicing
and Other Compensation and Payment of Expenses" herein. In addition, the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), to any Mortgage Loan will adversely affect, for an
indeterminate period of time, the ability of the Servicer to collect full
amounts of interest on such Mortgage Loan. The effect of any shortfalls
resulting from the application of the Relief Act, will be to reduce the
aggregate amount of interest collected that is available for distribution to
Certificateholders. See "Certain Legal Aspects of the Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the Prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yield to
maturity of the Offered Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of
such Mortgage Loans as the same change to accommodate changes in the Mortgage
Rates and by the rate of principal prepayments thereon (including for this
purpose payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor or the Mortgage Loan Originator, as the
case may be). The Mortgage Loans generally may be prepaid by the mortgagors at
any time; however, as described under "The Mortgage Pool" herein, with respect
to a majority of the Mortgage Loans, a prepayment may subject the related
mortgagor to a prepayment charge, which will not be available to holders of
the Offered Certificates. In addition, the Mortgage Loans are assumable in
connection with the conveyance of the related Mortgaged Property by persons
who meet the then current credit standards of the Servicer for mortgage loans
similar to the Mortgage Loans.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the Holders of the Offered
Certificates then entitled to receive such distributions that otherwise would
be distributed over the remaining terms of the Mortgage Loans. See "Maturity
and Prepayment Considerations" in the Prospectus. Since the rate of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance
can be given as to such rate or the rate of principal prepayments. The extent
to which the yield to maturity of the Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such Certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the Mortgage Loans. Further,
in the case of Offered Certificates purchased at a discount, an investor
should consider the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of Offered
Certificates purchased at a premium, an investor should consider the risk that
a faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield. In general,
the earlier a prepayment of principal on the Mortgage Loans, the greater will
be the effect on the yield to maturity of an investor in the Offered
Certificates. As a result, the effect on an investor's yield of principal
payments occurring on the Mortgage Loans at a rate higher (or lower) than the
rate anticipated by the investor during the period immediately following the
issuance of the Offered Certificates would not be fully offset by a subsequent
like reduction (or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate, and the prepayment charges imposed in connection with
prepayments on certain of the Mortgage Loans will have an uncertain effect on
the rate and timing of prepayments on the Mortgage Loans. Moreover, the timing
of prepayments on the Mortgage Loans may significantly affect the actual yield
to maturity on the Offered Certificates, even if the average rate of principal
payments experienced over time is consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage
loans is influenced by a variety of economic, geographic, social and other
factors. If prevailing mortgage rates fall significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayment (and refinancing) would be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. The existence of the Periodic Rate Cap,
Maximum Mortgage Rates and Minimum Mortgage Rates also may affect the
prepayment experience on the Mortgage Loans. In addition, the prepayment
experience on the Delayed First Adjustment Date Mortgage Loans may differ from
that on the other Mortgage Loans, especially as they approach their first
Adjustment Date. At such time, the prepayment experience on the Delayed First
Adjustment Date Mortgage Loans may be more sensitive to relatively small
changes in market interest rates. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
Certificates. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates generally
are higher for mortgage loans used to refinance an existing mortgage loan than
on mortgage loans used to purchase a home. In the event of a mortgagor's
default on a Mortgage Loan, other than as provided by the
overcollateralization provisions of the Trust Fund, there can be no assurance
that recourse will be available beyond the specific Mortgaged Property pledged
as security for repayment. See "The Mortgage Pool--Underwriting Standards;
Representations" herein.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
The Mortgage Rates on the Mortgage Loans adjust semiannually (in the
case of the Delayed First Adjustment Date Mortgage Loans, after an initial
period of one or two years) based upon the Index, whereas the Pass-Through
Rates on the Offered Certificates adjust monthly based upon One-Month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" herein, subject to the Available Funds Pass-Through Rate. As a result,
increases in the Pass-Through Rates on the Offered Certificates may be limited
for extended periods in a rising interest rate environment. In addition,
because each Pass-Through Rate is determined, to some extent, by the Mortgage
Rates on the Mortgage Loans, disproportionate prepayments of Mortgage Loans
with Mortgage Rates above the then current weighted average Mortgage Rate may
adversely affect the Pass-Through Rate on one or more Classes of Offered
Certificates by lowering the Available Funds Pass-Through Rate. [Investors
should note that approximately ____% of the Mortgage Loans are two year
Delayed First Adjustment Date Mortgage Loans and approximately ____% of the
Mortgage Loans are one year Delayed First Adjustment Date Mortgage Loans.] The
interest due on the Mortgage Loans during any Collection Period may not equal
the amount of interest that would accrue at One-Month LIBOR plus the
applicable Pass-Through Margin during the related Interest Accrual Period in
which case the applicable Pass-Through Rate will be limited to the Available
Funds Pass-Through Rate. Although Holders of the Offered Certificates are
entitled to receive from and to the limited extent of funds available therefor
as described herein, any related LIBOR Carryover Amount, there can be no
assurance that such funds will be available or, if available, sufficient for
such purposes. The ratings of the Offered Certificates do not address the
likelihood of the payment of any LIBOR Carryover Amount. Since the
Pass-Through Margin is different for each Class of Offered Certificates, it is
possible that, on any particular Distribution Date, the LIBOR Rate applicable
to one or more Classes of Offered Certificates, may be less than the Available
Funds Pass-Through Rate, while the LIBOR Rate applicable to one or more other
Classes of Offered Certificates may exceed the Available Funds Pass-Through
Rate. In addition, the Index and One-Month LIBOR may respond differently to
economic and market factors. Thus, it is possible, that if both One-Month
LIBOR and the Index rise during the same period, One-Month LIBOR may rise more
rapidly than the Index or may rise higher than the Index. In addition, the
Index and/or One-Month LIBOR may not move at the same time or in the same
direction as market interest rates generally. It is possible that market
interest rates may fall at the same time that One-Month LIBOR and/or the Index
is rising.
THE SUBORDINATED CERTIFICATES
The weighted average lives of, and the yields to maturity on, the
Subordinated Certificates, in increasing order of their numerical Class
designations, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans.
If the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinated Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such
Holder based on such assumption. The timing of losses on the Mortgage Loans
will also affect an investor's actual yield to maturity, even if the rate of
defaults and severity of losses over the life of the Mortgage Pool are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Applied
Realized Loss Amounts on the Mortgage Loans will reduce the Class Certificate
Balance of the applicable Class of Subordinated Certificates (and if the
Subordinated Certificates are no longer outstanding, will reduce the Class
Certificate Balance of the Class A Certificates), without the receipt of cash
attributable to such reduction. As a result of such reductions, less interest
will accrue on such Class of Subordinated Certificates (or Class A
Certificates) than otherwise would be the case.
The Principal Remittance Amount includes the net proceeds in respect
of principal received upon liquidation of a Liquidated Mortgage Loan. If such
net proceeds are less than the unpaid principal balance, the Pool Principal
Balance will decline more than the aggregate Class Certificate Balance of the
Offered Certificates, thereby reducing the Overcollateralization Amount. If
such difference is not covered by the Overcollateralization Amount, or the
application of the Monthly Excess Cashflow Amount, the Class of Subordinated
Certificates then outstanding with the highest numerical Class designation
will bear such loss as a result of the application of Applied Realized Loss
Amounts. In addition, the Subordinated Certificates will not be entitled to
any principal distributions prior to the Stepdown Date or during the
continuation of a Trigger Event (unless all of the Certificates with a higher
payment priority have been paid in full). Because of the disproportionate
distribution of principal of the Class A Certificates, depending on the timing
of Realized Losses, the Subordinated Certificates may bear a disproportionate
percentage of the Realized Losses on the Mortgage Loans.
For all purposes, the Class B Certificates will be deemed to have the
highest numerical Class designation and the lowest payment priority of any
Class of Subordinated Certificates.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average lives of
the Offered Certificates will be influenced by the rate at which principal on
the Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
(the "Prepayment Assumption") assumes a prepayment rate of __% CPR. The
Constant Prepayment Rate model ("CPR") assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual
rate or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume __% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at __% CPR or at
any other rate. Neither the prepayment model used herein nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Mortgage Pool.
The tables following the next paragraph indicate the percentage of
the initial Class Certificate Balance of each Class of Offered Certificates
that would be outstanding after each of the dates shown at various percentages
of the Prepayment Assumption and the corresponding weighted average lives. The
tables are based on the following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Pool consists of Mortgage Loans with the characteristics set
forth in the table below, (ii) distributions on such Certificates are
received, in cash, on the 20th day of each month, commencing in _______ __,
(iii) the Mortgage Loans prepay at the percentages of the Prepayment
Assumption indicated, (iv) no defaults or delinquencies occur in the payment
by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act are incurred, (v) none of
the Depositor, the Mortgage Loan Originator, the holder of the Class X
Certificates, the Servicer or any other person purchases from the Trust Fund
any Mortgage Loan pursuant to any obligation or option under the Agreement,
except as indicated in footnote two in the tables, (vi) scheduled monthly
payments on the Mortgage Loans are received on the first day of each month
commencing in ______ __, and are computed prior to giving effect to any
prepayments received in the prior month, and the number of days of accrual on
the Mortgage Loans in the first accrual period is the same as the number of
days in the first Interest Accrual Period for the Certificates, (vii)
prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in ______ ____, and include
30 days' interest thereon, (viii) the scheduled monthly payment for each
Mortgage Loan is calculated based on its principal balance, Mortgage Rate,
original term to maturity and remaining term to maturity such that the
Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term to maturity,
(ix) the Certificates are purchased on _______ __, ____, (x) the Index remains
constant at _______% per annum and the Mortgage Rate on each Mortgage Loan is
adjusted on the next Adjustment Date (and on subsequent Adjustment Dates if
necessary) to equal the Index plus the applicable Gross Margin, subject to the
applicable Periodic Rate Cap, (xi) One-Month LIBOR remains constant at ______%
per annum, (xii) the monthly payment on each Mortgage Loan is adjusted on the
Due Date immediately following the next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal a fully amortizing monthly payment as
described in clause (viii) above, and (xiii) the Expense Fee Rate is equal to
______% per annum.
<TABLE>
<CAPTION>
HYPOTHETICAL MORTGAGE LOANS (6 MONTH LIBOR):
Original Remaining Periodic
Maximum Minimum Term to Term to Cap (%)
Principal Months to Interest Gross Interest Interest Maturity Maturity Initial/
Balance ($) Rate Change Rate % Margin % Rate % Rate % (Months) (Months) Subsequent
----------- ----------- ------ -------- ------ ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the initial Class
Certificate Balance outstanding (and the weighted average life) of each Class
of Offered Certificates set forth in the tables. In addition, since the actual
Mortgage Loans will have characteristics that differ from those assumed in
preparing the tables set forth below and, since it is not likely the level of
the Index will remain constant as assumed, each Class of Offered Certificates
may mature earlier or later than indicated by the tables. Variations in the
prepayment experience and the balance of the Mortgage Loans that prepay may
increase or decrease the percentages of initial Class Certificate Balances
(and weighted average lives) shown in the following tables. Such variations
may occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentages of the Prepayment Assumption.
<TABLE>
<CAPTION>
Class A Certificates
--------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
Initial Percentage
<S> <C>
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in
Years (1) (2)
Weighted Avg. Life in
Years (1) (3)
</TABLE>
- ----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchase the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is [10]% of
Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement--Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
<TABLE>
<CAPTION>
Class M-1 Certificates
--------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
Initial Percentage
<S> <C>
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in
Years (1) (2)
Weighted Avg. Life in
Years (1) (3)
</TABLE>
- ----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchase the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is [10]% of
Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement--Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
<TABLE>
<CAPTION>
Class M-2 Certificates
--------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
Initial Percentage
<S> <C>
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in
Years (1) (2)
Weighted Avg. Life in
Years (1) (3)
</TABLE>
- ----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchase the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is [10]% of
Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement--Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
<TABLE>
<CAPTION>
Class B Certificates
---------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
- ----------------- ------ ------- ------- ------- ------- ------- -------
Initial Percentage
<S> <C>
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
_________ 20, ____
Weighted Avg. Life in
Years (1) (2)
Weighted Avg. Life in
Years (1) (3)
</TABLE>
- ----------------------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
(2) Assumes the majority holder of the Residual Certificates exercises its
option to purchase the Mortgage Loans when the aggregate principal
balance of the Mortgage Loans and REO Properties remaining is [10]% of
Cut-off Date Pool Principal Balance. See "Pooling and Servicing
Agreement--Termination" herein.
(3) Assumes that the Certificates remain outstanding to their maturity date.
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the Prepayment Assumption indicated in the
table above, or to any other level, or that the actual weighted average life
of any Class of Offered Certificates will conform to any of the weighted
average lives set forth in the table above. Furthermore, the information
contained in the table with respect to the weighted average lives is not
necessarily indicative of the weighted average lives that might be calculated
or projected under different or varying prepayment or Index level assumptions.
The characteristics of the Mortgage Loan will differ from those assumed in
preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity, that all of the
Mortgage Loans will prepay at the same rate or that the level of the Index
will remain constant or any level for any period of time. The timing of
changes in the rate of prepayments may significantly affect the actual yield
to maturity to investors, even if the average rate of principal prepayments
and the level of the Index is consistent with the expectations of investors.
FINAL SCHEDULED DISTRIBUTION DATES
The Final Scheduled Distribution Date of each Class of Offered
Certificates is set forth under "Summary of Prospectus Supplement." The Final
Scheduled Distribution Date for the Class A Certificates has been calculated
on the basis of the Modeling Assumptions and the assumptions that there are no
prepayments and no Monthly Excess Interest Amounts are used to create
overcollateralization. The Final Scheduled Distribution Date for each other
Class of Offered Certificates has been set to equal the Distribution Date in
the thirteenth month after the month of maturity of the latest maturing
Mortgage Loan. Since the rate of distributions in reduction of the Class
Certificate Balance of each Class of Offered Certificates will depend on the
rate of payment (including prepayments) of the Mortgage Loans, the Class
Certificate Balance of any such Class could be reduced to zero significantly
earlier or later than the Final Scheduled Distribution Date. The rate of
payments on the Mortgage Loans will depend on their particular
characteristics, as well as on prevailing interest rates from time to time and
other economic factors, and no assurance can be given as to the actual payment
experience of the Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of (i) the Class A Certificates (the
"Class A Certificates"), (ii) the Class M-1 Certificates and the Class M-2
Certificates (collectively, the "Mezzanine Certificates"), (iii) the Class B
Certificates (collectively with the Mezzanine Certificates, the "Subordinated
Certificates"), (iv) the Class BB Certificates (the "Class BB Certificates"),
(v) the Class X Certificates (the "Class X Certificates"), and (vi) the Class
R Certificates (the "Residual Certificates" and with the Class BB Certificates
and the Class X Certificates, the "Non-Offered Certificates"). Only the Class
A Certificates and the Subordinated Certificates (collectively, the "Offered
Certificates") are offered hereby. The Non-Offered Certificates, which are not
being offered hereby, may be sold at any time on or after the Closing Date in
accordance with the Agreement.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of
a pool (the "Mortgage Pool") of conventional, one- to four-family, first lien
mortgage loans having original terms to maturity of 30 years (the "Mortgage
Loans"). The Class A Certificates evidence an initial beneficial interest in
the Trust Fund of ____% and the Class M-1, Class M-2 and Class B Certificates
evidence initial beneficial interests in the Trust Fund of ___%, ___% and
___%, respectively.
The "Class Certificate Balance" of any Class of Certificates as of
any Distribution Date is the initial Class Certificate Balance thereof reduced
by the sum of (i) all amounts previously distributed to Holders of
Certificates of such Class as payments of principal and (ii) in the case of
any Class of Offered Certificates, any Applied Realized Loss Amounts allocated
to such Class.
All distributions to Holders of the Offered Certificates, other than
the final distribution on the Offered Certificates, will be made by or on
behalf of the Trustee to the persons in whose names such Offered Certificates
are registered at the close of business on each Record Date. Such
distributions will be made either (i) by check mailed to the address of each
such Certificateholder as it appears in the Certificate Register or (ii) upon
written request to the Trustee at least five business days prior to the
relevant Record Date by any Holder of Offered Certificates having an aggregate
initial Certificate Principal Balance that is in excess of $__________ by wire
transfer in immediately available funds to the account of such
Certificateholder specified in the request. The final distribution on any
Class of Offered Certificates will be made in like manner, but only upon
presentment and surrender of such Certificates at the corporate trust office
of the Trustee or such other location specified in the notice to
Certificateholders of such final distribution.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
The Offered Certificates will be issued, maintained and transferred
on the book-entry records of DTC and its Participants in minimum denominations
of $100,000 and integral multiples of $1,000 in excess thereof. The Offered
Certificates will initially be represented by one or more global certificates
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the Depositor, the "Clearing Agency"), except as
provided below. The Depositor has been informed by DTC that DTC's nominee will
be Cede & Co. ("CEDE"). No Certificate Owner will be entitled to receive a
certificate representing such person's interest, except as set forth below.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, all references to actions by
Certificateholders with respect to the Offered Certificates refer to actions
taken by DTC upon instructions from its Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Offered Certificates refer to
distributions, notices, reports and statements to DTC or CEDE, as the
registered holder of the Offered Certificates, for distribution to Certificate
Owners in accordance with DTC procedures.
Holders of Offered Certificates may hold their Certificates through
DTC (in the United States) or Cedelbank ("CEDEL") or the Euroclear System
("Euroclear") in Europe. Transfers within DTC, CEDEL or Euroclear, as the case
may be, will be in accordance with the usual rules and operating procedures of
the relevant system (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositories which in turn will hold
such positions in customers' securities accounts in the depositaries' names on
the books of DTC. _______ will act as depositary for CEDEL and ________will
act as depositary for Euroclear (in such capacities, individually the
"Depositary" and collectively the "Depositaries"). Transfers between
Participants (as defined below) will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants (each as
defined below) will occur in accordance with their respective rules and
operating procedures.
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Beneficial owners of the Offered Certificates ("Certificate Owners")
or prospective owners, as the case may be, that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in the Offered Certificates may do so only
through Participants and Indirect Participants. In addition, such Certificate
Owners will receive all distributions of principal and interest on the Offered
Certificates from the Trustee or the applicable paying agent through DTC and
its Participants. Under a book-entry format, Certificateholders may receive
payments after the related Distribution Date because, while payments are
required to be forwarded to CEDE, as nominee for DTC on each such date, DTC
will forward such payments to its Participants which thereafter will be
required to forward them to Indirect Participants or Certificate Owners. The
only "Certificateholder" (as such term is used in the Agreement) will be CEDE,
as nominee of DTC, and the Certificate Owners will not be recognized by the
Trustee as Certificateholders under the Agreement. Certificate Owners will be
permitted to exercise the rights of Certificate Owners under the Agreement
only indirectly through DTC and its Participants who in turn will exercise
their rights though DTC.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit distributions of principal of and interest on
the Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Certificates similarly
are required to make book-entry transfers and receive and transmit such
payments on behalf of their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain other entities, the ability of
a Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for
such Certificates.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL
or Euroclear cash account only as of the business day following settlement in
DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement
of certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may now be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services including
lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers
with DTC described above. Euroclear is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, and not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly. The Euroclear Operator
is the Belgian branch of a New York banking corporation which is a member bank
of the Federal Reserve System and the New York State Banking Department, as
well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear system and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash with Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect
to securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants and has no record of or relationship with
persons holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Certain Federal Income Tax Consequences." CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Certificateholder under the Agreement only at the direction
of one or more Participants to whose account with DTC the Certificates are
credited.
Certificates initially issued as Book-Entry Certificates will be
issued as Definitive Certificates only if (i) DTC or the Depositor advises the
Trustee in writing that DTC is no longer willing or able to properly discharge
its responsibilities as nominee and depository with respect to the
Certificates and the Servicer is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC or (iii) if Holders of Offered Certificates evidencing not less
than 51% of the Voting Rights advise the Trustee in writing that the
continuation of a book-entry system through DTC (or a successor thereto) to
the exclusion of any physical certificates being issued to Certificate Owners
is no longer in the best interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Certificates. Upon
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for registration, the Trustee will issue such
Certificates in the form of Definitive Certificates as Certificateholders
under the Agreement and such Holders of Definitive Certificates will deal
directly with the Trustee with respect to transfers, notices and
distributions. In the event that Definitive Certificates are issued or DTC
ceases to be the clearing agency for the Certificates, the Agreement will
provide that the applicable Certificateholders will be notified of such event.
CALCULATION OF ONE-MONTH LIBOR
The Pass-Through Rates for the first Distribution Date will be
determined on the second business day preceding the Closing Date and for each
subsequent Distribution Date will be determined on the second business day
prior to the immediately preceding Distribution Date (each such date, an
"Interest Determination Date"). The Trustee will determine the London
interbank offered rate for one-month U.S. dollar deposits ("One-Month LIBOR")
for the next Interest Accrual Period on the basis of the offered rates of the
Reference Banks for one-month U.S. dollar deposits, as such rates appear on
the Telerate Page 3750, as of 11:00 a.m. (London time) on such Interest
Determination Date. As used in this section: "business day" means a day on
which banks are open for dealing in foreign currency and exchange in London
and New York City; "Telerate Page 3750" means the display page currently so
designated on the Dow Jones Telerate Service (or such other page as may
replace the Telerate Page 3750 page on that service for the purpose of
displaying London interbank offered rates of major banks); and "Reference
Banks" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Telerate Page 3750 on the Interest Determination Date in question, (iii) which
have been designated as such by the Trustee and (iv) which are not
controlling, controlled by, or under common control with, the Depositor or the
Mortgage Loan Originator.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Accrual Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the arithmetic mean of
such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.001%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the
related Interest Accrual Period shall be the higher of (x)
One-Month LIBOR as determined on the previous Interest
Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of
0.001%) of the one-month U.S. dollar lending rates which New
York City banks selected by the Trustee are quoting on the
relevant Interest Determination Date to the principal London
offices of leading banks in the London interbank market or, in
the event that the Trustee can determine no such arithmetic
mean or (ii) the lowest one-month U.S. dollar lending rate
which New York City banks selected by the Trustee are quoting
on such Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to each Class of Offered Certificates for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
INTEREST DISTRIBUTIONS
On each Distribution Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Holders of the Class A Certificates, the related
Accrued Certificate Interest plus the Class A Interest Carry Forward Amount;
Third, to the extent of the Interest Remittance Amount then
remaining, to the Holders of the Class M-1 Certificates, the related Accrued
Certificate Interest;
Fourth, to the extent of the Interest Remittance Amount then
remaining, to the Holders of the Class M-2 Certificates, the related Accrued
Certificate Interest;
Fifth, to the extent of the Interest Remittance Amount then
remaining, to the Holders of the Class B Certificates, the related Accrued
Certificate Interest; and
Sixth, the amount, if any, of the Interest Remittance Amount
remaining in the Certificate Account after application with respect to the
priorities set forth above is defined as the "Monthly Excess Interest Amount"
for such Distribution Date and will be applied as described below under
"--Application of Monthly Excess Cashflow Amounts."
"Interest Remittance Amount" means, as of any Determination Date, the
sum, without duplication, of (i) all interest due and collected or advanced
during the related Collection Period on the Mortgage Loans (less the Servicing
Fee, certain amounts available for reimbursement of Monthly Advances and
Servicing Advances as described below under "-Advances" and certain other
reimbursable expenses pursuant to the Agreement), (ii) all Compensating
Interest paid by the Servicer on such Determination Date and (iii) the portion
of any payment in connection with any substitution, Purchase Price or Net
Liquidation Proceeds relating to interest; provided that with respect to the
first Collection Period, the Interest Remittance Amount shall be reduced by an
amount equal to five days of interest due and collected or advanced on the
Mortgage Loans.
The "Interest Accrual Period" for any Distribution Date is the period
from the Distribution Date in the month immediately preceding the month in
which such Distribution Date occurs (or, in the case of the first Distribution
Date, from the Closing Date) through the day before such Distribution Date.
All distributions of interest will be based on a 360-day year and the actual
number of days in the applicable Interest Accrual Period.
PASS-THROUGH RATES
The Pass-Through Rate on each Class of Offered Certificates on each
Distribution Date will be a rate per annum equal to the least of (i) One-Month
LIBOR (as defined herein) plus the applicable Pass-Through Margin (the "LIBOR
Rate"), (ii) the Available Funds Pass-Through Rate for such Distribution Date,
and (iii) the weighted average Expense Adjusted Maximum Mortgage Rate for all
Mortgage Loans. The "Pass-Through Margin" for each Class of Offered
Certificates will be as set forth below; provided, however, that for each
Interest Accrual Period beginning after the Distribution Date on which the
aggregate Stated Principal Balance (as defined herein) of the Mortgage Loans
is [10]% or less of the Stated Principal Balance of the Mortgage Loans as of
the Cut-off Date (the "Cut-off Date Pool Principal Balance") each such
Pass-Through Margin will be doubled for the Senior Certificates and increased
by __% for the Subordinated Certificates:
Class Pass-Through Margin
A ___%
M-1 ___%
M-2 ___%
B ___%
The "Available Funds Pass-Through Rate" will be, with respect to any
Distribution Date, the per annum rate equal to the percentage obtained by
dividing (x) the amount of interest that accrued on the Mortgage Loans in
respect of the related Collection Period at the weighted average of the
related Mortgage Rates applicable to monthly payments due on such Mortgage
Loans during such Collection Period, reduced by the Expense Fee Rate, by (y)
the product of (i) the aggregate Class Certificate Balance and (ii) the actual
number of days elapsed during such Interest Accrual Period divided by 360.
The "Expense Adjusted Maximum Mortgage Rate" on any Mortgage Loan is
equal to the applicable Maximum Mortgage Rate thereon minus the sum of (i) the
Trustee Fee Rate, and (ii) the Servicing Fee Rate (collectively, the "Expense
Fee Rate"). For any Distribution Date, the Trustee Fee Rate is _____% per
annum and the Servicing Fee Rate is ___% per annum.
The Pass-Through Rate on each Class of Offered Certificates for the
current Interest Accrual Period, to the extent it has been determined, and for
the immediately preceding Interest Accrual Period may be obtained by
telephoning the Trustee at (___) ___-____.
PRINCIPAL DISTRIBUTIONS
With respect to each Distribution Date (a) before the Stepdown Date
or (b) with respect to which a Trigger Event is in effect, Holders of the
Class A Certificates will be entitled to receive 100% of the Principal
Distribution Amount for such Distribution Date until the Class Certificate
Balance thereof has been reduced to zero.
In the event that on any Distribution Date on or after the Stepdown
Date on which a Trigger Event is in effect the Holders of the Class A
Certificates will be entitled to receive 100% of the Principal Distribution
Amount until the Class Certificate Balance of the Class A Certificates has
been reduced to zero. Once the Class Certificate Balance of the Class A
Certificates has been reduced to zero, the Holders of the Class M-1
Certificates will be entitled to receive 100% of the Principal Distribution
Amount for such Distribution Date until the Class Certificate Balance of the
Class M-1 Certificates has been reduced to zero. Similarly if the Class
Certificate Balance of the Class M-1 Certificates has been reduced to zero,
the Holders of the Class M-2 Certificates will be entitled to receive 100% of
the Principal Distribution Amount until the Class Certificate Balance of the
Class M-2 Certificates has been reduced to zero. Finally, if the Class
Certificate Balance of the Class M-2 Certificates has been reduced to zero,
the Holders of the Class B Certificates will be entitled to receive 100% of
the Principal Distribution Amount until the Class Certificate Balance of the
Class B Certificates has been reduced to zero.
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Holders of all
Classes of Offered Certificates will be entitled to receive payments of
principal, in the order of priority and in the amounts set forth below and to
the extent of the Principal Distribution Amount:
First, the lesser of (x) the Principal Distribution Amount and (y)
the Class A Principal Distribution Amount will be distributed to the Class A
Certificates, until the Class Certificate Balance thereof has been reduced to
zero;
Second, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the Class A
Certificates in clause First above and (y) the Class M-1 Principal
Distribution Amount will be distributed to the Class M-1 Certificates, until
the Class Certificate Balance thereof has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Class A Certificates
in clause First above and the amount distributed to the Class M-1 Certificates
in clause Second above and (y) the Class M-2 Principal Distribution Amount
will be distributed to the Class M-2 Certificates, until the Class Certificate
Balance thereof has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amount distributed to the Class A
Certificates pursuant to Clause First above, the amount distributed to the
Class M-1 Certificates pursuant to Clause Second above and the amount
distributed to the Class M-2 Certificates pursuant to Clause Third above and
(y) the Class B Principal Distribution Amount will be distributed to the Class
B Certificates, until the Class Certificate Balance thereof has been reduced
to zero; and
Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in Clauses First, Second, Third and Fourth
above will be included as part of the Monthly Excess Cashflow Amount and will
be applied as described below under "--Application of Monthly Excess Cashflow
Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class A Principal Distribution Amount" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event
is in effect, the lesser of (i) 100% of the Principal Distribution Amount and
(ii) the Class Certificate Balance of the Class A Certificates and (b) on or
after the Stepdown Date and as long as a Trigger Event is not in effect, the
positive difference, if any, of the excess of (x) the Class Certificate
Balance of the Class A Certificates immediately prior to such Distribution
Date over (y) the lesser of (A) the product of (i) approximately ___% and (ii)
the Pool Principal Balance as of the last day of the related Collection Period
and (B) the Pool Principal Balance as of the last day of the related
Collection Period minus $_________.
"Class M-1 Principal Distribution Amount" means as of any
Distribution Date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, the positive difference, if any, of the excess of (x) the
sum of (i) the Class Certificate Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount
on such Distribution Date) and (ii) the Class Certificate Balance of the Class
M-1 Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) approximately ___% and (ii) the Pool
Principal Balance as of the last day of the related Collection Period and (B)
the Pool Principal Balance as of the last day of the related Collection Period
minus $________.
"Class M-2 Principal Distribution Amount" means as of any
Distribution Date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, the positive difference, if any, of the excess of (x) the
sum of (i) the Class Certificate Balance of the Class A Certificates (after
taking into account the payment of the Class A Principal Distribution Amount
on such Distribution Date), (ii) the Class Certificate Balance of the Class
M-1 Certificates (after taking into account the payment of the Class M-1
Principal Distribution Amount on such Distribution Date) and (iii) the Class
Certificate Balance of the Class M-2 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) approximately
___% and (ii) the Pool Principal Balance as of the last day of the related
Collection Period and (B) the Pool Principal Balance as of the last day of the
related Collection Period minus $_______.
"Class B Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i)
the Class Certificate Balance of the Class A Certificates (after taking into
account the payment of the Class A Principal Distribution Amount on such
Distribution Date), (ii) the Class Certificate Balance of the Class M-1
Certificates (after taking into account the payment of the Class M-1 Principal
Distribution Amount on such Distribution Date), (iii) the Class Certificate
Balance of the Class M-2 Certificates (after taking into account the payment
of the Class M-2 Principal Distribution Amount on such Distribution Date), and
(iv) the Class Certificate Balance of the Class B Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
approximately ___% and (ii) the Pool Principal Balance as of the last day of
the related Collection Period and (B) the Pool Principal Balance as of the
last day of the related Collection Period minus $_______.
"Extra Principal Distribution Amount" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such
Distribution Date and (y) the Overcollateralization Deficiency for such
Distribution Date, provided that on the first Distribution Date principal due
during the period from the Cut-off Date to the related Determination Date will
be distributed, which will reduce the amount available on such Distribution
Date for distribution as Extra Principal Distribution Amount.
"Liquidated Mortgage Loan" means as to any Distribution Date, a
Mortgage Loan with respect to which the Servicer has determined, in accordance
with the servicing procedures specified in the Agreement, as of the end of the
preceding Collection Period, that all Liquidation Proceeds which it expects to
recover with respect to such Mortgage Loan have been recovered.
"Overcollateralization Amount" means as of any Distribution Date the
excess, if any, of (x) the Pool Principal Balance as of the last day of the
immediately preceding Collection Period over (y) the aggregate Class
Certificate Balance of all Classes of Offered Certificates (after taking into
account all distributions of principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution
Date, the excess, if any, of (x) the Targeted Overcollateralization Amount for
such Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Balances of all
Classes of the Offered Certificates resulting from the distribution of the
Principal Remittance Amount (but not the Extra Principal Distribution Amount)
on such Distribution Date, but prior to taking into account any Applied
Realized Loss Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date after the Stepdown Date on which a Trigger Event is not in
effect, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for such Distribution Date, assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on the Offered
Certificates on such Distribution Date, over (ii) the Targeted
Overcollateralization Amount for such Distribution Date.
"Principal Distribution Amount" means as of any Distribution Date,
the sum of (i) the Principal Remittance Amount (minus, for Distribution Dates
occurring on and after the Stepdown Date and for which a Trigger Event is not
in effect, the Overcollateralization Release Amount, if any) and (ii) the
Extra Principal Distribution Amount, if any.
"Principal Remittance Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein the amount
equal to the sum (less certain amounts available for reimbursement of Monthly
Advances and Servicing Advances as described below under "-Advances" and
certain other reimbursable expenses pursuant to the Agreement) of the
following amounts (without duplication) with respect to the immediately
preceding Collection Period: (i) each payment of principal on a Mortgage Loan
received by the Servicer during such Collection Period, including all full and
partial principal prepayments and any Advances with respect thereto, (ii) the
Net Liquidation Proceeds allocable to principal actually collected by the
Servicer during the related Collection Period, (iii) the portion of the
Purchase Price allocable to principal of all repurchased Defective Mortgage
Loans with respect to such Collection Period and (iv) any Substitution
Adjustment Amounts received on or prior to the previous Determination Date and
not yet distributed.
"Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Class
Certificate Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case after taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Principal Balance as of the last day of the related Collection
Period.
"Senior Specified Enhancement Percentage" on any date of
determination thereof means 30.50%.
"60+ Day Delinquent Loan" means each Mortgagee Loan with respect to
which any portion of a Monthly Payment is, as of the last day of the prior
Collection Period, two months or more past due (without giving effect to any
grace period), each Mortgage Loan in foreclosure, all REO Property and each
Mortgage Loan for which the Mortgagor has filed for bankruptcy.
"Stepdown Date" means the earlier to occur of (i) the later to occur
of (x) the Distribution Date in _______ ____ and (y) the first Distribution
Date on which the Senior Enhancement Percentage (after taking into account
distributions of principal on such Distribution Date) is greater than or equal
to the Senior Specified Enhancement Percentage and (ii) the Distribution Date
on which the Class Certificate Balance of the Class A Certificates has been
reduced to zero.
"Targeted Overcollateralization Amount" means as of any Distribution
Date, (x) prior to the Stepdown Date, ___% of the initial Class Certificate
Balance of the Pool Principal Balance and (y) on and after the Stepdown Date
and assuming a Trigger Event is not in effect, the greater of (i) __% of the
Pool Principal Balance as of the last day of the related Collection Period and
(ii) $_______. If a Trigger Event is in effect on and after the Stepdown Date,
the Targeted Overcollateralization Amount shall be equal to the Targeted
Overcollateralization Amount for the immediately preceding Distribution Date.
A "Trigger Event" has occurred on a Distribution Date if the
three-month rolling average of 60+ Day Delinquent Loans equals or exceeds
one-half of the Senior Enhancement Percentage; provided, that if the Class
Certificate Balance of the Class A Certificates has been reduced to zero, a
Trigger Event will have occurred if the three-month rolling average of 60+ Day
Delinquent Loans equals or exceeds ____%.
CREDIT ENHANCEMENT
The credit enhancement consists of the subordination of the
Subordinated Certificates to the Class A Certificates, the further
subordination of each other Class of Subordinated Certificates that is junior
in priority of distribution, the priority of the application of the Applied
Realized Loss Amounts and the overcollateralization provisions of the Trust
Fund as described herein.
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated, to the
extent described herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates of the full amount
of their scheduled monthly payment of interest and principal and to afford
such Certificateholders protection against Realized Losses. The protection
afforded to the holders of the Class A Certificates by means of the
subordination of the Subordinated Certificates will be accomplished by the
preferential right of the holders of the Class A Certificates to receive,
prior to any distribution being made on a Distribution Date in respect of the
Subordinated Certificates, the amounts of interest due them and principal
available for distribution on such Distribution Date.
In addition, the rights of the holders of the Class M-2 and Class B
Certificates to receive distributions will be subordinated, to the extent
described herein, to such rights of the holders of the Class A Certificates
and the Class M-1 Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates and
the Class M-1 Certificates of the amount of interest due them and principal
available for distribution and to afford such Certificateholders with
protection against losses.
The rights of the holders of the Class B Certificates to receive
distributions will be subordinated in the same manner to such rights of the
holders of the Class A Certificates, the Class M-1 Certificates and the Class
M-2 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates, the Class M-1
Certificates and the Class M-2 Certificates of the amount of interest due them
and principal available for distribution and to afford such Certificateholders
with protection against losses.
The protection afforded to the Class B Certificateholders against
losses is provided by the Overcollateralization Amount and the Monthly Excess
Cashflow Amounts, as described below.
ALLOCATION OF LOSSES
If a Mortgage Loan becomes a Liquidated Mortgage Loan during a
Collection Period, the Net Liquidation Proceeds relating thereto and allocated
to principal may be less than the Stated Principal Balance of such Mortgage
Loan. The amount of such insufficiency is a "Realized Loss." Realized Losses
will, in effect, be absorbed first by the Class R Certificates (through the
application of the Monthly Excess Interest Amount to fund such deficiency, as
well as through a reduction in the Overcollateralization Amount).
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Class Certificate
Balance of the Offered Certificates exceeds the Pool Principal Balance as of
the end of the related Collection Period, such excess will be allocated
against the Class B, Class M-2, Class M-1 and Class A Certificates, in that
order and until the respective Class Certificate Balances thereof are reduced
to zero. Any allocation of such excess in reduction of a Class Certificate
Balance is referred to as an "Applied Realized Loss Amount." Any such
reduction of a Class Certificate Balance will not be reversed or reinstated.
However, on future Distribution Dates, Certificateholders of the related Class
may receive amounts in respect of prior reductions in the related Class
Certificate Balances as described below. Such subsequent payments will be
applied in the reverse of the order set forth above.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average Available Funds Pass-Through Rate for the
Mortgage Loans is generally expected to be higher than the weighted average of
the Pass-Through Rates on the Offered Certificates, thus generating certain
excess interest collections which, in the absence of losses, will not be
necessary to fund interest distributions on the Offered Certificates. This
excess interest for a Collection Period, together with interest on the
Overcollateralization Amount itself, is the "Monthly Excess Interest Amount."
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted
Overcollateralization Amount is initially (i.e., prior to the Stepdown Date)
$________.
If Realized Losses not accounted for by an application of the Monthly
Excess Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Pool Principal
Balance without giving rise to a corresponding reduction of the aggregate
Class Certificate Balance). The cashflow priorities of the Trust Fund require
that, in this situation, an Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly Excess Cashflow Amount in
subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is
not in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Agreement permits a
portion of the Principal Remittance Amount for such Distribution Date not to
be passed through as a distribution of principal on such Distribution Date.
This has the effect of decelerating the amortization of the Offered
Certificates relative to the Pool Principal Balance, thereby reducing the
actual level of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Offered Certificates therefore releases
overcollateralization from the Trust Fund. The amount of such releases are the
"Overcollateralization Release Amounts."
On any Distribution Date, the sum of the Monthly Excess Interest
Amount and the Overcollateralization Release Amount is the "Monthly Excess
Cashflow Amount", which is required to be applied in the following order of
priority on such Distribution Date:
(1) to fund the Class A Interest Carry Forward Amount, if any;
(2) to fund the Extra Principal Distribution Amount for such
Distribution Date;
(3) to fund the Class M-1 Interest Carry Forward Amount, if any;
(4) to fund the Class M-1 Realized Loss Amortization Amount for
such Distribution Date;
(5) to fund the Class M-2 Interest Carry Forward Amount, if any;
(6) to fund the Class M-2 Realized Loss Amortization Amount for
such Distribution Date;
(7) to fund the Class B Interest Carry Forward Amount, if any;
(8) to fund the Class B Realized Loss Amortization Amount for such
Distribution Date;
(9) to fund the aggregate amount of LIBOR Carryover Amount, among
all Classes of Offered Certificates in proportion to the
respective LIBOR Carryover Amounts for each such Class in the
same priority order as interest distributions;
(10) to fund a distribution to the Holders of the Class B
Certificates;
(11) to fund a distribution to the Holders of the Class X
Certificates; and
(12) to fund a distribution to the Holders of the Class R
Certificates.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class B Applied Realized Loss Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the Applied Realized Loss Amount as of such
Distribution Date.
"Class B Realized Loss Amortization Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Class B
Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess of
(i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class M-1 Realized Loss Amortization Amount, the Class M-2 Realized Loss
Amortization Amount, the Class M-1 Interest Carry Forward Amount, the Class
M-2 Interest Carry Forward Amount and the Class B Interest Carry Forward
Amount, in each case for such Distribution Date.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount
as of such Distribution Date over (ii) the sum of the Class M-2 Applied
Realized Loss Amount and the Class B Applied Realized Loss Amount, in each
case as of such Distribution Date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-1 Unpaid Realized Loss Amount as of such Distribution Date and (y) the
excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the
Class A Interest Carry Forward Amount, the Extra Principal Distribution Amount
and the Class M-1 Interest Carry Forward Amount, in each case for such
Distribution Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B Applied Realized
Loss Amount and the Class B Applied Realized Loss Amount, in each case as of
such Distribution Date.
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-2 Unpaid Realized Loss Amount as of such Distribution Date and (y) the
excess of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the
Class A Interest Carry Forward Amount, the Extra Principal Distribution
Amount, the Class M-1 Interest Carry Forward Amount, the Class M-1 Realized
Loss Amortization Amount and the related Class M-2 Interest Carry Forward
Amount, in each case for such Distribution Date.
"Unpaid Realized Loss Amount" means for any Class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to
such Class for all prior Distribution Dates over (y) the aggregate, cumulative
amount of related Realized Loss Amortization Amounts with respect to such
Class for all prior Distribution Dates.
MONTHLY ADVANCES
Subject to the following limitations, the Servicer will be obligated
to advance or cause to be advanced by the Servicer before each Distribution
Date its own funds in an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee Rate, that were due during
the related Collection Period on the Mortgage Loans and that were delinquent
on the related Determination Date, plus certain amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure (any such advance, a
"Monthly Advance").
Monthly Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Servicer will not be required
to make any Monthly Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to bankruptcy proceedings or the
application of the Relief Act.
All Monthly Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which such unreimbursed Monthly Advances were made. In addition,
any Monthly Advances or Servicing Advances previously made in respect of any
Mortgage Loan that are deemed by the Servicer to be nonrecoverable from
related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Servicer out of any funds in the Collection Account prior to
the distributions on the Certificates. In the event the Servicer fails in its
obligations to make any such advance, the Trustee will be obligated to make
any such advance, to the extent required in the Agreement.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of
which is filed as an exhibit to the Registration Statement. The Trust Fund
created under the Agreement will consist of (i) all of the Depositor's right,
title and interest in the Mortgage Loans, the related Mortgage Notes,
Mortgages and other related documents, (ii) all payments on or collections in
respect of the Mortgage Loans received after the Cut-off Date (other than
payments due on or before the Cut-off Date), together with any proceeds
thereof, (iii) any Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon, (iv) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Agreement and (v) the
rights of the Depositor under the Mortgage Loan Purchase Agreement between the
Depositor and the Mortgage Loan Originator. Reference is made to the
Prospectus for important information in addition to that set forth herein
regarding the Trust Fund, the terms and conditions of the Agreement and the
Offered Certificates. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee, located in
_______, ______. The Depositor will provide to a prospective or actual
Certificateholder without charge, on written request, a copy (without
exhibits) of the Agreement. Requests should be addressed to the Secretary,
Merrill Lynch Mortgage Investors, Inc.
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will deliver to the Trustee with respect to each
Mortgage Loan (i) the original Mortgage Note endorsed without recourse to the
Trustee to reflect the transfer of the Mortgage Loan, (ii) the original
Mortgage with evidence of recording indicated thereon and (iii) an original
assignment of the Mortgage in recordable form to the Trustee, reflecting the
transfer of the Mortgage Loan. Such assignments of Mortgage Loans are required
to be recorded by or on behalf of the Depositor in the appropriate offices for
real property records. The Trustee, concurrently with the Depositor's
assignment, will deliver the Certificates to the Depositor in exchange for the
Mortgage Loans.
THE SERVICER
The Mortgage Loans will be serviced on behalf of the Trust Fund by
_______, a _______ (the "Servicer"). The information set forth in the
following paragraphs has been provided by the Servicer and neither the
Depositor nor any other party makes any representation as to the accuracy or
completeness of such information.
[Specific information as provided by the Servicer.]
Delinquency and Foreclosure Experience. The following table sets
forth the delinquency and foreclosure experience of the mortgage loans
serviced by the Servicer as of the date indicated. The Servicer's portfolio of
mortgage loans may differ significantly from the Mortgage Loans in terms of
interest rates, principal balances, geographic distribution, types of
properties and other possibly relevant characteristics. There can be no
assurance, and no representation is made, that the delinquency and foreclosure
experience with respect to the Mortgage Loans will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted Mortgage Loans.
The actual delinquency experience on the Mortgage Loans will depend, among
other things, upon the value of the real estate securing such Mortgage Loans
and the ability of the related mortgagor to make required payments. It should
be noted that the Servicer's business emphasizes to a certain degree the
acquisition of servicing rights with respect to non-performing and
subperforming mortgage loans, and the Servicer has been an active participant
in the market for such servicing rights over the past several months. The
acquisition of such servicing rights may have affected the delinquency and
foreclosure experience of the Servicer in the period ending on _______ __,
____ as compared with the period ending on _______ __, ____.
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE1
As of ____ __, ____ As of ____ __, ____
--------------------------------------------- --------------------------------------------
No. of % by No. of % by
Loans Principal Loans Principal Principal
Principal Balance2 Balance Balance2 Balance
------------------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Loans $ % $
Period of Delinquency3
30-59 %
60-89 %
90 Days or More __________ % ______ ___________ _______
---------- ---- ------ ----------- -------
Total Delinquencies %
Foreclosure/Bankruptcies4 %
Real Estate Owned %
--------------------------------------------- --------------------------------------------
Total Portfolio _______ $________ 100.0% _______ $_______ 100.00%
======= ========= ====== ======= ======== =======
As of ______ __, ____
---------------------------------------------
% by
No. of Principal
Loans Principal Balance2 Balance
----- ----------------- -------
<C> <C>
$ %
%
%
______ __________ _____%
------ ---------- ------
%
%
%
---------------------------------------------
______ $________ 100.0%
====== ========= ======
</TABLE>
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For Real Estate Owned properties, the Principal Balance is at the time of
foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and Principal Balance shown in Period of
Delinquency.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Servicer's
mortgage servicing portfolio (which may differ substantially from the Mortgage
Pool with respect to credit underwriting standards and other factors) only for
the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans comprising the Mortgage Pool will depend on the results
obtained over the life of the Mortgage Pool. There can be no assurance that
the Mortgage Loans comprising the Mortgage Pool will perform in a manner
consistent with the delinquency or foreclosure experience described herein. It
should be noted that if the residential real estate market should experience
an overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the
Servicer. In addition, adverse economic conditions may affect the timely
payment by Mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
THE TRUSTEE
__________ will act as Trustee for the Certificates pursuant to the
Agreement. The Trustee's offices for notices under the Agreement are located
at ________, ______, _____ _____, and its telephone number is (___) ___-____.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the
Trustee Fee Rate of _____% per annum on the Stated Principal Balance of each
Mortgage Loan. The Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Trust
Fund and will be held harmless against any loss, liability or expense (not
including expenses, disbursements and advances incurred or made by the
Trustee, including the compensation and the expenses and disbursements of its
agents and counsel, in the ordinary course of the Trustee's performance in
accordance with the provisions of the Agreement) incurred by the Trustee
arising out of or in connection with the acceptance or administration of its
obligations and duties under the Agreement, other than any loss, liability or
expense (i) resulting from the Servicer's actions or omissions in connection
with the Agreement and the Mortgage Loans, (ii) that constitutes a specific
liability of the Trustee under the Agreement or (iii) incurred by reason of
willful misfeasance, bad faith or negligence in the performance of the
Trustee's duties under the Agreement or as a result of a breach, or by reason
of reckless disregard, of the Trustee's obligations and duties under the
Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of
it servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of ___% per annum, in each case with respect to each
Mortgage Loan on the Stated Principal Balance of each Mortgage Loan. As
additional servicing compensation, the Servicer is entitled to retain all
assumption fees, late payment charges and other fees and charges (other than
prepayment penalties) to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Certificate Account
and any escrow accounts. The Servicer will be obligated to offset any
Prepayment Interest Shortfall on any Distribution Date (payments made by the
Servicer in satisfaction of such obligation, "Compensating Interest") to the
extent of the Servicing Fee for such Distribution Date. The Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the Mortgage Pool and incurred by the Servicer in connection
with its responsibilities with respect to the Mortgage Loans and is entitled
to reimbursement therefor as provided in the Agreement.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled
in the aggregate to such percentage of Voting Rights. The percentage of the
Voting Rights allocated among Holders of the Offered Certificates (other than
the Class X Certificates) will be __%; the percentage of the Voting Rights
allocated to the Holders of the Class X Certificates will be __%; and the
percentage of the Voting Rights allocated among Holders of the Class R
Certificates will be _%. The Voting Rights allocated to each Class of
Certificates will be allocated among all Holders of each such Class in
proportion to the outstanding Certificate Principal Balance of such
Certificates.
TERMINATION
The circumstances under which the obligations created by the
Agreement will terminate in respect of the Certificates are described in
"Description of the Certificates--Termination" in the Prospectus. The
Depositor will have the right to purchase all remaining Mortgage Loans and any
properties acquired in respect thereof and thereby effect early retirement of
the Certificates on any Distribution Date following the Collection Period
during which the aggregate principal balance of the Mortgage Loans and such
properties at the time of purchase is [10]% or less of the Cut-off Date Pool
Principal Balance. In the event the Depositor exercises such option, the
purchase price payable in connection therewith generally will be equal to par
plus accrued interest for each Mortgage Loan at the related Mortgage Rate to
but not including the first day of the month in which such repurchase price is
distributed. In the event the Depositor exercises such option, the portion of
the purchase price allocable to the each Class of Offered Certificates will
be, to the extent of available funds (i) 100% of the then outstanding Class
Certificate Balance thereof, plus (ii) one month's interest on the then
outstanding Class Certificate Balance thereof at the then applicable
Pass-Through Rate, plus (iii) any previously accrued but unpaid interest
thereon, plus (iv) any related LIBOR Carryover Amount. In no event will the
trust created by the Agreement continue beyond the expiration of 21 years from
the death of the survivor of the persons named in the Agreement. See
"Description of the Certificates--Termination" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Trust Agreement provides that the Trust Fund, exclusive of the
rights of the Offered Certificates to receive interest payments in excess of
the weighted average interest rate that accrued on the Mortgage Loans in
respect of the related Collection Period (the "Cap Contract") which is held by
the Trust Fund in the Basis Risk Reserve Fund, will comprise multiple REMICs
organized in a tiered REMIC structure. Each Lower Tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the Lower Tier
REMICs and the Upper Tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Class R Certificate will represent
beneficial ownership of the residual interests in each of the REMICs.
Elections will be made to treat each Lower Tier REMIC and the Upper Tier REMIC
as a REMIC for federal income tax purposes.
Each Class of Offered Certificates and the Class X Certificates will
represent beneficial ownership of a corresponding class of regular interests
issued by the Upper Tier REMIC. In addition, each of the Offered Certificates
will represent a beneficial interest in the right to receive payments under
the cap contract from the Basis Risk Reserve Fund.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance
with the Trust Agreement, for federal income tax purposes, each Lower Tier
REMIC and the Upper Tier REMIC will qualify as a REMIC within the meaning of
Section 860D of the Internal Revenue Code of 1986, as amended (the "Code"). In
addition, Tax Counsel will deliver an opinion to the effect that the Basis
Risk Reserve Fund is an "outside reserve fund" that is beneficially owned by
the holders of the Class X Certificates. Moreover, Tax Counsel will deliver an
opinion to the effect that the rights of the holders of the Offered
Certificates to receive payments from the Basis Risk Reserve Fund represent,
for federal income tax purposes, interests in an interest rate cap contract.
TAXATION OF REGULAR INTERESTS
A holder of a Class of Offered Certificates will be treated for
federal income tax purposes as owning an interest in the corresponding Class
of Regular Interest in the Upper Tier REMIC and an interest in the Cap
Contract. A holder of an Offered Certificate must allocate its purchase price
for the Offered Certificate between its two components - the REMIC Regular
Interest component and the Cap Contract component. For information reporting
purposes, the Trustee will assume that, with respect to any Offered
Certificate, the Cap Contract component will have only nominal value relative
to the value of the Regular Interest component. The Internal Revenue Service
(the "IRS") could, however, argue that the Cap Contract component has a
greater value than that allocated, and if that argument were to be sustained,
the Regular Interest component could be viewed as having been issued with an
additional amount of original issue discount ("OID") (which could cause the
total amount of OID to exceed a statutorily defined de minimis amount). See
"Certain Federal Income Tax Consequences - Taxation of Owners REMIC Regular
Certificates - Original Issue Discount and Premium" in the Prospectus.
For federal income tax reporting purposes, it is expected that the
Offered Certificates will not be treated as having been issued with original
issue discount. The prepayment assumption that will be used in determining the
rate of accrual of original issue discount, premium and market discount, if
any, for federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at
a constant rate of __% CPR. No representation is made that the Mortgage Loans
will prepay at such rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The IRS has issued regulations (the "OID Regulations") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt
instruments issued with original issue discount. Purchasers of the Offered
Certificates should be aware that the OID Regulations do not adequately
address certain issues relevant to, or are not applicable to, securities such
as the Offered Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such Certificates, and
because the rules of the OID Regulations relating to debt instruments having
an adjustable rate of interest are limited in their application in ways that
could preclude their application to such Certificates even in the absence of
Section 1272(a)(6) of the Code, the IRS could assert that the Offered
Certificates should be treated as issued with original issue discount or
should be governed by the rules applicable to debt instruments having
contingent payments or by some other manner not yet set forth in regulations.
Prospective purchasers of the Offered Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates if such Certificates are
required to be treated as issued with original issue discount generally would
be to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by
assuming that the value of the applicable Index will remain constant for
purposes of determining the original yield to maturity of, and projecting
future distributions on such Certificates, thereby treating such Certificates
as fixed rate instruments to which the original issue discount computation
rules described in the Prospectus can be applied, and (ii) by accounting for
any positive or negative variation in the actual value of the applicable Index
in any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered
Certificate, the holder must allocate the amount realized between the two
components of the Offered Certificate based on the relative fair market values
of those components at the time of sale. Assuming that an Offered Certificate
is held as a "capital asset" within the meaning of Section 1221 of the Code,
gain or loss on the disposition of an interest in the Cap Contract component
should be capital gain or loss, and gain or loss on the disposition of the
Regular Interest component should, subject to the limitation described below,
be capital gain or loss. Gain attributable to the Regular Interest component
of an Offered Certificate will be treated as ordinary income, however, to the
extent such gain does not exceed the excess, if any, of (i) the amount that
would have been includible in the holder's gross income with respect to the
Regular Interest component had income thereon accrued at a rate equal to 110%
of the applicable federal rate as defined in Section 1274(d) of the Code
determined as of the date of purchase of the Offered Certificate over (ii) the
amount actually included in such holder's income.
The Offered Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(4)(A) of the Code, generally in the same proportion that the assets in
the Trust Fund would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages
on real property" under Section 856(c)(3)(B) of the Code, generally to the
extent that the Offered Certificates are treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. Investors are cautioned that since the
Offered Certificates comprise rights in addition to the rights under the
Offered Regular Interests, the Offered Certificates will not in their entirety
constitute assets described in Section 7701(a)(19) of the Code or real estate
assets described in Section 856(c)(4)(A) of the Code, and income earned on the
Offered Regular Certificates will qualify as "interest on obligations secured
by mortgages on real property" under Section 856(c)(3)(B) of the Code only to
the extent that the income reflects the income so qualifying earned by the
Offered Regular Interests. The Offered Certificates also will not be treated
as "qualified mortgages" under Section 860G(a)(3) of the Code in their
entirety and may not be appropriate investments for REMICs. See "Certain
Federal Income Tax Consequences--REMICs-- Characterization of Investments in
REMIC Certificates" in the Prospectus.
As indicated above, a portion of the purchase price paid by a holder
to acquire an Offered Certificate will be attributable to the Cap Contract
component of such Offered Certificate. The portion of the overall purchase
price attributable to the Cap Contract component must be amortized over the
life of an Offered Certificate, taking into account the declining balance of
the related Regular Interest component. Treasury regulations concerning
notional principal contracts provide alternative methods for amortizing the
purchase price of an interest rate cap contract. Under one method - the level
yield constant interest method - the price paid for an interest rate cap is
amortized over the life of the cap as though it were the principal amount of a
loan bearing interest at a reasonable rate. Holders are urged to consult their
tax advisors concerning the methods that can be employed to amortize the
portion of the purchase price paid for the Cap Contract component of an
Offered Certificate.
Any payments made to a holder from the Basis Risk Reserve Fund will
be treated as periodic payments on an interest rate cap contract. To the
extent the sum of such periodic payments for a year exceeds that year's
amortized costs of the Cap Contract components, such excess is ordinary
income. If for any year the amount of that year's amortized cost exceeds the
sum of the periodic payments, such excess is allowable as an ordinary
deduction.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on the Trust Fund, such tax will be borne (i) by the Trustee,
if the Trustee has breached its obligations with respect to REMIC compliance
under the Agreement, (ii) the Servicer, if the Servicer has breached its
obligations with respect to REMIC compliance under the Agreement, and (iii)
otherwise by the Trust Fund, with a resulting reduction in amounts otherwise
distributable to Holders of the Offered Certificates. See "Description of the
Certificates--General" and "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee and/or the Servicer. See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Offered Certificates will be applied by the Depositor to the purchase
price of the Mortgage Loans and expenses connected with pooling the Mortgage
Loans and issuing the Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Offered Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Underwriter") and the Underwriter has agreed to purchase
the Offered Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby, if any are purchased.
The distribution of the Offered Certificates by the Underwriter will
be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the Offered
Certificates to or through dealers, and such dealers may receive from the
Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Offered Certificates may be deemed to be underwriters, and any discounts,
concessions or commissions received by them, and any profit on the resale of
the Offered Certificates positioned by them, may be deemed to be underwriting
discounts and commissions under the Act.
The Depositor has agreed to indemnify the Underwriter against, or
make contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
[All of the Mortgage Loans evidenced by the Certificates have been
acquired by the Depositor from Merrill Lynch Mortgage Capital Inc., an
affiliate, which acquired them in a privately negotiated transaction with the
Mortgage Loan Originator.]
The Depositor is an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
LEGAL MATTERS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor and the Underwriter by Brown & Wood LLP, New
York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that
they receive the respective ratings set forth below from ________ and ________
(the "Rating Agencies"):
Class _______ ______
----- ------- ------
A ___ ___
M-1 ___ ___
M-2 ___ ___
B ___ ___
The ratings of the Rating Agencies assigned to mortgage pass-through
certificates address the likelihood of the receipt by Certificateholders of
all distributions to which such Certificateholders are entitled. The rating
process addresses structural and legal aspects associated with the
Certificates, including the nature of the underlying mortgage loans. The
ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which such prepayments will differ from that
originally anticipated.
The ratings do not address the likelihood of the payment of any LIBOR
Carryover Amount.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for
any reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the
Offered Certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates as stated above.
LEGAL INVESTMENT
The Class A and Class M-1 Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization, and, as such, are legal investments for certain entities to the
extent provided in SMMEA. SMMEA provided the states could override its
provisions on legal investment and restrict or condition investment in
mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the
preemption provisions of SMMEA. The Class M-2 and Class B Certificates will
NOT be "mortgage related securities" for purposes of SMMEA.
The Depositor makes no representation as to the proper
characterization of the Offered Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Offered
Certificates under applicable legal investment restrictions. The uncertainties
may adversely affect the liquidity of the Offered Certificates. Accordingly,
all institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining
whether and the extent to which the Offered Certificates constitute a legal
investment under SMMEA or are subject to investment, capital or other
restrictions. See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans or
arrangements (including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested) that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its legal advisors whether the
purchase or holding of Offered Certificates could give rise to a transaction
that is prohibited or is not otherwise permitted either under ERISA or Section
4975 of the Code.
The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption 90-29 (the "Exemption"), on May 24, 1990 to
the Underwriter which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Sections 4975(a) and (b) of the
Code and Section 502(i) of ERISA, certain transactions, among others, relating
to the servicing and operation of mortgage pools and the purchase, sale and
holding of mortgage pass-through certificates underwritten by an Underwriter
(as hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this discussion, the term
"Underwriter" shall include (a) Merrill Lynch, Pierce, Fenner & Smith
Incorporated, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
Merrill Lynch, Pierce, Fenner & Smith Incorporated and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to the Class A Certificates.
The Exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class A Certificates to be eligible for exemptive relief thereunder. First,
the acquisition of the Class A Certificates by certain employee benefit plans
subject to Section 4975 of the Code (each, a "Plan"), must be on terms that
are at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class A Certificates must not be subordinate to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class A Certificates at the time of acquisition by the Plan must be rated
in one of the three highest generic rating categories by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (the "National Credit
Ratings Agencies"). Fourth, the Trustee cannot be an affiliate of any member
of the "Restricted Group," which consists of any Underwriter, the Depositor,
the Servicer, each sub-servicer and any mortgagor with respect to the Mortgage
Loans constituting more than 5% of the aggregate unamortized principal balance
of the Mortgage Loans as of the date of initial issuance of the Class A
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; the sum of all payments made to and retained by the Servicer and
any sub-servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501 (a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. Seventh, (i) the investment pool consists
only of assets of the type enumerated in the Exemption and which have been
included in other investment pools; (ii) certificates evidencing interests in
such other investment pools have been rated in one of the three highest
generic rating categories by one of the National Credit Rating Agencies for at
least one year prior to a Plan's acquisition of certificates; and (iii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to a
Plan's acquisition of certificates. See "ERISA Considerations" in the
Prospectus.
In addition, the Exemption will not apply to a Plan's investment in
Class A Certificates if the plan fiduciary responsible for the decision to
invest in Class A Certificates is a mortgagor or obligor with respect to more
than 5% of the fair market value of the obligations constituting the Mortgage
Loans or an affiliate of such person, unless: (1) in the case of an
acquisition in connection with the initial issuance of any Certificates, at
least 50% of each Class of Certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least 50% of
the aggregate interest in the Trust is acquired by persons independent of the
Restricted Group; (2) the Plan's investment in any Class of Certificates does
not exceed 25% of the outstanding Certificates of that Class at the time of
acquisition; (3) immediately after such acquisition, no more than 25% of the
Plan assets with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in Certificates evidencing
interest in trusts sponsored or containing assets sold or serviced by the same
entity; and (4) the Plan is not sponsored by any member of the Restricted
Group.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
BECAUSE THE CHARACTERISTICS OF THE CLASS M-1, CLASS M-2 AND CLASS B
CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF THE EXEMPTION OR ANY OTHER
ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF THE CLASS M-1, CLASS
M-2 AND CLASS B CERTIFICATES BY A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR
OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN PROHIBITED
TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES.
CONSEQUENTLY, TRANSFERS OF THE CLASS M-1, CLASS M-2 AND CLASS B CERTIFICATES
WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A
REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE, ACCEPTABLE TO AND IN
FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH
TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR
A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING
ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH
PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER; (II) IF THE PURCHASER IS AN
INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY
WHICH IS PURCHASING SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN "INSURANCE
COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF
PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE
PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED UNDER PTCE 95-60; OR
(III) AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR
HOLDING OF SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN
OR USING SUCH PLAN'S ASSETS, WILL NOT RESULT IN THE ASSETS OF THE TRUST FUND
BEING DEEMED TO BE "PLAN ASSETS" AND SUBJECT TO THE PROHIBITED TRANSACTION
REQUIREMENTS OF ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY
OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE AGREEMENT. SUCH
REPRESENTATION AS DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE
TRUSTEE BY A BENEFICIAL OWNER'S ACCEPTANCE OF A CLASS M-1, CLASS M-2 OR CLASS
B CERTIFICATE IN BOOK-ENTRY FORM. IN THE EVENT THAT SUCH REPRESENTATION IS
VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A
PLAN OR USING SUCH PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH OPINION OF COUNSEL,
SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
<S> <C>
Accrued Certificate Interest.................................................................... S-9
Adjustment Date................................................................................. S-6, S-20
Agreement....................................................................................... S-2, S-4
Applied Realized Loss Amount.................................................................... S-11, S-53
Available Funds Pass-Through Rate............................................................... S-9, S-49
Basis Risk Reserve Fund......................................................................... S-63
Cap Contract.................................................................................... S-63
CEDE............................................................................................ S-8, S-45
CEDEL........................................................................................... S-8, S-45
CEDEL Participants.............................................................................. S-46
Certificate Owners.............................................................................. S-8, S-45
Certificate Principal Balance................................................................... S-48
Certificateholder............................................................................... S-48
Certificateholders.............................................................................. S-8
Certificates.................................................................................... S-4
Class........................................................................................... Cover
Class A Certificates............................................................................ S-4, S-44
Class A Principal Distribution Amount........................................................... S-50
Class B Applied Realized Loss Amount............................................................ S-55
Class B Certificates............................................................................ S-4, S-44
Class B Principal Distribution Amount........................................................... S-51
Class B Realized Loss Amortization Amount....................................................... S-55
Class Certificate Balance....................................................................... S-44
Class M-1 Applied Realized Loss Amount.......................................................... S-55
Class M-1 Principal Distribution Amount......................................................... S-51
Class M-1 Realized Loss Amortization Amount..................................................... S-55
Class M-2 Applied Realized Loss Amount.......................................................... S-55
Class M-2 Principal Distribution Amount......................................................... S-51
Class M-2 Realized Loss Amortization Amount..................................................... S-55
Class R Certificates............................................................................ Cover, S-4, S-44
Class X Certificates............................................................................ Cover, S-4, S-44
Clearing Agency................................................................................. S-44
Collection Period............................................................................... S-8
Compensating Interest........................................................................... S-62
Cooperative..................................................................................... S-46
CPR............................................................................................. S-37
Credit Bureau Risk Score........................................................................ S-30
Cut-off Date Pool Principal Balance............................................................. S-49
Defaulted Mortgage Loans........................................................................ S-62
Definitive Certificates......................................................................... S-8
Depositaries.................................................................................... S-8, S-45
Depositary...................................................................................... S-8, S-45
Depositor....................................................................................... S-4
Determination Date.............................................................................. S-8
Distribution Date............................................................................... Cover, S-8
DTC............................................................................................. S-8
Due Date........................................................................................ S-20
ERISA........................................................................................... S-6, S-67
Euroclear....................................................................................... S-8
Euroclear Operator.............................................................................. S-46
Euroclear Participants.......................................................................... S-46
Expense Adjusted Mortgage Rate.................................................................. S-10, S-49
Expense Fee Rate................................................................................ S-10, S-49
Final Scheduled Distribution Date............................................................... S-5
Gross Margin.................................................................................... S-6, S-22
Holders......................................................................................... S-8
HUD............................................................................................. S-59
Index........................................................................................... S-2
Indirect Participants........................................................................... S-45
Interest Accrual Period......................................................................... S-49
Interest Carry Forward Amount................................................................... S-9
Interest Determination Date..................................................................... S-47
Interest Distribution Amount.................................................................... S-9
Interest Remittance Amount...................................................................... S-49
IRS............................................................................................. S-64
LIBOR Rate...................................................................................... S-9
Liquidated Mortgage Loan........................................................................ S-51
Lower Tier REMIC................................................................................ S-63
Maximum Mortgage Rate........................................................................... S-20
Mezzanine Certificates.......................................................................... S-4, S-44
Minimum Mortgage Rate........................................................................... S-20
Modeling Assumptions............................................................................ S-38
Monthly Advances................................................................................ S-12, S-18, S-49
Monthly Excess Cashflow Amount.................................................................. S-54
Monthly Excess Interest Amount.................................................................. S-44
Mortgage Loan Originator........................................................................ S-2, S-5, S-21
Mortgage Loans.................................................................................. S-5
Mortgage Pool................................................................................... S-6, S-13, S-18
Mortgaged Properties............................................................................ S-6, S-17
National Credit Ratings Agencies................................................................ S-68
Non-Agency Mortgage Loans....................................................................... S-17
Non-Offered Certificates........................................................................ S-4, S-44
Offered Certificates............................................................................ Cover, S-63
OID Regulations................................................................................. S-68
One-Month LIBOR ................................................................................ S-2, S-9
One Year Delayed First Adjustment Date Mortgage Loan............................................ S-6, S-20
Overcollateralization Amount.................................................................... S-51
Overcollateralization Release Amount............................................................ S-51
Participants.................................................................................... S-8
Pass-Through Rate............................................................................... S-19
Periodic Rate Cap............................................................................... S-38
Plan............................................................................................ S-67
Plan Assets..................................................................................... S-68
Prepayment Assumption........................................................................... S-37
Prepayment Interest Shortfalls.................................................................. S-35
Principal Distribution Amount................................................................... S-50
Principal Remittance Amount..................................................................... S-52
PTCE 95-60...................................................................................... S-68
Rating Agencies................................................................................. S-15, S-66
Realized Losses................................................................................. S-2
Relief Act...................................................................................... S-35
REMIC........................................................................................... S-2
Residual Certificates........................................................................... Cover, S-38
Senior Certificates............................................................................. S-4, S-49
Senior Enhancement Percentage................................................................... S-52
Senior Specified Enhancement Percentage......................................................... S-52
Servicer........................................................................................ S-2, S-5, S-56
Servicing Transfer Date......................................................................... S-5, S-59
Six-Month LIBOR................................................................................. S-28
SMMEA........................................................................................... S-16, S-67
Stated Principal Balance........................................................................ S-9, S-49
Stepdown Date................................................................................... S-52
Subordinated Certificates....................................................................... S-4
Targeted Overcollateralization Amount........................................................... S-52
Terms and Conditions............................................................................ S-47
Trigger Event................................................................................... S-52
Trust Fund...................................................................................... S-2, S-4
Trustee......................................................................................... S-5, S-66
Trustee Fee..................................................................................... S-10
Two Year Delayed First Adjustment Date Mortgage Loan............................................ S-6
Underwriter .................................................................................... S-65
Underwriting Agreement.......................................................................... S-65
Unpaid Realized Loss Amount..................................................................... S-55
Upper Tier REMIC................................................................................ S-63
Voting Rights................................................................................... S-62
60+ Day Delinquent Loan......................................................................... S-52
</TABLE>
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SERIES _____-_____
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
$_____________ CLASS A CERTIFICATES
$___________ CLASS M-1 CERTIFICATES
$___________ CLASS M-2 CERTIFICATES
$_____________ CLASS B CERTIFICATES
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH & CO.
You should rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information.
We are not offering the Certificates in any state where the offer is
not permitted.
Until the expiration of 90 days after the date of this prospectus
supplement, all dealers selling the offered certificates, whether or not
participating in this distribution, will 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.
Prospectus Supplement
(To Prospectus Dated _______, ____
$--------
---------------
Asset-Backed Notes, Series ____-__, Class A-F
$--------
---------------
Asset-Backed Notes, Series ____-__, Class A-V
[LOGO]
-------------------------
Seller and Master Servicer
Merrill Lynch Mortgage Investors, Inc.
Depositor
___________________ Series ____- (the "Series ____-F Issuer") will be
formed pursuant to a Trust Agreement, dated as of _____ __, ____, between
Merrill Lynch Mortgage Investors, Inc. (the "Depositor") and ___________, (the
"Owner Trustee"). The Series ____-F Issuer will issue $___________aggregate
principal amount of _____________ Home Equity Loan Asset-Backed Notes, Series
____-__ (the "Class A-F Notes"). The Class A-F Notes will be issued pursuant
to an Indenture, dated as of ____ __, ____, between the Series ____-__ Issuer
and ________, (the "Indenture Trustee"). ________Home Equity Loan Trust Series
____-V (the "Series ____-V Issuer") will be formed pursuant to a Trust
Agreement, dated as of _______, ____, between the Depositor and the Owner
Trustee. The Series _____-V Issuer will issue $___________ aggregate principal
amount of Home Equity Loan Asset-Backed Notes, Series _____-_V (the "Class A-V
Notes"). The Class A-V Notes will be issued pursuant to an Indenture, dated as
of ________, ____, between the Series _____-V Issuer and the Indenture
Trustee. Only the Class A-F Notes and the Class A-V Notes (together the
"Notes") are offered hereby.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
----------
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
----------
Before buying these securities, you should consider the factors set
forth under "Risk Factors" beginning on page S-__ of this prospectus
supplement.
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 $____________ 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 $__________ 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 ________, ____ in
book-entry form through The Depository Trust Company, Cedelbank and the
Euroclear System as discussed herein, against payment therefor in immediately
available funds.
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.
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 with sufficient
liquidity of investment. The Notes will not be listed on any securities
exchange.
--------------------------
Merrill Lynch & Co.
--------------------------
The date of this Prospectus Supplement is ______, ___
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary................................................................2
Risk factors..........................................................11
Description of theHome Equity Loan Pool...............................12
The Seller............................................................24
The Series _____-F Issuer.............................................24
The Series _____-V Issuer.............................................25
The Owner Trustee.....................................................25
The Indenture Trustee.................................................25
_______________________...............................................25
Description of the Notes..............................................27
Certain Yield and Prepayment Considerations...........................38
Description of the Servicing Agreements...............................46
The Indentures........................................................50
Material Federal Income Tax Consequences..............................52
Method of Distribution................................................52
Legal Opinions........................................................53
Ratings...............................................................53
Legal Investment......................................................53
ErisaConsiderations...................................................53
Experts...............................................................54
Index of Principal Definitions........................................55
Prospectus
Available Information...................................................
Incorporation of Certain Information by Reference.......................
Summary of Prospectus...................................................
Description of the Trust Funds..........................................
Use of Proceeds.........................................................
Yield Considerations....................................................
The Depositor...........................................................
Description of the Securities...........................................
Description of the Agreements...........................................
Description of Credit Support...........................................
Certain Legal Aspects of Mortgage Loans.................................
Material Federal Income Tax Consequences................................
State Tax Considerations................................................
ERISA Considerations....................................................
Legal Investment........................................................
Plan of Distribution....................................................
Legal Matters...........................................................
Financial Information...................................................
Rating..................................................................
<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.
The Notes................................ $_____________ Home Equity Loan
Asset-Backed Notes, Series
_____-F and $________ Home Equity
Loan Asset-Backed Notes, Series
______-V. The Notes will be
issued pursuant to two separate
indentures, each dated as of
_____ , ____, 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 Home Equity Loan Trust
Series ____-F, the Series ____-F
Issuer, and the Class A-V Notes
will be issued by Home Equity
Loan Trust Series ____-V, the
Series -V -------- Issuer, each a
Delaware business trust
established pursuant to a Trust
Agreement, dated as of _____,
____, 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 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. See "The Depositor" in the
prospectus.
Seller................................... ___________________ . See
"Description of the Home Equity
Loan Pool-- The Seller" herein.
Master Servicer.......................... ___________________. See
"Description of the Servicing
Agreement-- The Master Servicer"
herein.
Sub-Servicer............................. ___________________. See
"Description of the Servicing
Agreement -- The Sub-Servicer"
herein.
Owner Trustee............................ ___________________, a Delaware
_________.
Indenture Trustee........................ ___________________, a
____________.
Cut-off Date............................. ___________.
Closing Date............................. On or about _____, ______.
Payment Date............................. The [25th] day of each month (or,
if such day is not a business
day, the next business day),
beginning on ______, _____.
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 Cedelbank or
Euroclear, in Europe. Transfers
within DTC, Cedelbank 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,
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 of home
equity loans. The loans in each
loan group are referred to herein
as the "fixed rate loans" and the
"adjustable rate loans."
Fixed Rate Loans. The fixed rate
loans are secured by first and
second liens on one- to four-
family real properties. The
initial fixed rate loans have
individual principal balances as
of the cut-off date of at least
$________ but not more than
$_______ with an average
principal balance as of the
cut-off date of approximately
$______. Approximately _____% of
the initial fixed rate loans (by
aggregate principal balance 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 ___
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 ____% per annum
but not more than _____% per
annum, with a weighted average of
______% .
Approximately ____% 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
$_______ but not more than
$_______ with an average
principal balance as of the
cut-off date of approximately
$_______. The initial adjustable
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 ___ months as of
the cut-off date.
The mortgage rate on the
adjustable rate loans will be
adjustable, subject to adjustment
commencing:
o with respect to approximately
_____% of the initial adjustable
rate loans approximately six
months after the date of
origination,
o with respect to approximately
_____% of the initial adjustable
rate loans, approximately two
years after origination,
o with respect to approximately
_____% of the initial adjustable
rate loans, approximately three
years after origination and
o with respect to approximately
_____% of the initial adjustable
rate loans, approximately five
years after origination on the
adjustment date to equal the sum
(rounded as described herein) of
the index described below and a
fixed percentage set forth in the
related mortgage note.
However,
o on any adjustment date such
mortgage rate may not increase or
decrease by more than the
periodic rate cap, except as
described herein,
o over the life of such
adjustable rate loan, such
mortgage rate may not exceed the
related maximum mortgage rate,
which maximum mortgage rates will
range from _____% per annum to
_____% per annum and
o over the life of such
adjustable rate loan, such
mortgage rate may not be lower
than a specified minimum mortgage
rate, which minimum mortgage
rates will range from _____% per
annum to _____% per annum.
The adjustable rate loans will
have gross margins ranging from
_____% per annum to _____% per
annum with a weighted average of
_____% 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 $___________ from
the sales proceeds of the Class
A-F Notes will be deposited in an
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 described
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
$____________ from the sales
proceeds of the Class A-V Notes
will be deposited in an 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 described
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 are the periods
commencing on the closing date
and ending on the earlier to
occur of the date on which the
amount on deposit in the Class
A-V pre-funding account is less
than $_______, and _____, ____.
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 for application by the
indenture trustee to cover
shortfalls in the Class A-F
interest payment amount (as
described 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 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.
Interest Payments........................ Interest on the Class A-F Notes
will be paid monthly on each
payment date, commencing in
_______, in an amount which is
equal to interest accrued on the
Class A-F Note principal balance
immediately prior to such payment
date at ____% per annum. 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 is referred to herein as
the Class A-F original pool
balance. Interest on the Class
A-V Notes will be paid monthly on
each payment date, commencing in
________, in an amount which is
equal to the lesser of
o interest accrued on the Class
A-V note principal balance
immediately prior to such payment
date at the Class A-V note
interest rate for the related
interest period and
o the guaranteed interest
payment amount. The Class A-V
note interest rate on each
payment date will be a floating
rate equal to the lesser of
o (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, One-Month LIBOR (as
defined herein) plus ____% and
(b) with respect to each
Payment Date thereafter,
One-Month LIBOR plus ____% and
o ____% per annum.
Interest in respect of any
Payment Date on the Class A-F
Notes will accrue on the basis of
a 360-day year consisting of
twelve 30-day months and 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 on the basis of the
actual number of days in the
Interest Period and a 360-day
year.
With respect to each loan and
each payment date, the master
servicer will be entitled to a
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 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 _____% per
annum, the indenture trustee fee
rate is equal to _____% per
annum, the owner trustee fee is
$______ per annum (payable on the
payment date in ____ 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, times the note
principal balance of the Class
A-F Notes or the Class A-V Notes,
as applicable. With respect to
each adjustable rate loan and
each payment date, the minimum
spread is equal to 1/12 of ____%
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 further
described 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 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 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.
Any loss on a liquidated loan
(i.e., a realized loss), 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
described 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............................. _________________. See
"____________" herein.
Note Insurance Policies.................. On the closing date, the note
insurer will issue a note
insurance policy in favor of the
indenture trustee for the benefit
of the holders of the Class A-F
Notes and 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 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 of the excess,
if any, of (x) 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
_____-F and Trust Certificates,
Series ____-V. 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 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--Overcollateralization
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, to
make 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 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 _____% and _____%
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
_____% 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 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, Brown & Wood LLP,
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 ____-F Issuer and the
Series ____-V 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
Internal Revenue 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, or Section 4975
of the Internal Revenue Code
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. 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.
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, 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.
<PAGE>
RISK FACTORS
You 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:
Delinquencies and Potential Delinquencies
Approximately ____% and ____% 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 ____% and ____% 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 _______. In the event ________
experiences a decline in real estate values, losses on the Loans may be
greater than otherwise would be the case.
Approximately ____% and ____% 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 ___%. 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 ___% 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 ___% 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 you 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 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 ______% 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 ____% (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 ____%),
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."
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 _______, _____, 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 $__________________. The
Depositor will acquire the Initial Fixed Rate Loans to be included in the Home
Equity Loan Pool from _____________________ (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. All of
the Fixed Rate Loans will be master serviced by ___________________ (in such
capacity, the "Master Servicer") and subserviced by ____________ (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 ________ 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 _______
will be pledged to the Indenture Trustee for the benefit of the Class A-F
Noteholders and the Note Insurer.
Approximately _____% 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 ___%. 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 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 ____% and _____%, respectively, and the weighted average
Loan-to-Value Ratio at origination of the Initial Fixed Rate Loans was
approximately _____% . 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 _____% and _____%, respectively,
and the weighted average Combined Loan-to-Value Ratio at origination of the
Initial Fixed Rate Loans was approximately ______%. 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 ____% 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 $______ or more than $______ and the
average unpaid principal balance of the Initial Fixed Rate Loans will be
approximately $______. The latest stated maturity date of any of the Initial
Fixed Rate Loans will be in _______; 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 ___ months. The weighted average
original term to maturity of the Initial Fixed Rate Loans will be
approximately ___ months.
The earliest year of origination of any Initial Fixed Rate Loan is
____ and the latest month and year of origination is ______.
With respect to approximately _____% 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 ____% 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.
<PAGE>
<TABLE>
<CAPTION>
Fixed Rate Loan Geographic Distribution of Mortgaged Properties
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
State Fixed Rate Loans Principal Balance Principal Balance
- ----- ---------------- ----------------- -----------------
<S> <C> <C>
[Alaska $ %
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
Nebraska
New Hampshire
New Jersey
New Mexico
Nevada
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming]
Total.......................... $ 100.00%
=======
No more than approximately _____% of the Initial Fixed Rate Loans will be secured by Mortgaged
Properties in any one zip code.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Balances of the Initial Fixed Rate Loans at Origination
Percentage of
Cut-off Date
Original Home Equity Number of Initial Aggregate Unpaid Aggregate
Loan Principal Balance ($) Fixed Rate Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0.01- 25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
400,000.01- 450,000.00
Total................................ $ 100.00%
=======
The average principal balance of the Initial Fixed Rate Loans at origination will be approximately
$-------.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Balances of the Initial Adjustable Rate Loans at the Cut-off Date
Percentage of
Cut-off Date
Cut-off Date Home Equity Number of Initial Aggregate Unpaid Aggregate
Loan Principal Balance ($) Adjustable Rate Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0.01 - 25,000.00 $ %
25,000.01 - 50,000.00 ............
50,000.01 - 75,000.00 ............
75,000.01 - 100,000.00 ............
100,000.01 - 125,000.00 ............
125,000.01 - 150,000.00 ............
150,000.01 - 175,000.00 ............
175,000.01 - 200,000.00 ............
200,000.01 - 225,000.00 ............
225,000.01 - 250,000.00 ............
250,000.01 - 275,000.00 ............
275,000.01 - 300,000.00 ............
300,000.01 - 325,000.00 ............
325,000.01 - 350,000.00 ............
350,000.01 - 400,000.00 ............
400,000.01 450,000.00 ............
450,000.01 - 500,000.00 ............
500,000.01 - 550,000.00 ............
550,000.01 - 600,000.00 ............
600,000.01 - 650,000.00 ............
700,000.01 - 750,000.00 ............
Total........................... $ 100.00%
=======
The average Cut-off Date principal balance of the Initial Adjustable Rate Loans will be approximately
$---------.
</TABLE>
<TABLE>
<CAPTION>
Original Term to Maturity
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Original Term Adjustable Rate Loans Principal Balance Principal Balance
--------------------- ----------------- -----------------
<S> <C> <C>
180..................................... $ %
360.....................................
Total.......................... $ 100.00%
=======
The weighted average Original Term to Maturity at origination of the Initial Adjustable Rate Loans will
be approximately _____ months.
</TABLE>
<TABLE>
<CAPTION>
Remaining Term to Maturity
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Remaining Term Adjustable Rate Loans Principal Balance Principal Balance
<S> <C> <C>
121-180 $ %
301-360
Total......................... $ 100.00%
=======
The weighted average Remaining Term to Maturity at origination of the Initial Adjustable Rate Loans will
be approximately ____ months.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Documentation Type
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Documentation Type Adjustable Rate Loans Principal Balance Principal Balance
- ------------------ --------------------- ----------------- -----------------
<S> <C> <C>
Limited................................ $ %
Stated.................................
Full...................................
Total......................... $ 100.00%
= =======
</TABLE>
<TABLE>
<CAPTION>
Occupancy Types
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>
Investor Non-Owner-Occupied............ $ %
Owner..................................
Secondary..............................
Total......................... $ 100.00%
= =======
</TABLE>
<TABLE>
<CAPTION>
Risk Categories of Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Risk Category Adjustable Rate Loans Principal Balance Principal Balance
- ------------- --------------------- -----------------
<S> <C> <C>
A..................................... $ %
A-....................................
B.....................................
C.....................................
C-....................................
D.....................................
Other.................................
Total........................ $ 100.00%
= =======
See "-- Underwriting" below for a description of the credit categories of the Loans.
</TABLE>
<TABLE>
<CAPTION>
Property Types
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Property Type Adjustable Rate Loans Principal Balance Principal Balance
------------- --------------------- ----------------- -----------------
<S> <C> <C>
Single Family Detached.................. $ %
Single Family Attached..................
Three- to Four-Family...................
Condominium.............................
Townhouse...............................
Manufactured Housing....................
Total.......................... $ 100.00%
= =======
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Purposes of Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Purpose Adjustable Rate Loans Principal Balance Principal Balance
-------
<S> <C> <C>
Refinance-Cashout..................... $ %
Rate and Term Refinance...............
Purchase..............................
Total........................ $ 100.00%
= =======
See "-- Underwriting" below for a description of loan purpose.
</TABLE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios
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>
5.01 - 10.00 .................... $ %
15.01 - 20.00 ....................
25.01 - 30.00 ....................
30.01 - 35.00 ....................
35.01 - 40.00 ....................
40.01 - 45.00 ....................
45.01 - 50.00 ....................
50.01 - 55.00 ....................
55.01 - 60.00 ....................
60.01 - 65.00 ....................
65.01 - 70.00 ....................
70.01 - 75.00 ....................
75.01 - 80.00 ....................
80.01 - 85.00 ....................
85.01 - 90.00 ....................
90.01 - 95.00 ....................
Total..................... $ 100.00%
=======
The weighted average Loan-to-Value Ratio at origination of the Initial Adjustable Rate Loans will be
approximately ______%.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Mortgage Rates at Origination
for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Mortgage Rates (%) Adjustable Rate Loans Principal Balance Principal Balance
- ------------------ --------------------- ----------------- -----------------
<S> <C> <C>
6.01 - 6.50....................... $ %
6.51 - 7.00.......................
7.01 - 7.50.......................
7.51 - 8.00.......................
8.01 - 8.50.......................
8.51 - 9.00.......................
9.01 - 9.50.......................
9.51 - 10.00.......................
10.01 - 10.50.......................
10.51 - 11.00.......................
11.01 - 11.50.......................
11.51 - 12.00.......................
12.01 - 12.50.......................
12.51 - 13.00.......................
13.01 - 13.50.......................
13.51 - 14.00.......................
14.01 - 14.50.......................
14.51 - 15.00.......................
15.01 - 15.50.......................
15.51 - 16.00.......................
16.01 - 16.50.......................
16.51 - 17.00.......................
Total............................. $ 100.00%
=======
The weighted average Mortgage Rate of the Initial Adjustable Rate Loans at origination will be
approximately ________% per annum.
</TABLE>
<TABLE>
<CAPTION>
Minimum Mortgage Rates at Cut-off Date
for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Minimum Mortgage Rates (%) Adjustable Rate Loans Principal Balance Principal Balance
-------------------------- --------------------- ----------------- -----------------
<S> <C> <C>
6.01 - 6.5.................... $ %
6.51 - 7.0....................
7.01 - 7.5....................
7.51 - 8.0....................
8.01 - 8.5....................
8.51 - 9.0....................
9.01 - 9.5....................
9.51 - 10.0....................
10.01 - 10.5....................
10.51 - 11.0....................
11.01 - 11.5....................
11.51 - 12.0....................
12.01 - 12.5....................
12.51 - 13.0....................
13.01 - 13.5....................
13.51 - 14.0....................
14.01 - 14.5....................
14.51 - 15.0....................
15.01 - 15.5....................
15.51 - 16.0....................
16.01 - 16.5....................
16.51 - 17.0....................
Total........................... $ 100.00%
=======
The weighted average Minimum Mortgage Rate of the Initial Adjustable Rate Loans as of Cut-off Date will
be approximately _______% per annum.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Next Adjustment Date
for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Next Adjustment Date Adjustable Rate Loans Principal Balance Principal Balance
- -------------------- --------------------- ----------------- -----------------
<S> <C> <C>
_______, ________..................... $ %
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
- -------, --------.....................
Total........................... $ 100.00%
=======
The weighted average remaining months to the next Adjustment Date of the Initial Adjustable Rate Loans
will be approximately __ months.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Maximum Mortgage Rate
for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Maximum Mortgage Rates (%) Adjustable Rate Loans Principal Balance Principal Balance
-------------------------- --------------------- ----------------- -----------------
<S> <C> <C>
12.51- 13.00...................... $ %
13.01- 13.50......................
13.51- 14.00......................
14.01- 14.50......................
14.51- 15.00......................
15.01- 15.50......................
15.51- 16.00......................
16.01- 16.50......................
16.51- 17.00......................
17.01- 17.50......................
17.51- 18.00......................
18.01- 18.50......................
18.51- 19.00......................
19.01- 19.50......................
19.51- 20.00......................
20.01- 20.50......................
20.51- 21.00......................
21.01- 21.50......................
21.51- 22.00......................
22.01- 22.50......................
22.51- 23.00......................
23.01- 23.50......................
Total....... $ 100.00%
=======
The weighted average Maximum Mortgage Rate of the Initial Adjustable Rate Loans will be approximately
_______% per annum.
</TABLE>
<TABLE>
<CAPTION>
Gross Margin
for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Gross Margin (%) Adjustable Rate Loans Principal Balance Principal Balance
- ---------------- --------------------- ----------------- -----------------
<S> <C> <C>
4.01 - 4.50......................... $ %
4.51 - 5.00.........................
5.01 - 5.50.........................
5.51 - 6.00.........................
6.01 - 6.50.........................
6.51 - 7.00.........................
7.01 - 7.51.........................
7.51 - 8.00.........................
8.01 - 8.50.........................
8.51 - 9.00.........................
9.01 - 9.50.........................
9.51 - 10.00.........................
10.01 - 10.50.........................
10.51 - 11.00.........................
11.01 - 11.50.........................
Total.............................. $ 100.00%
=======
The weighted average Gross Margin of the Initial Adjustable Rate Loans will be approximately _____% per
annum.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Initial Periodic Rate Cap for Initial Adjustable Rate Loans
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.................................. $ %
3.000..................................
Total............................ $ 100.00%
= =======
The weighted average Initial Periodic Rate Cap of the Initial Adjustable Rate Loans will be
approximately %.
</TABLE>
<TABLE>
<CAPTION>
Periodic Rate Cap for Initial Adjustable Rate Loans
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Periodic Rate Cap Adjustable Rate Loans Principal Balance Principal Balance
- ----------------- --------------------- ----------------- -----------------
<S> <C> <C>
1.500.................................. $ %
Total............................ $ 100.00%
Number of Days Delinquent
</TABLE>
<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............................... $ %
30-59 Days..............................
Total.......................... $ 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 ____-V 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 ____-V Issuer pursuant
to Subsequent transfer instruments (the "Subsequent Transfer Instruments")
between the Seller and the Series ____-V Issuer. In connection with the
purchase of Subsequent Adjustable Rate Loans on such dates of transfer (the
"Subsequent Transfer Dates"), the Series ____-V 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 -V 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 $_______ (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 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) _____, _____.
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 _______%; (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 ____%;
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
[Description of Seller's Underwriting].
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
_____-F Issuer, the Series _____-V 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.
[Description of the Seller].
No person other than the Seller and ___________ 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 ________ 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 _________ 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, you should consider the possibility that the Seller
and _________ 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 _______-F ISSUER
Home Equity Loan Trust Series _______-F is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement, dated
as of _________, ____, between the Depositor and ________________ 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
_____-F Issuer will not engage in any activity other than (i) acquiring and
holding the Fixed Rate Loans and the other assets of the Series _____-F 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 _____-F 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 ____-F Issuer will consist of the Fixed Rate
Loans and certain related assets pledged to secure the Class A-F Notes.
The Series ____-F Issuer's principal offices are in Wilmington,
Delaware, in care of _______________, as Owner Trustee.
THE SERIES ____-V ISSUER
Home Equity Loan Trust Series ____-V is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement, dated as of
_______, ____, 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
____-V Issuer will not engage in any activity other than (i) acquiring and
holding the Adjustable Rate Loans and the other assets of the Series ____-V
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 ____-V 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 ____-V Issuer will consist of the Adjustable
Rate Loans and certain related assets pledged to secure the Class A-V Notes.
The Series ____-V Issuer's principal offices are in Wilmington,
Delaware, in care of __________________, as Owner Trustee.
THE OWNER TRUSTEE
______________________ is the Owner Trustee under each Trust
Agreement. The Owner Trustee is a Delaware ____________________ 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 ____-F Issuer, the
Series ____-V 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
___________________________________, a _______________________, 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
_______________________________________, Attention: Home Equity Loan Trust
Series ____-F or Attention: Home Equity Loan Trust Series ____-V, as
applicable.
-----------------------
The following information has been supplied by ____________________
(the "Note Insurer") for inclusion in this Prospectus Supplement.
General
[Note Insurer information].
The principal executive offices of the Note Insurer are located at
_________________________________________, and its telephone number at that
location is (___) ___-____.
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]. 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 ______________, ____ (in thousands):
<TABLE>
<CAPTION>
----------, ----
(unaudited)
------------------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)..................... $
Shareholder's Equity:
Common Stock...................................................................
Additional Paid-in Capital.....................................................
Unrealized Gain on Investments (net of deferred income taxes)..................
Accumulated Earnings...........................................................
Total Shareholder's Equity.........................................................
Total Deferred Premium Revenue and Shareholder's Equity............................ $
===========
</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 are hereby incorporated by reference in this
Prospectus Supplement, which together with the Prospectus, forms a part of the
Depositor's Registration Statement: (a) the Annual Report on Form 10-K for the
year ended ____________, ____ and (b) the Quarterly Report on Form 10-Q for
the three-month period ended _____________, ____.
All financial statements of the Note Insurer and subsidiaries
included in documents filed 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 __________ 1, ____, between the Series ____-F Issuer and
__________________, as Indenture Trustee. The Class A-F Certificates (together
with the Class A-F Notes, the "Series ____-F Securities") will be issued
pursuant to the Trust Agreement dated as of __________, 1998, between the
Depositor and ___________________, 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 ___________ 1, ____, between the Series ____-V
Issuer and ________________________, as Indenture Trustee. The Class A-V
Certificates (together with the Class A-V Notes, the "Series ____-V
Securities") will be issued pursuant to the Trust Agreement dated as of
________, _____, between the Depositor and ______________________, 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 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 Cedelbank ("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.
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.
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 ________________.
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, __________ 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 ________ and __________ ______, 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 ___%
per annum.
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
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 ____% per annum, the Indenture Trustee Fee Rate is equal to
_____% per annum, the Owner Trustee Fee is $______ per annum (payable on the
Payment Date in __________ 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) minus the amount by which
the Class A-F Interest Payment Amount exceeds the Class A-F
Available Funds and (b) the Subordination Deficit relating 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.
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
"____-F Insurance Agreement") and (c) interest on the foregoing as
set forth in the Insurance Agreement from the date such amounts
became due until paid in full (the "Reimbursement Amount");
(iv) to Class A-V Notes, if necessary, any amounts to pay (x)
the amount by which the Class A-V Interest Payment Amount exceeds
Class A-V Available Funds for such related Loan Group on such
Payment Date and (y) any Realized Loss 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 Note Insurance Policy relating to
the Class A-V Notes which have not previously been reimbursed, (b)
any other amounts due to the Note Insurer pursuant to the Series
____-V Insurance Agreement (as defined herein), to the extent not
previously paid or reimbursed and (c) interest on the foregoing as
set forth in the ____-V 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 ____-F 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. 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 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
any shortfalls in amounts to pay the Class A-V Interest Payment Amount and any
Subordination Deficit relating to such Payment Date and any such Net Monthly
Excess Cashflow remaining after a application of items (i) --(viii) under
"--Class A-F Notes --Priority of Payments" herein shall be available 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 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 ____, and (b) with respect to each Payment Date
thereafter, One-Month LIBOR plus ____% and (ii) _____ % 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 ____% per annum, the Indenture Trustee Fee Rate is equal to
_____% per annum, the Owner Trustee Fee is $______ per annum (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 ____% 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 ___________, 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 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) minus the amount by which
the Class A-V Interest Payment Amount exceeds the Class A-V
Available Funds and (b) the Subordination Deficit relating 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 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
"____-V Insurance Agreement") and (c) interest on the foregoing as
set forth in the Insurance Agreement from the date such amounts
became due until paid in full (the "Reimbursement Amount");
(iv) to Class A-F Notes, if necessary, any amounts to pay (x)
the amount by which the Class A-F Interest Payment Amount exceeds
Class A-F Available Funds for such related Loan Group on such
Payment Date and (y) any Realized Loss 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 Note Insurance Policy relating to
the Class A-F Notes which have not previously been reimbursed, (b)
any other amounts due to the Note Insurer pursuant to the ____-F
Insurance Agreement to the extent not previously paid or reimbursed
and (c) interest on the foregoing as set forth in the ____-F
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 ____-V 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 (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 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
any shortfalls in amounts to pay the Class A-F Interest Payment Amount and any
Subordination Deficit relating to such Payment Date and any such Net Monthly
Excess Cashflow remaining after application of items (i)-(viii) under "--Class
A-V Notes--Priority of Payments" herein shall be available 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 ____________ (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
(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 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
amortized 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 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 ______________ 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.
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 ______% and _____% 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 _____% 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 Adjustable Rate Loans
generally are assumable under certain circumstances if, in the sole judgment
of the Master Servicer, the prospective purchaser of a Mortgaged Property is
creditworthy and the security for such Adjustable Rate Loan is not impaired by
the assumption. The Fixed 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 or
deteriorating economy 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 _____% (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
____%), 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 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 "Prepayment Assumption"). The levels of CPR used above in defining the
Prepayment Assumption represent 100% of the 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 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:
<PAGE>
<TABLE>
<CAPTION>
Fixed Rate Loans
Original Remaining Original
Term to Term to Amortization Mortgage
Principal Maturity Maturity Term Interest Amortization
Balance (in months) (in months) (in months) Rate Method
Initial Loans
<S> <C> <C> <C> <C> <C> <C>
%
%
%
%
Subsequent Loans
%
%
%
%
</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 ___________; (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
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 Class A-F Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Class A-F 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 _______%
per annum and the Servicing Fee Rate is _____% per annum; (viii) there are
additional ongoing Trust Estate expenses of approximately $_________ per 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 __________,
____ and are assumed to have their first scheduled monthly payment due in
_________; and (xii) the Notes will be purchased on _________ , ____.
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 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.
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class A-F Note Principal Balance Outstanding
at the Specified Percentages of CPR or the Prepayment Assumption
Scenario(1)(4)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans(2)............................. 0% 25% 75% 100% 125% 175% 200%
Payment Date
Initial Percentage.............................. 100% 100% 100% 100% 100% 100% 100%
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
Weighted Average Life in Years(3)(4)............
Weighted Average Life in Years(3)(5)............
</TABLE>
- -----------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the 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 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.
(5) Assumes that the Class A-F Notes remain outstanding to their maturity
date.
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.
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 "Prepayment
Assumption"). The levels of CPR used above in defining the Prepayment
Assumption represent 100% of the 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:
<TABLE>
<CAPTION>
Adjustable Rate Loans
Principal Original Remaining
Balance Term to Term to Mortgage Months
Maturity Maturity Interest Gross to Life Life Period Initial
(in months) (in months) Rate Margin Rate Change Cap Floor Cap Cap
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Loans
$
Subsequent Loans
$
</TABLE>
(ii) One-Month LIBOR remains constant at _______%; (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 [25]th day of each month, commencing in
____________; (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 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 _____% 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 ____% per annum and the Servicing Fee Rate is
____% per annum; (xi) there are additional ongoing Trust Estate expenses of
approximately $________ per 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 _____________ and are assumed to have
their first scheduled monthly payment due in ____________; and (xv) the Class
A-V Notes will be purchased on ___________, _____.
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
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 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.
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class A-V Note Principal Balance Outstanding
at the Specified Percentages of CPR or the Prepayment Assumption
Scenario(1)(4)
Adjustable Rate Loans(2) 0% 10% 20% 25% 30% 40% 50%
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Payment Date
Initial Percentage................................ 100% 100% 100% 100% 100% 100% 100%
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
Weighted Average Life in Years(3)(4)..............
Weighted Average Life in Years(3)(5)..............
</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 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.
(5) Assumes that the Class A-V Notes remain outstanding to their
maturity date.
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.
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 _________ 1, ____, 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
___________________________ (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.
______________________ (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.
[Sub-Servicer information].
The Notes will not represent an interest in or obligation of, nor are
the Loans guaranteed by, the Sub-Servicer.
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 _________, ____, and for each of the four prior years ended
____________. 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 _________, ____, approximately ________
mortgage loans with an aggregate principal balance as of such date of
approximately $_________, 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>
Three Months Ending Year Ending ,
---------------------- ---------------------------------------------------------------------------------
March 31, 1998 ____ ____ ____ ____
---------------------- ------------------ ----------------- ---------------- ----------------
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...........
Delinquency
Percentage(1)
30-59 days.....
60-89 days.....
90 days or more.
Total...............
Foreclosure Rate(2).
REO Properties(3)...
- ----------------------
</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.
<PAGE>
<TABLE>
<CAPTION>
Loan Loss Experience of the Sub-Servicer's Owned and
Managed Servicing Portfolio of Loans*
Year Ending December 31,
------------- ---------------------------------------------------------
Three Months
Ending
-------,
---- ---- ---- ---- ----
------------- ---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average amount outstanding(1) $ $ $ $ $
Gross losses(2)... $ $ $ $ $
Recoveries(3)...... $ $ $ $ $
Net losses(4)...... $ $ $ $ $
Net losses as a percentage of average
amount outstanding(5) % % % % %
</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) For the three months ended __________, _____, "Net losses as a
percentage of average amount outstanding" was annualized by
multiplying Net Losses by four before calculating the percentage of
"Net losses as a percentage of average amount outstanding."
*Managed portfolio statistics restated to exclude interest advances on
serviced portfolio to be consistent with presentation of owned portfolio
<PAGE>
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, if the Note Insurer does not object in
writing to such change or extension specified in such notice to the Note
Insurer within five (5) Business Days after its receipt thereof, the Master
Servicer may effectuate such change or extension and the Note Insurer shall be
deemed to approve such action; provided further, 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 ____% 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 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 ____-F Issuer and the Series ____-V 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, 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.
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, Brown & Wood LLP, 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 under each of
the Series ____-F Issuer and the Series ____-V 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 ____-F Issuer and the Series ____-V 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.
You 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement dated __________, ____ with respect to the Class A-F Notes and an
underwriting agreement 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 ___________, _____, 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 $___________, 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 $___________, 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 ________________, and for the Depositor
and the Underwriter by Brown & Wood LLP, 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.
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 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 ___________________________ and
its subsidiaries as of _____________, _____ and _____________________, _____
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
_______________, ____, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of
____________________ independent accountants, given on the authority of that
firm as experts in accounting and auditing.
<PAGE>
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
Page(s) on which term
is defined in the
Terms Prospectus Supplement
---------------------
<S> <C>
____-V Insurance Agreement.......................................................36
____-F Insurance Agreement.......................................................32
2/28 or 2/13 Loan.................................................................6
3/27 Loan.........................................................................6
5/25 Loan.........................................................................6
Adjustable Rate Loans.............................................................1
Administrative Fee............................................................8, 35
Advances.........................................................................11
aggregate risks..................................................................28
Balloon Loan.....................................................................13
Balloon Payment..................................................................13
Carry-Forward Amount..........................................................8, 34
Class A-F Interest Coverage Account...............................................7
Class A-F Interest Payment Amount.............................................7, 31
Class A-F Notes...................................................................1
Class A-F Original Pre-Funded Amount..............................................7
Class A-F Pre-Funding Account.....................................................7
Class A-V Interest Coverage Account...............................................7
Class A-V Interest Payment Amount.............................................7, 34
Class A-V Notes...................................................................1
Class A-V Notes--Cross-collateralization..........................................37
Class A-V Original Pool Balance................................................3, 8
Class A-V Original Pre-Funded Amount..........................................7, 25
Class A-V Pre-Funded Amount......................................................25
Class A-V Pre-Funding Account.................................................7, 25
Compensating Interest............................................................52
CPR..............................................................................42
Definitive Note...............................................................6, 29
Depositor......................................................................1, 5
Disqualified Persons.............................................................56
DOL..............................................................................56
DTC...........................................................................3, 29
Due Period...................................................................33, 37
ERISA........................................................................12, 55
European Depositaries............................................................29
Financial Intermediary...........................................................29
Fixed Rate Loans..................................................................1
Fixed Rate Purchase Agreement....................................................14
Gross Margin......................................................................6
Indenture.........................................................................5
Indenture Trustee.................................................................1
Indenture Trustee Fee.....................................................8, 31, 35
Initial Adjustable Rate Loans.....................................................1
Initial Fixed Rate Loans..........................................................1
Initial Loans....................................................................14
Interest Coverage Account........................................................40
Interest Period...................................................................8
Loan Group.....................................................................1, 6
Loans.........................................................................6, 14
Loan-to-Value Ratio..............................................................15
Master Servicer...........................................................5, 14, 49
Maximum Interest Rate......................................................3, 8, 34
Maximum Mortgage Rate.............................................................6
Minimum Mortgage Rate.............................................................7
Moody's...................................................................3, 12, 55
Mortgaged Property................................................................6
Note Insurance Policy.............................................................1
Note Insurer...............................................................1, 9, 27
Note Interest Rate................................................................3
Notes.........................................................................1, 29
One-Month LIBOR..................................................................35
Order............................................................................38
Owner Trustee.....................................................................1
Parties in Interest..............................................................56
Payment Account..................................................................29
Payment Date...................................................................3, 5
Plan.........................................................................12, 56
Plan Asset Regulations.......................................................12, 56
Prepayment Assumption........................................................42, 44
Prepayment Period............................................................33, 37
Reimbursement Amount.........................................................32, 36
Rules........................................................................29, 30
S&P.......................................................................3, 12, 55
Seller........................................................................5, 14
Series ____-F Issuer..............................................................1
Series ____-F Securities..........................................................5
Series ____-V Issuer...........................................................1, 5
Series ____-V Securities.........................................................29
Servicing Agreement..............................................................48
Servicing Fee.............................................................8, 31, 35
single risks.....................................................................28
Six-Month LIBOR...................................................................7
Subordination Increase Amount.....................................................9
Subsequent Cut-off Date..........................................................25
Subsequent Transfer Dates........................................................25
Subsequent Transfer Instruments..................................................25
Sub-Servicer..............................................................5, 14, 49
Third-Party Servicing Portfolio..................................................49
Trust Agreement...................................................................5
Trust Estate...............................................................1, 5, 29
Underwriter...................................................................1, 54
Underwriting Agreements..........................................................54
Yield Considerations.............................................................41
</TABLE>
<PAGE>
[LOGO]
$----------
Home Equity Loan
Asset-Backed Notes,
Series ____-F, Class A-F
$----------,
Home Equity Loan
Asset-Backed Notes,
Series ____-V, Class A-V
----------------
Seller and Master Servicer
Merrill Lynch
Mortgage Investors, Inc.
Depositor
Prospectus Supplement
Merrill Lynch & Co.
-------------, ----
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not
be relied upon. This prospectus supplement and the prospectus do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the notes offered hereby, nor an offer of the notes in
any state or jurisdiction in which, or to any person to whom, such offer would
be unlawful. The delivery of this prospectus supplement or the prospectus at
any time does not imply that information herein or therein is correct as of
any time subsequent to its date; however, if any material change occurs while
this prospectus supplement or the prospectus is required by law to be
delivered, this prospectus supplement or the prospectus will be amended or
supplemented accordingly.
Until 90 days after the date of this prospectus supplement, all
dealers selling the notes, whether or not participating in this distribution,
will 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.
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
Consider carefully the risk factors beginning on page 3 of this prospectus.
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.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
The Securities
Merrill Lynch Mortgage Investors, Inc., as depositor, will sell the
securities, which may be in the form of asset backed certificates or asset
backed notes. Each issue of securities will have its own series designation
and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
o Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments
on the assets in the related trust fund. In each case, the specified portion
may equal from 0% to 100%. A series may include one or more classes of
securities that are senior in right of payment to one or more other classes.
One or more classes of securities may be entitled to receive distributions of
principal, interest or both prior to one or more other classes, or before or
after certain specified events have occurred. The related prospectus
supplement will specify each of these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund
will consist primarily of assets from one of the following categories:
o one or more segregated pools of various types of mortgage loans
and/or closed-end and/or revolving home equity loans (or
certain balances of these loans), in each case secured by first
and/or junior liens on one- to five-family residential
properties, or security interests in shares issued by
cooperative housing corporations, including mixed residential
and commercial structures;
o home improvement installment sales contracts or installment
loan agreements 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; and
o mortgage pass-through certificates or mortgage-backed
securities evidencing interests in mortgage loans or secured
thereby or certain direct obligations of the United States,
agencies thereof or agencies created thereby.
Each trust fund may be subject to early termination in certain
circumstances.
Market for the Securities
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued
and sold, there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities are made through Merrill Lynch, Pierce,
Fenner & Smith Incorporated and the other underwriters listed in the related
prospectus supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved these securities or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
MERRILL LYNCH & CO.
The date of this Prospectus is ______, 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that series.
If the prospectus supplement contains information about a particular
series that differs from the information contained in this
prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home improvement
contracts and/or securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home improvement contracts and/or securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or all
of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Merrill Lynch Mortgage Investors, Inc., 250
Vesey Street, World Financial Center-North Tower, 10th Floor, New York, New
York 10281-1310, Attention: Secretary, and our telephone number is (212)
449-0357. For other means of acquiring additional information about us or a
series of securities, see "Incorporation of Certain Information by Reference"
beginning on page 93 of this prospectus.
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it identifies
certain significant sources of risk associated with an investment in the
securities.
There is a risk that the securities will have limited liquidity.
At the time a series of securities is issued, there will not be a
secondary market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated
currently expects to make a secondary market in the offered securities, but it
is not required to. We cannot assure you that a secondary market for the
securities of any series will develop or, if it does develop, that it will
provide holders of those securities with liquidity of investment or will
continue while those securities remain outstanding.
There is a risk associated with limited assets and that those assets will not
be sufficient to pay the securities in full.
o The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their affiliates.
o The only obligations with respect to the securities or the assets
securing them will be the obligations (if any) of any "warranting
party" (as further described in this prospectus) 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 agreements (including the
limited obligation to make certain advances in the event of
delinquencies on the mortgage loans, but only to the extent they deem
such advances recoverable) and, if 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 adjustable-rate
mortgage loan (as more fully described in this prospectus) upon
conversion to a fixed rate or a different index.
o Since certain representations and warranties with respect to the
mortgage assets may have been made and/or assigned in connection with
transfers of the 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.
o 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.
o 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.
o 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 these proceeds are insufficient or otherwise
unavailable to make all payments provided for under the securities.
o 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 these 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.
o If 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 that prospectus supplement.
We refer you to "Description of the Trust Funds" for further information.
There is a risk that prepayments on the assets in a trust fund will adversely
affect the average life and yields of the related securities.
o 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 these 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 time to time is
influenced by a variety of economic, demographic, geographic, social,
tax, legal and other factors. We can't assure you as to the rate of
prepayment on the assets in any trust fund or that the rate of
payments will conform to any model we describe here 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.
o 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 these 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.
We refer you to "Yield Considerations" in the prospectus and, if applicable,
in the related prospectus supplement for further information.
There is a risk that defaults by obligors or declines in the values of
mortgaged properties will result in losses to investors.
o 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.
o To the extent that these 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.
o 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 cases 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.
o 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 will thus experience
higher rates of loss and delinquency than the mortgage loans
generally will experience. The mortgage loans underlying certain
series of securities may be concentrated in these regions, and this
concentration may present risk considerations in addition to those
generally present for similar mortgage-backed securities without this
concentration.
o Further, the rate of default on mortgage loans that are refinance or
limited documentation mortgage loans, and on mortgage loans with high
loan-to-value ratios, may be higher than for other types of mortgage
loans. Additionally, a decline in the value of the mortgaged
properties will increase the risk of loss particularly with respect
to any related junior mortgage loans.
We refer you to "--There is a risk that there will be reduced or no proceeds
available when junior lien mortgage loans are liquidated." in this prospectus
for further information.
o In addition, a prospectus supplement may specify that the
loan-to-value ratios for the mortgage loans in the related trust will
exceed 100%. The related mortgaged properties will thus be highly
unlikely to provide adequate security for these mortgage loans. To
the extent specified in that prospectus supplement, the assessment of
the credit history of a borrower and that borrower's capacity to make
payments on the related mortgage loan will have been the primary
considerations in underwriting the mortgage loans included in that
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 those mortgage loans.
There is a risk that there will be reduced or no proceeds available when
junior lien mortgage loans are liquidated.
o Certain mortgage loans may be secured by junior liens and the related
first and other senior liens, if any, may not be included in the
mortgage pool.
o 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. If 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 these proceeds are sufficient,
before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
o 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 that 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.
We refer you to "Certain Legal Aspects of the Mortgage Loans -- Junior
Mortgages" in this prospectus for further information.
There is a risk that any applicable credit support will not cover all losses.
o 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 of these. Any credit
support will be subject to the conditions and limitations described
here and in the related prospectus supplement. Moreover, this 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.
o A series of securities may include one or more classes of subordinate
securities (which may include offered securities), if we provide for
that in the related prospectus supplement. Although subordination is
designed 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 this 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 (we refer to
this as a "covered trust"), holders of securities evidencing an
interest in a covered trust will be subject to the risk that this
credit support will be exhausted by the claims of other covered
trusts. o 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. We can't assure you, however, that the
loss experience on the related assets will not exceed these assumed
levels.
o Regardless of the form of credit enhancement, 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 of those securities will not be adversely
affected.
o The rating agency rating a series of securities may lower their
rating following the initial issuance of the securities if the
obligations of any applicable credit support provider have been
downgraded, or as a result of losses on the related assets
substantially in excess of the levels contemplated by that rating
agency when they performed their 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.
We refer you to "--There are risks in relying on the limited nature of
ratings.", "Description of the Securities" and "Description of Credit Support"
for further information.
There is a risk to holders of subordinate securities that losses will have a
greater impact on them.
o 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.
We refer you to "Description of the Securities -- General" and "-- Allocation
of Losses and Shortfalls" in this prospectus for further information.
o 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 you anticipated.
There is a risk that obligors on balloon loans will not be able to make
balloon payments.
Some of the mortgage loans as of the cut-off date may not be fully
amortizing over their terms to maturity (we call these "balloon loans") 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.
There is a possibility, if the related prospectus supplement provides for it,
that upon an optional termination of a trust fund, the proceeds may be less
than the outstanding principal amount of the securities plus accrued interest.
o If 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 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, 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.
o In either such case, if the related prospectus supplement provides
for it, the proceeds available for distribution to securityholders
may be less than the outstanding principal balance of their
securities plus accrued interest. If this happens, these
securityholders could incur a loss on their investment.
There are risks relating to certain federal income tax considerations
regarding REMIC residual certificates.
o Holders of REMIC residual certificates must 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." Under certain circumstances,
holders of offered securities that are 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.
o 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.
We refer you to "Material Federal Income Tax Consequences -- REMICs" in this
prospectus for further information.
There are risks in relying on the limited nature of ratings.
Any rating assigned by a rating agency to a class of securities will
reflect that rating agency's assessment solely of the likelihood that holders
of securities of that class will receive payments to which those
securityholders are entitled under the related agreement. This rating will not
be 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 you originally
anticipated or the likelihood of early optional termination of the series of
securities. This rating will not address the possibility that prepayment at
higher or lower rates than you anticipated may cause you to experience a yield
lower than you anticipated 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.
We refer you to "Rating" in this prospectus for further information.
<PAGE>
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.
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 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 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.
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.
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.
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 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."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model, each as described below. CPR represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans. A prepayment assumption of 100% of SPA assumes prepayment rates
of 0.2% per annum of the then outstanding principal balance of such loans in
the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities
may contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Securities of such series and the
percentage of the initial Security Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of any
Mortgage Loans comprising or underlying the Assets for any series will conform
to any particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Mortgage Loans having balloon
payments may default at maturity. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the mortgagor or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted Mortgage Loans, the servicer may, to the extent
and under the circumstances set forth in the related Prospectus Supplement, be
permitted to modify Mortgage Loans that are in default or as to which a
payment default is imminent. Any defaulted balloon payment or modification
that extends the maturity of a Mortgage Loan will tend to extend the weighted
average life of the Securities, thereby lengthening the period of time elapsed
from the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate. In addition, certain Mortgage
Loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the mortgagor during the early
years of the Mortgage Loan will be less than the scheduled monthly payments
thereon (the "Buydown Period"). The periodic increase in the amount paid by
the mortgagor of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as
immediately after origination (initial Mortgage Rates are generally lower than
the sum of the applicable index at origination and the related margin over
such index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Rate. The
addition of any such deferred interest to the principal balance of any related
class or classes of Securities will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased. In addition, with respect to certain ARM
Loans subject to negative amortization, during a period of declining interest
rates, it might be expected that each minimum scheduled monthly payment on
such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will
be applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of such Securities will be reduced and
may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on
the Securities. In general, defaults on mortgage loans are expected to occur
with greater frequency in their early years. The rate of default on Mortgage
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the
general economic condition of the region of the country in which the related
Mortgage Properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the Mortgage Loans comprising or underlying the Assets that are foreclosed
or repossessed in relation to the number and principal amount of Mortgage
Loans that are repaid in accordance with their terms will affect the weighted
average life of the Mortgage Loans comprising or underlying the Assets and
that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the
same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would have
the same effect as a prepayment in full of the related Mortgage Loan. A
Sub-Servicer or the Master Servicer may, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition,
Sub-Servicers may encourage the refinancing of Mortgage Loans, including
defaulted Mortgage Loans, that would permit creditworthy borrowers to assume
the outstanding indebtedness of such Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets may include "due-on-sale" clauses that allow the holder
of the Mortgage Loans to demand payment in full of the remaining principal
balance of the Mortgage Loans upon sale, transfer or conveyance of the related
Mortgaged Property. With respect to any Whole Loans, unless otherwise provided
in the related Prospectus Supplement, the Master Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it
is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310. Its
telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected
in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture (an
"Indenture"). Each series of Securities will consist of one or more classes of
Securities that may:
(i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
(ii) be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on
the Securities;
(iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions
(collectively, "Stripped Principal Securities");
(iv) be entitled to interest distributions, with disproportionately
low, nominal or no principal distributions (collectively,
"Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of
Securities of such series (collectively, "Accrual Securities");
(vi) provide for payments of principal as described in the related
Prospectus Supplement, from all or only a portion of the Assets
in such Trust Fund, to the extent of available funds, in each
case as described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination of two or
more components thereof with one or more of the characteristics
described in this paragraph including a Stripped Principal
Security component and a Stripped Interest Security component.
If so specified in the related Prospectus Supplement, a Trust Fund
may include additional Mortgage Loans (or certain balances thereof) that will
be transferred to the Trust from time to time and/or, in the case of revolving
Home Equity loans or certain balances thereof, any additional balances
advanced to the borrowers under the revolving Home Equity loans during certain
periods. If so specified in the related Prospectus Supplement, distributions
on one or more classes of a series of Securities may be limited to collections
from a designated portion of the Whole Loans in the related Mortgage Pool
(each such portion of Whole Loans, a "Mortgage Loan Group"). Any such classes
may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in
minimum denominations corresponding to the Security Balances or, in case of
Stripped Interest Securities, notional amounts or percentage interests
specified in the related Prospectus Supplement. The transfer of any Offered
Securities may be registered and such Securities may be exchanged without the
payment of any service charge payable in connection with such registration of
transfer or exchange, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other governmental
charge. One or more classes of Securities of a series may be issued in
definitive form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "--Limited Assets."
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the
close of business on the last business day of the month preceding the month in
which the Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution
Date will be allocated pro rata among the outstanding Securities in such class
or by random selection, as described in the related Prospectus Supplement or
otherwise established by the related Trustee. Payments will be made either by
wire transfer in immediately available funds to the account of a
Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on
the Security Register; provided, however, that the final distribution in
retirement of the Securities (whether Definitive Securities or Book-Entry
Securities) will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement. Unless provided otherwise in the related Prospectus
Supplement, the "Available Distribution Amount" for each Distribution Date
equals the sum of the following amounts:
(i) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive of:
(a) all scheduled payments of principal and
interest collected but due on a date subsequent to the
related Due Period (unless the related Prospectus Supplement
provides otherwise, a "Due Period" with respect to any
Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date
occurs, or the day after the Cut-off Date in the case of the
first Due Period, and will end on the first day of the month
of the related Distribution Date),
(b) unless the related Prospectus Supplement
provides otherwise, all prepayments, together with related
payments of the interest thereon and related Prepayment
Premiums, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related
Due Period, and
(c) all amounts in the Collection Account that are
due or reimbursable to the Depositor, the Trustee, an Asset
Seller, a Sub-Servicer, the Master Servicer or any other
entity as specified in the related Prospectus Supplement or
that are payable in respect of certain expenses of the
related Trust Fund;
(ii) if the related Prospectus Supplement so provides,
interest or investment income on amounts on deposit in the Collection
Account, including any net amounts paid under any Cash Flow
Agreements;
(iii) all advances made by a Master Servicer or any other
entity as specified in the related Prospectus Supplement with respect
to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement
so provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to
interest shortfalls resulting from prepayments during the related
Prepayment Period; and
(v) unless the related Prospectus Supplement provides
otherwise, to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any Credit Support with
respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a
different Pass-Through Rate or interest rate, which will be a fixed, variable
or adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class
will be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Stripped
Principal Securities that are not entitled to any distributions of interest)
based on the Accrued Security Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Securities, the amount of
Accrued Security Interest otherwise distributable on such class will be added
to the Security Balance thereof on each Distribution Date. With respect to
each class of Securities and each Distribution Date (other than certain
classes of Stripped Interest Securities), "Accrued Security Interest" will be
equal to interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Unless
otherwise provided in the Prospectus Supplement, Accrued Security Interest on
Stripped Interest Securities will be equal to interest accrued for a specified
period on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. The method of determining the notional amount for
any class of Stripped Interest Securities will be described in the related
Prospectus Supplement. Reference to notional amount is solely for convenience
in certain calculations and does not represent the right to receive any
distributions of principal.
Unless otherwise provided in the related Prospectus Supplement, the
Accrued Security Interest on a series of Securities will be reduced in the
event of prepayment interest shortfalls, which are shortfalls in collections
of interest for a full accrual period resulting from prepayments prior to the
due date in such accrual period on the Mortgage Loans comprising or underlying
the Assets in the Trust Fund for such series. The particular manner in which
such shortfalls are to be allocated among some or all of the classes of
Securities of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the Security Balance of) a class of Offered Securities may be reduced
as a result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Loans comprising or
underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a class of Securities by reason
of the allocation to such class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the Security Balance of such class.
See "Risk Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other
assets included in the related Trust Fund. The outstanding Security Balance of
a Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Securities prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Security Interest. Unless otherwise provided
in the related Prospectus Supplement, the initial aggregate Security Balance
of all classes of Securities of a series will not be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series
and each class thereof will be specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, distributions
of principal will be made on each Distribution Date to the class or classes of
Securities entitled thereto in accordance with the provisions described in
such Prospectus Supplement until the Security Balance of such class has been
reduced to zero. Stripped Interest Securities with no Security Balance are not
entitled to any distributions of principal.
Components
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference in
such sections to Security Balance and Pass-Through Rate or interest rate refer
to the principal balance, if any, of any such component and the Pass-Through
Rate or interest rate, if any, on any such component, respectively.
Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a series of
Securities consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a class of Subordinate Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer or another entity described therein will be required as
part of its servicing responsibilities to advance on or before each
Distribution Date its own funds or funds held in the Collection Account that
are not included in the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of payments of principal (other than
any balloon payments) and interest (net of related servicing fees and Retained
Interest) that were due on the Whole Loans in such Trust Fund during the
related Due Period and were delinquent on the related Determination Date,
subject to the Master Servicer's (or another entity's) good faith
determination that such advances will be reimbursable from Related Proceeds
(as defined below). In the case of a series of Securities that includes one or
more classes of Subordinate Securities and if so provided in the related
Prospectus Supplement, the Master Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary
to make the required distributions on one or more classes of Senior Securities
and/or may be subject to the Master Servicer's (or another entity's) good
faith determination that such advances will be reimbursable not only from
Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of such Subordinate Securities. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the class or classes of
Certificates entitled thereto, rather than to guarantee or insure against
losses. Unless otherwise provided in the related Prospectus Supplement,
advances of the Master Servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Mortgage Loans (including
amounts received under any form of Credit Support) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and, if so
provided in the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of such series;
provided, however, that any such advance will be reimbursable from any amounts
in the Collection Account prior to any distributions being made on the
Securities to the extent that the Master Servicer (or such other entity) shall
determine in good faith that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess
funds in the Collection Account, the Master Servicer is required to replace
such funds in the Collection Account on any future Distribution Date to the
extent that funds in the Collection Account on such Distribution Date are less
than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the Master
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer (or another entity) will be entitled to
receive interest at the rate specified therein on its outstanding advances and
will be entitled to pay itself such interest periodically from general
collections on the Assets prior to any payment to Securityholders or as
otherwise provided in the related Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
Reports to Securityholders
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Depositor
and to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities
of such class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of
Securities of such class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to
Prepayment Premiums;
(iv) the amount of related servicing compensation received
by a Master Servicer (and, if payable directly out of the related
Trust Fund, by any Sub-Servicer) and such other customary information
as any such Master Servicer or the Trustee deems necessary or
desirable, or that a Securityholder reasonably requests, to enable
Securityholders to prepare their tax returns;
(v) the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at
the close of business on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the
close of business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole
Loans in respect of which:
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the
related Due Period, the portion of such liquidation proceeds payable
or reimbursable to the Master Servicer (or any other entity) in
respect of such Mortgage Loan, and 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, the loan number of the related Mortgage Loan and the date of
acquisition;
(x) with respect to each REO Property relating to a Whole
Loan and included in the Trust Fund as of the end of the related Due
Period:
(a) the book value,
(b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date
(calculated as if such Mortgage Loan were still
outstanding taking into account certain limited
modifications to the terms thereof specified in the
Agreement),
(c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof
and
(d) if applicable, the aggregate amount of interest
accrued and payable on related servicing expenses and
related advances;
(xi) with respect to any such REO Property sold during the
related Due Period:
(a) the aggregate amount of sale proceeds,
(b) the portion of such sales proceeds payable or
reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan and
(c) the amount of any loss to Securityholders in respect
of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as
the case may be, of each class of Securities (including any class of
Securities not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Security Balance due to the allocation of any loss and increase in
the Security Balance of a class of Accrual Securities in the event
that Accrued Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made
during the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of
the close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any,
on each class of Securities at the close of business on such
Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through
Rate or interest rate, the Pass-Through Rate or interest rate
applicable to such Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in
accordance with the method specified in the related Prospectus
Supplement;
(xviii) in the case of Securities with an adjustable
Pass-Through Rate or interest rate, for statements to be distributed
in any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such Distribution
Date, if available, and the immediately succeeding Distribution Date
as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xix) as to any series which includes Credit Support, the
amount of coverage of each instrument of Credit Support included
therein as of the close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of
default interest, late charges and assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each series
of Offered Securities will describe any additional information to be included
in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each person who at any time during the
calendar year was a holder of a Security a statement containing the
information set forth in subclauses (i)-(iv) above, aggregated for such
calendar year or the applicable portion thereof during which such person was a
Securityholder. Such obligation of the Master Servicer or the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Master Servicer or the Trustee pursuant
to any requirements of the Code as are from time to time in force. See
"Description of the Securities--Registration and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and (ii)
the purchase of all of the assets of the Trust Fund by the party entitled to
effect such termination, under the circumstances and in the manner set forth
in the related Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the Agreement will be
given to each Securityholder, and the final distribution will be made only
upon presentation and surrender of the Securities at the location to be
specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets
of the Trust Fund, or of a sufficient portion of such assets to retire such
class or classes or purchase such class or classes at a price set forth in the
related Prospectus Supplement, in each case, under the circumstances and in
the manner set forth therein.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include Merrill
Lynch, Pierce, Fenner & Smith Incorporated, securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede & Co., as nominee for DTC ("Cede"), on each such date, DTC will
forward such payments to its Participants which thereafter will be required to
forward them to Indirect Participants or Security Owners. Unless otherwise
provided in the related Prospectus Supplement, the only "Securityholder" (as
such term is used in the Agreement) will be Cede, as nominee of DTC, and the
Security Owners will not be recognized by the Trustee as Securityholders under
the Agreement. Security Owners will be permitted to exercise the rights of
Securityholders under the related Agreement, Trust Agreement or Indenture, as
applicable, only indirectly through the Participants who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Security Owner to pledge its interest in the Book-Entry Securities to persons
or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in the Book-Entry Securities, may be
limited due to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Securityholder under an Agreement only at the direction of
one or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("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 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.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax
purposes will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. The Assets of such
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the
context of the conveyance and servicing of the related Assets, the Pooling and
Servicing Agreement may be referred to herein as the "Agreement".
Notwithstanding the foregoing, if the Assets of the Trust Fund for such a
series consists only of Government Securities or MBS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a "Trust Agreement"), which may also be
referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with a servicing agreement (a "Servicing Agreement") between the
Depositor, the Servicer and the Trustee. In the context of the conveyance and
servicing of the related Assets, a Servicing may be referred to herein as the
"Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to
the indenture (the "Indenture") between the related Trust Fund and an
indenture trustee (the "Indenture Trustee") named in the related Prospectus
Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the
Trust Fund and administered in accordance with the terms of the Trust
Agreement, which in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any
series of Securities will be named in the related Prospectus Supplement. In
any series of Securities for which there are multiple Master Servicers, there
may also be multiple Mortgage Loan Groups, each corresponding to a particular
Master Servicer; and, if the related Prospectus Supplement so specifies, the
servicing obligations of each such Master Servicer will be limited to the
Whole Loans in such corresponding Mortgage Loan Group. In lieu of appointing a
Master Servicer, a servicer may be appointed pursuant to the Agreement for any
Trust Fund. Such servicer will service all or a significant number of Whole
Loans directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans directly. A manager
or administrator may be appointed pursuant to the Trust Agreement for any
Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
The following summaries describe certain provisions that may appear
in each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Security" refers to all of the Securities of that series, whether or not
offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Depositor will provide a copy of the Agreement
(without exhibits) relating to any series of Securities without charge upon
written request of a holder of a Security of such series addressed to Merrill
Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial Center,
North Tower, 10th Floor, New York, New York 10281-1310. Attention: Jack Ross.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to
be included in the related Trust Fund, together with all principal and
interest to be received on or with respect to such Assets after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the 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.
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 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
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and covering 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.
Deposits
A Master Servicer or the Trustee will deposit or cause to be
deposited in the Collection Account for one or more Trust Funds on a daily
basis, unless otherwise provided in the related Agreement, the following
payments and collections received, or advances made, by the Master Servicer or
the Trustee or on its behalf subsequent to the Cut-off Date (other than
payments due on or before the Cut-off Date, and exclusive of any amounts
representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion
thereof retained by a Master Servicer or a Sub-Servicer as its
servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in
the Trust Fund (to the extent such proceeds are not applied to
the restoration of the property or released to the mortgagor in
accordance with the normal servicing procedures of a Master
Servicer or the related Sub-Servicer, subject to the terms and
conditions of the related Mortgage and Mortgage Note)
(collectively, "Insurance Proceeds") and all other amounts
received and retained in connection with the liquidation of
defaulted Mortgage Loans in the Trust Fund, by foreclosure or
otherwise ("Liquidation Proceeds"), together with the net
proceeds on a monthly basis with respect to any Mortgaged
Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund
that constitutes Credit Support for the related series of
Securities as described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow
Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole
Loan, property acquired in respect thereof purchased by the
Depositor, any Asset Seller or any other specified person as
described under "Assignment of Assets; Repurchases" and
"Representations and Warranties; Repurchases," all proceeds of any
defaulted Mortgage Loan purchased as described under "Realization
Upon Defaulted Whole Loans," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover
certain interest shortfalls arising out of the prepayment of Whole
Loans in the Trust Fund as described under "Description of the
Agreements --Retained Interest; Servicing Compensation and Payment of
Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments
on account of modification or assumption fees, late payment charges
or prepayment premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket
insurance policy described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master
Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Trustee, as
the case may be, of funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described
in the related Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund
for any of the following purposes:
(i) to 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";
(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."
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 affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or, 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, in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent, and
in its judgment, such modification, waiver or amendment is reasonably likely
to produce a greater recovery with respect to the Whole Loan on a present
value basis than would liquidation. The Master Servicer is required to notify
the Trustee in the event of any modification, waiver or amendment of any Whole
Loan.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect
of the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest; Servicing
Compensation and Payment of Expenses."
Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if
cure is likely, inspect the Mortgaged Property and take such other actions as
are consistent with the Servicing Standard. A significant period of time may
elapse before the Master Servicer is able to assess the success of such
corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes
of Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified
number of scheduled payments thereunder are delinquent. Any such right granted
to the holder of an Offered Security will be described in the related
Prospectus Supplement. The related Prospectus Supplement will also describe
any such right granted to any person if the predetermined purchase price is
less than the Purchase Price described under "Representations and Warranties;
Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Master Servicer accept the highest cash bid
received from any person (including itself, an affiliate of the Master
Servicer or any Securityholder) that constitutes a fair price for such
defaulted Whole Loan. In the absence of any bid determined in accordance with
the related Agreement to be fair, the Master Servicer shall proceed with
respect to such defaulted Mortgage Loan as described below. Any bid in an
amount at least equal to the Purchase Price described under "Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise,
if such action is consistent with the Servicing Standard and a default on such
Whole Loan has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Master Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless the Internal Revenue Service grants an extension of time
to sell such property, or unless 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
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 accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Whole Loan, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Whole Loan, unreimbursed servicing expenses
incurred with respect to the Whole Loan and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Securityholders on liquidation of the Whole Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder
with respect to defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance
policy. The ability of the Master Servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by mortgagors. All amounts collected by the Master
Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor
in accordance with the Master Servicer's normal servicing procedures, subject
to the terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Collection Account. The Agreement will provide that the
Master Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Master Servicer's maintaining a blanket
policy insuring against hazard losses on the Whole Loans. If such blanket
policy contains a deductible clause, the Master Servicer will be required to
deposit in the Collection Account all sums that would have been deposited
therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause generally provides that the insurer's liability in the event of
partial loss does not exceed the lesser of (i) the replacement cost of the
improvements less physical depreciation and (ii) such proportion of the loss
as the amount of insurance carried bears to the specified percentage of the
full replacement cost of such improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property
as is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the
related Mortgaged Property was located at the time of origination in a
federally designated flood area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer or Sub-Servicer, as the case may be, from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability
of the Master Servicer to present or cause to be presented such claims is
dependent upon the extent to which information in this regard is furnished to
the Master Servicer by mortgagors.
Fidelity Bonds and Errors and Omissions Insurance
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Master Servicer. The related Agreement will allow the Master
Servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the Master Servicer so long as certain
criteria set forth in the Agreement are met.
Due-on-Sale Provisions
The Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the Whole
Loan upon any sale, transfer or conveyance of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Unless otherwise
specified in the related Prospectus Supplement, any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will
be retained by or on behalf of the Master Servicer as additional servicing
compensation.
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it of
a portion of the interest payment on each Asset. Since any Retained Interest
and a Master Servicer's primary compensation are percentages of the principal
balance of each Asset, such amounts will decrease in accordance with the
amortization of the Assets. The Prospectus Supplement with respect to a series
of Securities evidencing interests in a Trust Fund that includes Whole Loans
may provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification
fees, late payment charges or Prepayment Premiums collected from mortgagors
and any interest or other income which may be earned on funds held in the
Collection Account or any account established by a Sub-Servicer pursuant to
the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Securityholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Whole Loans and, to the extent so provided in the related
Prospectus Supplement, interest thereon at the rate specified therein may be
borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement,
the Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole Loans
in the related Trust Fund during such period prior to their respective due
dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Whole Loans will
provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with 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:
(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 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 Agreement
unless it shall first have received an opinion of counsel to the effect that
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause the related Trust Fund to fail to qualify as a REMIC at any time
that the related Securities are outstanding.
The Trustee
The Trustee under each Agreement or Trust Agreement will be named in
the related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have
a banking relationship with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset
or related document and is not accountable for the use or application by or on
behalf of any Master Servicer of any funds paid to the Master Servicer or its
designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required
under the related Agreement or Trust Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement or Trust
Agreement, as applicable.
Certain Matters Regarding the Trustee
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's:
(i) enforcing its rights and remedies and protecting the interests,
of the Securityholders during the continuance of an Event of
Default,
(ii) defending or prosecuting any legal action in respect of the
related Agreement or series of Securities,
(iii) being the mortgagee of record with respect to the Mortgage
Loans in a Trust Fund and the owner of record with respect to
any Mortgaged Property acquired in respect thereof for the
benefit of Securityholders, or (iv) acting or refraining from
acting in good faith at the direction of the holders of the
related series of Securities entitled to not less than 25% (or
such other percentage as is specified in the related Agreement
with respect to any particular matter) of the Voting Rights for
such series; provided, however, that such indemnification will
not extend to any loss, liability or expense that constitutes a
specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence on the
part of the Trustee in the performance of its obligations and
duties thereunder, or by reason of its reckless disregard of
such obligations or duties, or as may arise from a breach of
any representation, warranty or covenant of the Trustee made
therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Master Servicer, if any, and all Securityholders. Upon receiving such notice
of resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will
adversely affect the rating on any class of the Securities, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the
Master Servicer, if any. Holders of the Securities of any series entitled to
at least 51% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series may at any time remove the
Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment
by the successor trustee.
Certain Terms of the Indenture
Events of Default. Unless otherwise specified in the related
Prospectus Supplement, Events of Default under the Indenture for each Series
of Notes include:
(i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment
of any principal of or interest on any Note of such series;
(ii) failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture which continues for a period of
sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related
Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith
with respect to or affecting such series having been incorrect
in a material respect as of the time made, and such breach is
not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof
is given in accordance with the procedures described in the
related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or
(v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that series, as provided in the related Prospectus
Supplement) of all the Notes of such series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled
by the holders of a majority in aggregate outstanding amount of the Notes of
such series.
If, following an Event of Default with respect to any series of
Notes, the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless:
(a) the holders of 100% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate
outstanding amount of the Notes of such series consent to such
sale,
(b) the proceeds of such sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such series at the date of such
sale or
(c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such
Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders of 66 2/3% (or such other
percentage specified in the related Prospectus Supplement) of
the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing with respect to a series of Notes, the Indenture Trustee shall be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of Notes of such
series, unless such holders offered to the Indenture Trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with such request or direction. Subject
to such provisions for indemnification and certain limitations contained in
the Indenture, the holders of a majority of the then aggregate outstanding
amount of the Notes of such series shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes of such series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such series
affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing rights
specified in the Indenture) upon the delivery to the Indenture Trustee for
cancellation of all the Notes of such series or, with certain limitations,
upon deposit with the Indenture Trustee of funds sufficient for the payment in
full of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect thereof
in accordance with their terms will provide money in an amount sufficient to
pay the principal of and each installment of interest on the Notes of such
series on the maturity date for such Notes and any installment of interest on
such Notes in accordance with the terms of the Indenture and the Notes of such
series. In the event of any such defeasance and discharge of Notes of such
series, holders of Notes of such series would be able to look only to such
money and/or direct obligations for payment of principal and interest, if any,
on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders
a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes
will be specified in the related Prospectus Supplement. The Indenture Trustee
for any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may
also remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the Master
Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any series of Securities Credit Support may be provided with
respect to one or more classes thereof or the related Assets. Credit Support
may be in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Security
Balance of the Securities and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Securityholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), holders of Securities
evidencing interests in any of such Covered Trusts will be subject to the risk
that such Credit Support will be exhausted by the claims of other Covered
Trusts prior to such Covered Trust receiving any of its intended share of such
coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of:
(a) the nature and amount of coverage under such Credit Support,
(b) any conditions to payment thereunder not otherwise described
herein,
(c) the conditions (if any) under which the amount of coverage
under such Credit Support may be reduced and under which such
Credit Support may be terminated or replaced and
(d) the material provisions relating to such Credit Support.
Additionally, the related Prospectus Supplement will set forth
certain information with respect to the obligor under any
instrument of Credit Support, including
(i) a brief description of its principal business
activities,
(ii) its principal place of business, place of
incorporation and the jurisdiction under which it is
chartered or licensed to do business,
(iii) if applicable, the identity of regulatory agencies
that exercise primary jurisdiction over the conduct
of its business and
(iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement.
See "Risk Factors--Credit Support Limitations--Risk That Credit Support Will
Not Cover All Losses."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of (or may be limited to) certain types of losses or shortfalls. The
related Prospectus Supplement will set forth information concerning the amount
of subordination of a class or classes of Subordinate Securities in a series,
the circumstances in which such subordination will be applicable and the
manner, if any, in which the amount of subordination will be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Assets prior to distributions on Subordinate Securities evidencing
interests in a different group of Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
Insurance or Guarantees
If so provided in the Prospectus Supplement for a series of
Securities, the Whole Loans in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees.
Letter of Credit
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net
of unreimbursed payments thereunder, generally equal to a percentage specified
in the related Prospectus Supplement of the aggregate principal balance of the
Assets on the related Cut-off Date or of the initial aggregate Security
Balance of one or more classes of Securities. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws in the event of
only certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such
instruments may cover, with respect to one or more classes of Securities of
the related series, timely distributions of interest and/or full distributions
of principal on the basis of a schedule of principal distributions set forth
in or determined in the manner specified in the related Prospectus Supplement.
Reserve Funds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a
combination thereof will be deposited, in the amounts so specified in such
Prospectus Supplement. The reserve funds for a series may also be funded over
time by depositing therein a specified amount of the distributions received on
the related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with
the reinvestment income thereon, if any, will be applied for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement.
A reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of losses
and shortfalls. Following each Distribution Date amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from
the reserve fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
Credit Support With Respect to MBS
If so provided in the Prospectus Supplement for a series of
Securities, the MBS in the related Trust Fund and/or the Mortgage Loans
underlying such MBS may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify as to
each such form of Credit Support the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain state law legal aspects of loans secured by single-family
or multi-family residential properties. Because such legal aspects are
governed primarily by the applicable laws of the state in which the related
Mortgaged Property is located (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. See "Description of the Trust Funds--Assets."
General
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt,
depending upon the prevailing practice and law in the state in which the
Mortgaged Property is located. Mortgages, deeds of trust and deeds to secure
debt are herein collectively referred to as "mortgages." Any of the foregoing
types of mortgages will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to such instrument as well as the order of
recordation of the instrument in the appropriate public recording office.
However, recording does not generally establish priority over governmental
claims for real estate taxes and assessments and other charges imposed under
governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a
deed to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale
as security for the indebtedness evidenced by the related note. A deed to
secure debt typically has two parties. By executing a deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the
subject property to the grantee until such time as the underlying debt is
repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the
benefit of the mortgagor. At origination of a mortgage loan involving a land
trust, the mortgagor executes a separate undertaking to make payments on the
mortgage note. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express provisions of the mortgage, the law of
the state in which the real property is located, certain federal laws
(including, without limitation, the Soldiers' and Sailors' Civil Relief Act of
1940) and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Interest In Real Property
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the Prospectus Supplement.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by a cooperative housing corporation (a "Cooperative") and in the
related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. The security
agreement will create a lien upon, or grant a title interest in, the property
which it covers, the priority of which will depend on the terms of the
particular security agreement as well as the order of recordation of the
agreement in the appropriate recording office. Such a lien or title interest
is not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the cooperative, as property mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the cooperative's apartment building or
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket
mortgage, the mortgagee holding a blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not
fully amortize, with a significant portion of principal being due in one final
payment at maturity. The inability of the cooperative to refinance a mortgage
and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the cooperative to extend its term or, in the
alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder
of a blanket mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender that financed the purchase by an individual tenant stockholder of
cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through
ownership of stock or shares in the corporation, receive proprietary lease or
occupancy agreements which confer exclusive rights to occupy specific units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment
to the cooperative representing such tenant-stockholder's pro rata share of
the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "Foreclosure--Cooperatives" below.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated
by the service of legal pleadings upon all parties having an interest of
record in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged property,
the proceeds of which are used to satisfy the judgment. Such sales are made in
accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court
may alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the mortgagor's default and the likelihood that the mortgagor
will be able to reinstate the loan. In some cases, courts have substituted
their judgment for the lender's and have required that lenders reinstate loans
or recast payment schedules in order to accommodate mortgagors who are
suffering from a temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
is not monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows
a non-judicial public sale to be conducted generally following a request from
the beneficiary/lender to the trustee to sell the property upon any default by
the mortgagor under the terms of the mortgage note or the mortgage instrument
and after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers.
The mortgagor or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying
the entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a
deed of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the
deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such
property at the time of sale, due to, among other things, redemption rights
which may exist and the possibility of physical deterioration of the property
during the foreclosure proceedings. For these reasons, it is common for the
lender to purchase the mortgaged property for an amount equal to or less than
the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will
be subject to all senior mortgages, prior liens and certain governmental
liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was
conducted. Any proceeds remaining after satisfaction of senior mortgage debt
are generally payable to the holders of junior mortgages and other liens and
claims in order of their priority, whether or not the mortgagor is in default.
Any additional proceeds are generally payable to the mortgagor. The payment of
the proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgage or a subsequent ancillary proceeding or may
require the institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have
an interest in the property which is subordinate to the mortgage being
foreclosed, from exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee have an equity of redemption and may redeem the property
by paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their
equity of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be authorized if the former mortgagor
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser from a foreclosure sale or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to
maintain the property and pay the expenses of ownership until the redemption
period has expired. In some states, a post-sale statutory right of redemption
may exist following a judicial foreclosure, but not following a trustee's sale
under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property to
be held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such
additional period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as
set forth in the Cooperative's Certificate of Incorporation and By-laws, as
well as the proprietary lease or occupancy agreement, and may be cancelled by
the cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction
plan, some states require that a purchaser at a foreclosure sale take the
property subject to rent control and rent stabilization laws which apply to
certain tenants who elected to remain in the building was so converted.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or
deeds of trust, which are subordinate to first or other senior mortgages or
deeds of trust held by other lenders. The rights of the Trust Fund as the
holder of a junior deed of trust or a junior mortgage are subordinate in lien
and in payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of
trust are subordinate to the terms of the first mortgage or deed of trust, in
the event of a conflict between the terms of the first mortgage or deed of
trust and the junior mortgage or deed of trust, the terms of the first
mortgage or deed of trust will generally govern. Upon a failure of the
mortgagor or trustor to perform any of its obligations, the senior mortgagee
or beneficiary, subject to the terms of the senior mortgage or deed of trust,
may have the right to perform the obligation itself. Generally, all sums so
expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust. To the extent a first mortgagee
expends such sums, such sums will generally have priority over all sums due
under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment
against the mortgagor following foreclosure or sale under a deed of trust. A
deficiency judgment would be a personal judgment against the former mortgagor
equal to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. Some states require the
lender to exhaust the security afforded under a mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
mortgagor. In certain other states, the lender has the option of bringing a
personal action against the mortgagor on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security. In
some cases, a lender will be precluded from exercising any additional rights
under the note or mortgage if it has taken any prior enforcement action.
Consequently, the practical effect of the election requirement, in those
states permitting such election, is that lenders will usually proceed against
the security first rather than bringing a personal action against the
mortgagor. Finally, other statutory provisions limit any deficiency judgment
against the former mortgagor following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a lender
from obtaining a large deficiency judgment against the former mortgagor as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon
collateral or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative
plan to cure a monetary default in respect of a mortgage loan on a debtor's
residence by paying arrearages within a reasonable time period and reinstating
the original mortgage loan payment schedule even though the lender accelerated
the mortgage loan and final judgment of foreclosure had been entered in state
court (provided no sale of the residence had yet occurred) prior to the filing
of the debtor's petition. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by paying arrearages over
a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be
modified. These courts have allowed modifications that include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, forgiving all or a portion of the debt and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of
the residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 11 or Chapter 13 except with respect to mortgage
payment arrearages, which may be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the law. In some cases this liability may
affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award
unless the creditor establishes that the sale of the collateral (which, in the
case of a Cooperative Loan, would be the shares of the Cooperative and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
Environmental Legislation
Certain states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. Such a lien will generally have priority over all subsequent liens
on the property and, in certain of these states, will have priority over prior
recorded liens including the lien of a mortgage. In addition, under federal
environmental legislation and under state law in a number of states, a secured
party that takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or becomes involved in the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Fund) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Fund was acquired by the Trust Fund and cleanup costs were
incurred in respect of the Mortgaged Property, the holders of the related
series of Securities might realize a loss if such costs were required to be
paid by the Trust Fund.
Due-On-Sale Clauses
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally
provide that the lender may accelerate the maturity of the loan if the
mortgagor sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, with respect to certain loans the
Garn-St Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan
associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage
loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. The inability to enforce a
"due-on-sale" clause may result in a mortgage that bears an interest rate
below the current market rate being assumed by a new home buyer rather than
being paid off, which may affect the average life of the Mortgage Loans and
the number of Mortgage Loans which may extend to maturity.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
mortgagor may have difficulty servicing and repaying multiple loans. In
addition, if the junior loan permits recourse to the mortgagor (as junior
loans often do) and the senior loan does not, a mortgagor may be more likely
to repay sums due on the junior loan than those on the senior loan. Second,
acts of the senior lender that prejudice the junior lender or impair the
junior lender's security may create a superior equity in favor of the junior
lender. For example, if the mortgagor and the senior lender agree to an
increase in the principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent any existing
junior lender is harmed or the mortgagor is additionally burdened. Third, if
the mortgagor defaults on the senior loan and/or any junior loan or loans, the
existence of junior loans and actions taken by junior lenders can impair the
security available to the senior lender and can interfere with or delay the
taking of action by the senior lender. Moreover, the bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first
mortgage loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January
1, 1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would
not apply to such mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no mortgage loan originated after the date of such state action will be
eligible for inclusion in a Trust Fund unless (i) such mortgage loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such mortgage loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the mortgagor may cancel the recorded mortgage or deed
of trust upon paying its debt with lawful interest, and the lender may
foreclose, but only for the debt plus lawful interest. A second group of
statutes is more severe. A violation of this type of usury law results in the
invalidation of the transaction, thereby permitting the mortgagor to cancel
the recorded mortgage or deed of trust without any payment or prohibiting the
lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally
chartered lenders have historically been subject to a variety of restrictions.
Such restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who was in reserve status and is called to active duty after origination of
the Mortgage Loan), may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to mortgagors who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S. Public
Health Service assigned to duty with the military. Because the Relief Act
applies to mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Mortgage Loan, no
information can be provided as to the number of loans that may be affected by
the Relief Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of any servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition, the
Relief Act imposes limitations that would impair the ability of the servicer
to foreclose on an affected Mortgage Loan during the mortgagor's period of
active duty status, and, under certain circumstances, during an additional
three month period thereafter. Thus, in the event that such a Mortgage Loan
goes into default, there may be delays and losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
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 the
Internal Revenue Code of 1986, as amended (the "Code"), 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 state thereof or the District of
Columbia (other than a partnership that is not treated as a United States
person under any applicable Treasury regulations), an estate whose income is
subject to U.S. federal income tax regardless of its source, or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United states persons shall
be considered U.S. Persons as well.
General
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC election
will be made.
Grantor Trust Funds
If the related Prospectus Supplement indicates that the Trust Fund
will be treated as a grantor trust, then Brown & Wood LLP will deliver its
opinion that the Trust Fund will not be classified as an association taxable
as a corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
owners of Certificates will be treated for federal income tax purposes as
owners of a portion of the Trust Fund's assets as described below.
A. Single Class of Grantor Trust Certificates
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata
undivided interest in each of the Mortgage Assets in the Pool. Any amounts
received by a Grantor Trust Certificateholder in lieu of amounts due with
respect to any Mortgage Asset because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character
as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on
its federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162
or 212 each Grantor Trust Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Master
Servicer, provided that such amounts are reasonable compensation for services
rendered to the Trust Fund. Grantor Trust Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all
other Code Section 212 expenses exceed two percent of its adjusted gross
income. In addition, the amount of itemized deductions otherwise allowable for
the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
the applicable amount and (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. A Grantor Trust Certificateholder
using the cash method of accounting must take into account its pro rata share
of income and deductions as and when collected by or paid to the Master
Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions
as they become due or are paid to the Master Servicer, whichever is earlier.
If the servicing fees paid to the Master Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as
to each Series of Certificates evidencing an interest in a Trust Fund
comprised of Mortgage Loans, Brown & Wood LLP will have advised the Depositor
that:
(i) a Grantor Trust Certificate owned by a "domestic
building and loan association" within the meaning of Code Section
7701(a)(19) representing principal and interest payments on Mortgage
Assets will be considered to represent "loans . . . secured by an
interest in real property which is . . . residential property" within
the meaning of Code Section 7701(a)(19)(C)(v), to the extent that the
Mortgage Assets represented by that Grantor Trust Certificate are of
a type described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate
investment trust representing an interest in Mortgage Assets will be
considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), and interest income on the Mortgage Assets
will be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code Section 856(c)(3)(B), to
the extent that the Mortgage Assets represented by that Grantor Trust
Certificate are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will
represent "obligation[s] . . . which [are] principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal
of the bad debt reserve method for thrift institutions, repealed the
application of Code Section 593(d) to any taxable year beginning after
December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons"
as those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under
these rules, such Government Securities are treated as having OID 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 OID on each Government Security recognized
in any given year on an economic accrual basis even if the Grantor Trust
Certificateholder is a cash method taxpayer. Accordingly, the sum of the
income includible to the Grantor Trust Certificateholder in any taxable year
may exceed amounts actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may
include Buydown Loans. The characterization of any investment in Buydown Loans
will depend upon the precise terms of the related buydown agreement, but to
the extent that such Buydown Loans are secured in part by a bank account or
other personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax
basis. A Grantor Trust Certificateholder that acquires an interest in Mortgage
Assets at a premium may elect to amortize such premium under a constant
interest method, provided that the underlying mortgage loans with respect to
such Mortgage Assets were originated after September 27, 1985. Premium
allocable to mortgage loans originated on or before September 27, 1985 should
be allocated among the principal payments on such mortgage loans and allowed
as an ordinary deduction as principal payments are made. Amortizable bond
premium will be treated as an offset to interest income on such Grantor Trust
Certificate. The basis for such Grantor Trust Certificate will be reduced to
the extent that amortizable premium is applied to offset interest payments. It
is not clear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Code Section 171. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Mortgage Loan (or an underlying mortgage
loan with respect to a Mortgage Asset) prepays in full, equal to the
difference between the portion of the prepaid principal amount of such
Mortgage Loan (or underlying mortgage loan) that is allocable to the
Certificate and the portion of the adjusted basis of the Certificate that is
allocable to such Mortgage Loan (or underlying mortgage loan). If a reasonable
prepayment assumption is used to amortize such premium, it appears that such a
loss would be available, if at all, only if prepayments have occurred at a
rate faster than the reasonable assumed prepayment rate. It is not clear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
On December 30, 1997 the IRS issued final 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 Certificates. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective Certificateholders should
consult their tax advisors regarding the possible application of the
amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the special rules of
the Code relating to original issue discount ("OID") (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27,
1994, as amended on June 11, 1996, under such Sections (the "OID
Regulations"), will be applicable to a Grantor Trust Certificateholder's
interest in those Mortgage Assets meeting the conditions necessary for these
Sections to apply. Rules regarding periodic inclusion of OID income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Such OID could arise by the financing of points or other charges by the
originator of the mortgages in an amount greater than a statutory de minimis
exception to the extent that the points are not currently deductible under
applicable Code provisions or are not for services provided by the lender. OID
generally must be reported as ordinary gross income as it accrues under a
constant interest method. See "--Multiple Classes of Grantor Trust
Certificates--Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest
in a Mortgage Asset is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess of
the portion of the principal amount of such Mortgage Asset allocable to such
holder's undivided interest over such holder's tax basis in such interest.
Market discount with respect to a Grantor Trust Certificate will be considered
to be zero if the amount allocable to the Grantor Trust Certificate is less
than 0.25% of the Grantor Trust Certificate's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date
of purchase. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following
methods. If a Grantor Trust Certificate is issued with OID, the amount of
market discount that accrues during any accrual period would be equal to the
product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining
OID at the beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the Grantor Trust Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption
applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market
discount also may be required to defer a portion of its interest deductions
for the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market
discount. For these purposes, the de minimis rule referred above applies. Any
such deferred interest expense would not exceed the market discount that
accrues during such taxable year and is, in general, allowed as a deduction
not later than the year in which such market discount is includible in income.
If such holder elects to include market discount in income currently as it
accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will
not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April
4, 1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Certificateholder owns or acquires. See "--Regular
Certificates--Premium" herein. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is
irrevocable.
B. Multiple Classes of Grantor Trust Certificates
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of Code
Sections 1271 through 1288, Code Section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that such stripped
interest is created. If a Trust Fund is created with two classes of Grantor
Trust Certificates, one class of Grantor Trust Certificates may represent the
right to principal and interest, or principal only, on all or a portion of the
Mortgage Assets (the "Stripped Bond Certificates"), while the second class of
Grantor Trust Certificates may represent the right to some or all of the
interest on such portion (the "Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), any non-de
minimis discount arising from a subsequent transfer of the Certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Mortgage Asset by Mortgage Asset basis,
which could result in some Mortgage Assets being treated as having more than
100 basis points of interest stripped off. See "--Non-REMIC Certificates" and
"Multiple Classes of Grantor Trust Certificates --Stripped Bonds and Stripped
Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a Mortgage Asset is larger than a de minimis amount (as
calculated for purposes of the OID rules) a purchaser of such a Certificate
will be required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either:
(i) the amount of OID with respect to the Mortgage Assets is
treated as zero under the OID de minimis rule when the
Certificate was stripped or
(ii) no more than 100 basis points (including any amount of
servicing fees in excess of reasonable servicing fees) is
stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first
timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. However, based
on the recent IRS guidance, it appears that all payments from a Mortgage Asset
underlying a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case,
all payments from such Mortgage Asset would be included in the Mortgage
Asset's stated redemption price at maturity for purposes of calculating income
on such certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account
in computing yield with respect to such Grantor Trust Certificate, it appears
that no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However,
if such Certificate is treated as an interest in discrete Mortgage Assets, or
if no prepayment assumption is used, then when a Mortgage Asset is prepaid,
the holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon
Certificates are urged to consult with their own tax advisors regarding the
proper treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing OID, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from
doubt, based on policy considerations, each class of Grantor Trust
Certificates, unless otherwise specified in the related Prospectus Supplement,
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A) and "loans . . . secured by, an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest income attributable to Grantor Trust
Certificates should be considered to represent "interest on obligations
secured by mortgages on real property" within the meaning of Code Section
856(c)(3)(B), provided that in each case the underlying Mortgage Assets and
interest on such Mortgage Assets qualify for such treatment. Prospective
purchasers to which such characterization of an investment in Certificates is
material should consult their own tax advisors regarding the characterization
of the Grantor Trust Certificates and the income therefrom. Grantor Trust
Certificates will be "obligation[s] . . . which [are] principally secured,
directly or indirectly, by an interest in real property" within the meaning of
Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests
in Loans Other Than ARM Loans
The OID 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 OID 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 OID could arise by the charging of points by the originator
of the mortgage in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower
under applicable Code provisions, or under certain circumstances, by the
presence of "teaser" rates on the Mortgage Assets. OID on each Grantor Trust
Certificate must be included in the owner's ordinary income for federal income
tax purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. The amount of OID required to be included in
an owner's income in any taxable year with respect to a Grantor Trust
Certificate representing an interest in Mortgage Assets other than Mortgage
Assets with interest rates that adjust periodically ("ARM Loans") likely will
be computed as described below under "--Accrual of Original Issue Discount."
The following discussion is based in part on the OID Regulations and in part
on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The OID
Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992
may be treated as authority for debt instruments issued after December 21,
1992 and prior to April 4, 1994, and proposed Treasury regulations issued in
1986 and 1991 may be treated as authority for instruments issued before
December 21, 1992. In applying these dates, the issued date of the Mortgage
Assets should be used, or, in the case of Stripped Bond Certificates or
Stripped Coupon Certificates, the date such Certificates are acquired. The
holder of a Certificate should be aware, however, that neither the proposed
OID Regulations nor the OID Regulations adequately address certain issues
relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described
below under "--Accrual of Original Issue Discount," will, unless otherwise
specified in the related Prospectus Supplement, utilize the original yield to
maturity of the Grantor Trust Certificate calculated based on a reasonable
assumed prepayment rate for the mortgage loans underlying the Grantor Trust
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner prescribed by regulations that have not yet been
issued. The legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the Prepayment
Assumption be the prepayment assumption that is used in determining the
offering price of such Certificate. No representation is made that any
Certificate will prepay at the Prepayment Assumption or at any other rate. The
prepayment assumption contained in the Code literally only applies to debt
instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments,
such as the Certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the Master
Servicer intends to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily
portions," as defined below, of the OID on such Grantor Trust Certificate for
each day on which it owns such Certificate, including the date of purchase but
excluding the date of disposition. In the case of an original owner, the daily
portions of OID with respect to each component generally will be determined as
set forth under the OID Regulations. A calculation will be made by the Master
Servicer or such other entity specified in the related Prospectus Supplement
of the portion of OID that accrues during each successive monthly accrual
period (or shorter period from the date of original issue) that ends on the
day in the calendar year corresponding to each of the Distribution Dates on
the Grantor Trust Certificates (or the day prior to each such date). This will
be done, in the case of each full month accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the respective component under the
Prepayment Assumption) of all remaining payments to be
received under the Prepayment Assumption on the respective
component and
(b) any payments included in the state redemption price at
maturity received during such accrual period, and
(ii) subtracting from that total the "adjusted issue price" of the
respective component at the beginning of such accrual period.
The adjusted issue price of a Grantor Trust Certificate at the beginning of
the first accrual period is its issue price; the adjusted issue price of a
Grantor Trust Certificate at the beginning of a subsequent accrual period is
the adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment other than a payment of qualified stated interest made
at the end of or during that accrual period. The OID accruing during such
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the period. With respect to
an initial accrual period shorter than a full monthly accrual period, the
daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
OID 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 OID
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 OID, 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 OID 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 OID on the Mortgage Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing
Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to such instruments. In the absence of any
authority, the Master Servicer will report OID on Grantor Trust Certificates
attributable to ARM Loans ("Stripped ARM Obligations") to holders in a manner
it believes is consistent with the rules described above under the heading
"--Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules
may require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to such income. Further, the addition of interest
deferred by reason of negative amortization ("Deferred Interest") to the
principal balance of an ARM Loan may require the inclusion of such amount in
the income of the Grantor Trust Certificateholder when such amount accrues.
Furthermore, the addition of Deferred Interest to the Grantor Trust
Certificate's principal balance will result in additional income (including
possibly OID income) to the Grantor Trust Certificateholder over the remaining
life of such Grantor Trust Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. Sale or Exchange of a Grantor Trust Certificate
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the
amount received and the owner's adjusted basis in the Grantor Trust
Certificate. Such adjusted basis generally will equal the seller's purchase
price for the Grantor Trust Certificate, increased by the OID included in the
seller's gross income with respect to the Grantor Trust Certificate, and
reduced by principal payments on the Grantor Trust Certificate previously
received by the seller. Such gain or loss will be capital gain or loss to an
owner for which a Grantor Trust Certificate is a "capital asset" within the
meaning of Code Section 1221, and will be long-term or short-term depending on
whether the Grantor Trust Certificate has been owned for the long-term capital
gain holding period (generally more than one year). Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations.
Prospective investors should consult their own tax advisors
concerning the treatment of capital gains.
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 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.
E. Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a
reasonable time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown
on its federal income tax return, 31% backup withholding may be required with
respect to any payments. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax liability.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, 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).
A "qualified mortgage" for REMIC purposes is any obligation
(including certificates of participation in such an obligation) that is
principally secured by an interest in real property and that is transferred to
the REMIC within a prescribed time period in exchange for regular or residual
interests in the REMIC. The REMIC Regulations provide that manufactured
housing or mobile homes (not including recreational vehicles, campers or
similar vehicles) that are "single family residences" under Code Section
25(e)(10) will qualify as real property without regard to state law
classifications. Under Code Section 25(e)(10), a single family residence
includes any manufactured home that has a minimum of 400 square feet of living
space and a minimum width in excess of 102 inches and that is of a kind
customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such Series
of Certificates, Brown & Wood LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the related Agreement, the Master REMIC as well as any Subsidiary REMIC
will each qualify as a REMIC, and the REMIC Certificates issued by the Master
REMIC and the Subsidiary REMIC, respectively, will be considered to evidence
ownership of REMIC Regular Certificates or REMIC Residual Certificates in the
related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code; and (iii) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
A. Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates
may be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any class of Certificates issued
with OID will be required to include such OID in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest
method based on the compounding of interest as it accrues rather than in
accordance with receipt of the interest payments. The following discussion is
based in part on the OID Regulations and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Holders of REMIC Regular Certificates
(the "REMIC Regular Certificateholders") should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a
method for adjusting the amount and rate of accrual of such discount where the
actual prepayment rate differs from the Prepayment Assumption. Under the Code,
the Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative
History provides, however, that Congress intended the regulations to require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such REMIC Regular Certificates. The
Prospectus Supplement for each Series of REMIC Regular Certificates will
specify the Prepayment Assumption to be used for the purpose of determining
the amount and rate of accrual of OID. No representation is made that the
REMIC Regular Certificates will prepay at the Prepayment Assumption or at any
other rate.
In general, each REMIC Regular Certificate will be treated as a
single installment obligation issued with an amount of OID equal to the excess
of its "stated redemption price at maturity" over its "issue price." The issue
price of a REMIC Regular Certificate is the first price at which a substantial
amount of REMIC Regular Certificates of that class are first sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). If less
than a substantial amount of a particular class of REMIC Regular Certificates
is sold for cash on or prior to the date of their initial issuance (the
"Closing Date"), the issue price for such class will be treated as the fair
market value of such class on the Closing Date. The issue price of a REMIC
Regular Certificate also includes the amount paid by an initial
Certificateholder for accrued interest that relates to a period prior to the
issue date of the REMIC Regular Certificate. The stated redemption price at
maturity of a REMIC Regular Certificate includes the original principal amount
of the REMIC Regular Certificate, but generally will not include distributions
of interest if such distributions constitute "qualified stated interest."
Qualified stated interest generally means interest payable at a single fixed
rate or qualified variable rate (as described below) provided that such
interest payments are unconditionally payable at intervals of one year or less
during the entire term of the REMIC Regular Certificate. Interest is payable
at a single fixed rate only if the rate appropriately takes into account the
length of the interval between payments. Distributions of interest on REMIC
Regular Certificates with respect to which Deferred Interest will accrue will
not constitute qualified stated interest payments, and the stated redemption
price at maturity of such REMIC Regular Certificates includes all
distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during
the first period is treated as the amount by which the stated redemption price
at maturity of the Certificate exceeds its issue price for purposes of the de
minimis rule described below. The OID Regulations suggest that all interest on
a long first period REMIC Regular Certificate that is issued with non-de
minimis OID, as determined under the foregoing rule, will be treated as OID.
Where the interval between the issue date and the first Distribution Date on a
REMIC Regular Certificate is shorter than the interval between subsequent
Distribution Dates, interest due on the first Distribution Date in excess of
the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. REMIC Regular
Certificateholders should consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a REMIC Regular
Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the REMIC Regular Certificate
and the denominator of which is the stated redemption price at maturity of the
REMIC Regular Certificate. Although currently unclear, it appears that the
schedule of such distributions should be determined in accordance with the
Prepayment Assumption. The Prepayment Assumption with respect to a Series of
REMIC Regular Certificates will be set forth in the related Prospectus
Supplement. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the REMIC
Regular Certificate is held as a capital asset. However, accrual method
holders may elect to accrue all de minimis OID as well as market discount
under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide
for certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be
issued with OID. The calculation of income in this manner could result in
negative original issue discount (which delays future accruals of OID rather
than being immediately deductible) when prepayments on the Mortgage Assets
exceed those estimated under the Prepayment Assumption. The IRS might contend,
however, that certain proposed contingent payment rules contained in
regulations issued on December 15, 1994, with respect to OID, should apply to
such Certificates. Although such rules are not applicable to instruments
governed by Code Section 1272(a)(6), they represent the only guidance
regarding the current views of the IRS with respect to contingent payment
instruments. In the alternative, the IRS could assert that the stated
redemption price at maturity of such REMIC Regular Certificates should be
limited to their principal amount (subject to the discussion below under
"--Accrued Interest Certificates"), so that such REMIC Regular Certificates
would be considered for federal income tax purposes to be issued at a premium.
If such a position were to prevail, the rules described below under
"--Taxation of Owners of REMIC Regular Certificates--Premium" would apply. It
is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular
Certificate generally should not be treated as a Super-Premium Certificate and
the rules described below under "--REMIC Regular Certificates --Premium"
should apply. However, it is possible that holders of REMIC Regular
Certificates issued at a premium, even if the premium is less than 25% of such
Certificate's actual principal balance, will be required to amortize the
premium under an original issue discount method or contingent interest method
even though no election under Code Section 171 is made to amortize such
premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on the
first day or first business day of the immediately preceding month, interest
may be treated as payable on the last day of the immediately preceding month)
and begins on the day after the end of the immediately preceding accrual
period (or on the issue date in the case of the first accrual period). This
will be done, in the case of each full accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the REMIC Regular Certificates as
calculated under the Prepayment Assumption) of all
remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and
(b) any payments included in the stated redemption price at
maturity received during such accrual period, and
(iii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of
the first accrual period is its issue price; the adjusted issue price of a
REMIC Regular Certificate at the beginning of a subsequent accrual period is
the adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue
price but less than the stated redemption price at maturity), however, the
daily portion is reduced by the amount that would be the daily portion for
such day (computed in accordance with the rules set forth above) multiplied by
a fraction, the numerator of which is the amount, if any, by which the price
paid by such holder for that REMIC Regular Certificate exceeds the following
amount:
(a) the sum of the issue price plus the aggregate amount of OID that
would have been includible in the gross income of an original REMIC
Regular Certificateholder (who purchased the REMIC Regular
Certificate at its issue price), less
(b) any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that REMIC
Regular Certificate for all days beginning on the date after the purchase date
and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a
variable rate will constitute qualified stated interest and not contingent
interest if, generally,
(i) such interest is unconditionally payable at least annually,
(ii) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
(iii) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate,"
or a combination of "qualified floating rates" that do not operate
in a manner that significantly accelerates or defers interest
payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing
a variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest
on a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through
the life of the REMIC Regular Certificates. It is possible, however, that the
IRS may treat some or all of the interest on REMIC Regular Certificates with a
weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may effect the timing of
income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Certificateholder acquires during the year of
the election and thereafter. Similarly, a Certificateholder that makes this
election for a Certificate that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns
or acquires. See "--REMIC Regular Certificates--Premium" herein. The election
to accrue interest, discount and premium on a constant yield method with
respect to a Certificate is irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also
be subject to the market discount provisions of Code Sections 1276 through
1278. Under these provisions and the OID Regulations, "market discount" equals
the excess, if any, of
(i) the REMIC Regular Certificate's stated principal amount or, in the
case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased
such REMIC Regular Certificate from an original holder) over
(ii) the price for such REMIC Regular Certificate paid by the purchaser.
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity. In
particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount
not previously included in income, and to recognize ordinary income to that
extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual
amount of market discount must be allocated to the remaining principal
payments on the REMIC Regular Certificate, and gain equal to such allocated
amount will be recognized when the corresponding principal payment is made.
Treasury regulations implementing the market discount rules have not yet been
issued; therefore, investors should consult their own tax advisors regarding
the application of these rules and the advisability of making any of the
elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods.
For REMIC Regular Certificates issued with OID, the amount of market discount
that accrues during a period is equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at
the beginning of the period.
For REMIC Regular Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of:
(a) the total remaining market discount and
(b) a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the
beginning of the period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the REMIC Regular Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market
discount also may be required to defer a portion of its interest deductions
for the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the
year in which such market discount is includible in income. If such holder
elects to include market discount in income currently as it accrues on all
market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases
the REMIC Regular Certificate at a cost (not including accrued qualified
stated interest) greater than its remaining stated redemption price at
maturity will be considered to have purchased the REMIC Regular Certificate at
a premium and may elect to amortize such premium under a constant yield
method. A Certificateholder that makes this election for a Certificate that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder acquires during the year of the election or
thereafter. It is not clear whether the Prepayment Assumption would be taken
into account in determining the life of the REMIC Regular Certificate for this
purpose. However, the Legislative History states that the same rules that
apply to accrual of market discount (which rules require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have OID) will also
apply in amortizing bond premium under Code Section 171. The Code provides
that amortizable bond premium will be allocated among the interest payments on
such REMIC Regular Certificates and will be applied as an offset against such
interest payment. On December 30, 1997, the IRS issued final 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). Absent further guidance from the IRS the
Trust intends to account for amortizable bond premium in the manner described
above. Certificateholders should consult their tax advisors regarding the
possibility of making an election to amortize any such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. It is unclear, under the OID Regulations, whether
any of the interest on such Certificates will constitute qualified stated
interest or whether all or a portion of the interest payable on such
Certificates must be included in the stated redemption price at maturity of
the Certificates and accounted for as OID (which could accelerate such
inclusion). Interest on REMIC Regular Certificates must in any event be
accounted for under an accrual method by the holders of such Certificates and,
therefore, applying the latter analysis may result only in a slight difference
in the timing of the inclusion in income of interest on such REMIC Regular
Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the event
there are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to delays and
reductions in distributions on such Subordinated Certificates attributable to
defaults and delinquencies on the Mortgage Assets, except to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income reported by a Subordinated Certificateholder in any period
could significantly exceed the amount of cash distributed to such holder in
that period. The holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount
of distributions on the Subordinated Certificate is reduced as a result of
defaults and delinquencies on the Mortgage Assets. Timing and characterization
of such losses is discussed in "--REMIC Regular Certificates--Treatment of
Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the REMIC Regular
Certificate. Such adjusted basis generally will equal the cost of the REMIC
Regular Certificate to the seller, increased by any OID and market discount
included in the seller's gross income with respect to the REMIC Regular
Certificate, and reduced (but not below zero) by payments included in the
stated redemption price at maturity previously received by the seller and by
any amortized premium. Similarly, a holder who receives a payment that is part
of the stated redemption price at maturity of a REMIC Regular Certificate will
recognize gain equal to the excess, if any, of the amount of the payment over
the holder's adjusted basis in the REMIC Regular Certificate. A REMIC Regular
Certificateholder who receives a final payment that is less than the holder's
adjusted basis in the REMIC Regular Certificate will generally recognize a
loss. Except as provided in the following paragraph and as provided under
"--Market Discount" above, any such gain or loss will be capital gain or loss,
provided that the REMIC Regular Certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of Code Section
1221.
Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Gain from the sale or other disposition of a REMIC Regular
Certificate that might otherwise be capital gain will be treated as ordinary
income to the extent that such gain does not exceed the excess, if any, of (i)
the amount that would have been includible in such holder's income with
respect to the REMIC Regular Certificate had income accrued thereon at a rate
equal to 110% of the AFR as defined in Code Section 1274(d) determined as of
the date of purchase of such REMIC Regular Certificate, over (ii) the amount
actually includible in such holder's income.
The Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a REMIC Regular Certificate by a bank or a thrift institution to which
such section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
may not have, it appears that the information reports will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date
may or may not exceed such interval. Purchasers of Payment Lag Certificates
for which the period between the Closing Date and the first Distribution Date
does not exceed such interval could pay upon purchase of the REMIC Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date. If a portion of the initial purchase
price of a REMIC Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the REMIC
Regular Certificate provides for a payment of stated interest on the first
payment date (and the first payment date is within one year of the issue date)
that equals or exceeds the amount of the pre-issuance accrued interest, then
the REMIC Regular Certificates' issue price may be computed by subtracting
from the issue price the amount of pre-issuance accrued interest, rather than
as an amount payable on the REMIC Regular Certificate. However, it is unclear
under this method how the OID Regulations treat interest on Payment Lag
Certificates. Therefore, in the case of a Payment Lag Certificate, the Trust
Fund intends to include accrued interest in the issue price and report
interest payments made on the first Distribution Date as interest to the
extent such payments represent interest for the number of days that the
Certificateholder has held such Payment Lag Certificate during the first
accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those REMIC Regular
Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult their
own tax advisors about the impact of these rules on an investment in the REMIC
Regular Certificates. See "Pass-Through of Non-Interest Expenses of the REMIC"
under "Taxation of Owners of REMIC Residual Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all
Mortgage Assets remaining in the related Trust Fund have been liquidated or
the Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged in
a trade or business within the United States will not be subject to federal
withholding tax if (i) such REMIC Regular Certificateholder does not actually
or constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions
of interest to such holder, including distributions in respect of accrued OID,
may be subject to a 30% withholding tax, subject to reduction under any
applicable tax treaty.
Further, a REMIC Regular Certificate will not be included in the
estate of a non-resident alien individual and will not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates,
and holders of REMIC Residual Certificates (the "REMIC Residual
Certificateholder") and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates without consulting their tax
advisors as to the possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer
will furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or
desirable to assist REMIC Regular Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
REMIC Regular Certificates on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown
on its federal income tax return, 31% backup withholding may be required with
respect to any payments. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information reporting
rules described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
B. Taxation of Owners of REMIC Residual Certificates
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined
by allocating the taxable income of the REMIC for each calendar quarter
ratably to each day in the quarter. Such a holder's share of the taxable
income of the REMIC for each day will be based on the portion of the
outstanding REMIC Residual Certificates that such holder owns on that day. The
taxable income of the REMIC will be determined under an accrual method and
will be taxable to the holders of REMIC Residual Certificates without regard
to the timing or amounts of cash distributions by the REMIC. Ordinary income
derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the REMIC Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the REMIC Residual Certificates were treated for
federal income tax purposes as direct ownership interests in the Certificates
or as debt instruments issued by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such
a mismatching of income and cash distributions (that is, "phantom income").
This mismatching may be caused by the use of certain required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
Mortgage Assets and certain other factors. Depending upon the structure of a
particular transaction, the aforementioned factors may significantly reduce
the after-tax yield of a REMIC Residual Certificate to a REMIC Residual
Certificateholder. Investors should consult their own tax advisors concerning
the federal income tax treatment of a REMIC Residual Certificate and the
impact of such tax treatment on the after-tax yield of a REMIC Residual
Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would
equal the amounts that would have been reported for the same days by an
original REMIC Residual Certificateholder, as described above. The Legislative
History indicates that certain adjustments may be appropriate to reduce (or
increase) the income of a subsequent holder of a REMIC Residual Certificate
that purchased such REMIC Residual Certificate at a price greater than (or
less than) the adjusted basis such REMIC Residual Certificate would have in
the hands of an original REMIC Residual Certificateholder. See "--Sale or
Exchange of REMIC Residual Certificates" below. It is not clear, however,
whether such adjustments will in fact be permitted or required and, if so, how
they would be made. The REMIC Regulations do not provide for any such
adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed
to the REMIC for interest and OID on the REMIC Regular Certificates and,
except as described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that:
(i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
(ii) all bad loans will be deductible as business bad debts, and
(iii) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC's gross income includes interest, original issue discount income,
and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the REMIC Regular Certificates. Note
that the timing of cancellation of indebtedness income recognized by REMIC
Residual Certificateholders resulting from defaults and delinquencies on
Mortgage Assets may differ from the time of the actual loss on the Mortgage
Asset. The REMIC's deductions include interest and original issue discount
expense on the REMIC Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC and realized losses on the
Mortgage Loans. The requirement that REMIC Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC will continue
until there are no Certificates of any class of the related Series
outstanding.
For purposes of determining its taxable income, the REMIC will have
an initial aggregate tax basis in its assets equal to the sum of the issue
prices of the REMIC Regular Certificates and the REMIC Residual Certificates
(or, if a class of Certificates is not sold initially, its fair market value).
Such aggregate basis will be allocated among the Mortgage Assets and other
assets of the REMIC in proportion to their respective fair market value. A
Mortgage Asset will be deemed to have been acquired with discount or premium
to the extent that the REMIC's basis therein is less than or greater than its
principal balance, respectively. Any such discount (whether market discount or
OID) will be includible in the income of the REMIC as it accrues, in advance
of receipt of the cash attributable to such income, under a method similar to
the method described above for accruing OID on the REMIC Regular Certificates.
The REMIC expects to elect under Code Section 171 to amortize any premium on
the Mortgage Assets. Premium on any Mortgage Asset to which such election
applies would be amortized under a constant yield method. It is not clear
whether the yield of a Mortgage Asset would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to the yield with respect to
any underlying mortgage loan originated on or before September 27, 1985.
Instead, premium with respect to such a mortgage loan would be allocated among
the principal payments thereon and would be deductible by the REMIC as those
payments become due.
The REMIC will be allowed a deduction for interest and OID on the
REMIC Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with respect
to REMIC Regular Certificates except that the 0.25% per annum de minimis rule
and adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize
the cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See
"--Sale or Exchange of REMIC Residual Certificates" below. For a discussion of
possible adjustments to income of a subsequent holder of a REMIC Residual
Certificate to reflect any difference between the actual cost of such REMIC
Residual Certificate to such holder and the adjusted basis such REMIC Residual
Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net
loss would be allocated among the REMIC Residual Certificateholders in the
same manner as the REMIC's taxable income. The net loss allocable to any REMIC
Residual Certificate will not be deductible by the holder to the extent that
such net loss exceeds such holder's adjusted basis in such REMIC Residual
Certificate. Any net loss that is not currently deductible by reason of this
limitation may only be used by such REMIC Residual Certificateholder to offset
its share of the REMIC's taxable income in future periods (but not otherwise).
The ability of REMIC Residual Certificateholders that are individuals or
closely held corporations to deduct net losses may be subject to additional
limitations under the Code.
Mark to Market Rules. A Residual Certificate acquired after January
3, 1995 cannot be marked to market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general
rule, all of the fees and expenses of a REMIC will be taken into account by
holders of the REMIC Residual Certificates. In the case of a "single class
REMIC," however, the expenses and a matching amount of additional income will
be allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related REMIC Residual Certificates in their
entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in
a REMIC Regular Certificate or a REMIC Residual Certificate directly or
through a pass-through interest holder that is required to pass miscellaneous
itemized deductions through to its owners or beneficiaries (e.g. a
partnership, an S corporation or a grantor trust), such expenses will be
deductible under Code Section 67 only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the individual, exceed 2% of such
individual's adjusted gross income. In addition, Code Section 68 provides that
the amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a certain amount (the "Applicable Amount") will
be reduced by the lesser of (i) 3% of the excess of the individual's adjusted
gross income over the Applicable Amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income recognized by REMIC Residual Certificateholders who are subject
to the limitations of either Code Section 67 or Code Section 68 may be
substantial. Further, holders (other than corporations) subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining such holders' alternative minimum taxable income. The REMIC is
required to report to each pass-through interest holder and to the IRS such
holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. REMIC Residual Certificateholders that are
pass-through interest holders should consult their own tax advisors about the
impact of these rules on an investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any
calendar quarter will be subject to federal income tax in all events. Thus,
for example, an excess inclusion (i) may not, except as described below, be
offset by any unrelated losses, deductions or loss carryovers of a REMIC
Residual Certificateholder; (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the REMIC Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income (see "--Tax-Exempt
Investors" below); and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a REMIC Residual Certificateholder that is a
foreign investor. See "--Non-U.S. Persons" below. An exception to the excess
inclusion rules that applied to thrifts holding certain residuals was repealed
by the Small Business Tax Act of 1996.
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.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate. To the
extent a distribution exceeds such adjusted basis, it will be treated as gain
from the sale of the REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except that
the recognition of loss may be limited under the "wash sale" rules described
below). A holder's adjusted basis in a REMIC Residual Certificate generally
equals the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect
to such REMIC Residual Certificate, and decreased (but not below zero) by the
net losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC
Residual Certificate by a bank or thrift institution to which such section
applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Code Section 1091. In that event, any loss
realized by the REMIC Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such REMIC Residual
Certificateholder's adjusted basis in the newly acquired asset.
C. Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a source
other than a Mortgage Asset or certain other permitted investments, the
receipt of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Assets for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
Fund for any Series of Certificates will engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series
of Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to
treat such Trust Fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property,"
determined by reference to the rules applicable to real estate investment
trusts. "Net income from foreclosure property" generally means income from
foreclosure property other than qualifying income for a real estate investment
trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on a REMIC relating to any Series of Certificates arises
out of or results from (i) a breach of the related Master Servicer's,
Trustee's or Asset Seller's obligations, as the case may be, under the related
Agreement for such Series, such tax will be borne by such Master Servicer,
Trustee or Asset Seller, as the case may be, out of its own funds or (ii) the
Asset Seller's obligation to repurchase a Mortgage Loan, such tax will be
borne by the Asset Seller. In the event that such Master Servicer, Trustee or
Asset Seller, as the case may be, fails to pay or is not required to pay any
such tax as provided above, such tax will be payable out of the Trust Fund for
such Series and will result in a reduction in amounts available to be
distributed to the Certificateholders of such Series.
D. Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets (other than cash) within a 90-day
period beginning on such date, the REMIC will not be subject to any Prohibited
Transaction Tax, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to
meet claims) to holders of Regular and REMIC Residual Certificates within the
90-day period.
The REMIC will terminate shortly following the retirement of the
REMIC Regular Certificates. If a REMIC Residual Certificateholder's adjusted
basis in the REMIC Residual Certificate exceeds the amount of cash distributed
to such REMIC Residual Certificateholder in final liquidation of its interest,
then it would appear that the REMIC Residual Certificateholder would be
entitled to a loss equal to the amount of such excess. It is unclear whether
such a loss, if allowed, will be a capital loss or an ordinary loss.
E. Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will
be furnished quarterly to each REMIC Residual Certificateholder who held a
REMIC Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. Tax-Exempt Investors
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be
subject to such tax on that portion of the distributions received on a REMIC
Residual Certificate that is considered an excess inclusion. See "--Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions" above.
G. Residual Certificate Payments--Non-U.S. Persons
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Amounts distributed to holders of
REMIC Residual Certificates should qualify as "portfolio interest," subject to
the conditions described in "--Taxation of Owners of REMIC Regular
Certificates" above, but only to the extent that the underlying mortgage loans
were originated after July 18, 1984. Furthermore, the rate of withholding on
any income on a REMIC Residual Certificate that is excess inclusion income
will not be subject to reduction under any applicable tax treaties. See
"--Taxation of Owners of REMIC Residual Certificates--Excess Inclusions"
above. If the portfolio interest exemption is unavailable, such amount will be
subject to United States withholding tax when paid or otherwise distributed
(or when the REMIC Residual Certificate is disposed of) under rules similar to
those for withholding upon disposition of debt instruments that have OID. The
Code, however, grants the Treasury Department authority to issue regulations
requiring that those amounts be taken into account earlier than otherwise
provided where necessary to prevent avoidance of tax (for example, where the
REMIC Residual Certificates do not have significant value). See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" above. If the
amounts paid to REMIC Residual Certificateholders that are not U.S. Persons
are effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates. For special restrictions
on the transfer of REMIC Residual Certificates, see "--Tax-Related
Restrictions on Transfers of REMIC Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their
tax advisors as to the possible adverse tax consequences of such acquisition.
Tax-Related Restrictions on Transfers of REMIC Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in such entity are not held by "disqualified organizations" (as
defined below). Further, a tax is imposed on the transfer of a residual
interest in a REMIC to a "disqualified organization." The amount of the tax
equals the product of (i) 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 the Taxpayer Relief Act of
1997, large partnerships (generally with 250 or more partners) will be taxable
on excess inclusion income as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that
no record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to
be bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic
REMIC Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up calls
or required liquidation provided for in the REMIC's organizational documents,
(i) the present value of the expected future distributions on the REMIC
Residual Certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. A significant
purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. A transferor is presumed not to have such
knowledge if (i) the transferor conducted a reasonable investigation of the
transferee and (ii) the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated with
the residual interest as they become due. If a transfer of a Noneconomic REMIC
Residual Certificate is disregarded, the transferor would continue to be
treated as the owner of the REMIC Residual Certificate and would continue to
be subject to tax on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of
a REMIC Residual Certificate that has a "tax avoidance potential" to a
"foreign person" will be disregarded for federal income tax purposes. This
rule appears to apply to a transferee who is not a U.S. Person unless such
transferee's income in respect of the REMIC Residual Certificate is
effectively connected with the conduct of a United Sates trade or business. A
REMIC Residual Certificate is deemed to have a tax avoidance potential unless,
at the time of transfer, the transferor reasonably expect that the REMIC will
distribute to the transferee amounts that will equal at least 30 percent of
each excess inclusion, and that such amounts will be distributed at or after
the time the excess inclusion accrues and not later than the end of the
calendar year following the year of accrual. If the non-U.S. Person transfers
the REMIC Residual Certificate to a U.S. Person, the transfer will be
disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The provisions in the REMIC Regulations
regarding transfers of REMIC Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June 30,
1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with
a duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
Tax Characterization of a Trust Fund as a Partnership
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the 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.
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. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent
shareholder" of the Trust or the Depositor (including a holder of 10% of the
outstanding Certificates) or a "controlled foreign corporation" with respect
to which the Trust Fund or the Asset Seller is a "related person" within the
meaning of the Code and (ii) provides the Owner Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with an
appropriate statement (on Form W-8 or a similar form), signed under penalties
of perjury, certifying that the beneficial owner of the Note is a foreign
person and providing the foreign person's name and address. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the Note. If such interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at
a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a Note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the foreign person and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt
holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust Fund will be
required to withhold 31 percent of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted
that one or more of the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Trust Fund. If
so treated, the Trust Fund would likely be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
certain qualifying income tests. Nonetheless, treatment of the Notes as equity
interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable
income", income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their share
of the Trust Fund's expenses.
B. Tax Consequences to Holder of the Certificates
Treatment of the Trust Fund as a Partnership. The Depositor will
agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by
the Trust Fund, the partners of the partnership being the Certificateholders,
and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust Fund, the
Certificates, the Notes, the Trust Fund and the Master Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series
of Securities includes a single class of Certificates. If these conditions are
not satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be required
to separately take into account such holder's allocated share of income,
gains, losses, deductions and credits of the Trust Fund. The Trust Fund's
income will consist primarily of interest and finance charges earned on the
Mortgage Loans (including appropriate adjustments for market discount, OID and
bond premium) and any gain upon collection or disposition of Mortgage Loans.
The Trust Fund's deductions will consist primarily of interest accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such
month, including interest accruing at the Pass-Through Rate for such month and
interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the
Mortgage Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; (iii) prepayment premium payable
to the Certificateholders for such month; and (iv) any other amounts of income
payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Mortgage Loans
that corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Company. Based on the economic arrangement of the parties,
this approach for allocating Trust Fund income should be permissible under
applicable treasury regulations, although no assurance can be given that the
IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through
Rate plus the other items described above even though the Trust Fund might not
have sufficient cash to make current cash distributions of such amount. Thus,
cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Trust Fund income even if they have not received cash from the Trust
Fund to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund
(including fees to the Master Servicer but not interest expense) would be
miscellaneous itemized deductions. Such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on
an amount of income that exceeds the amount of cash actually distributed to
such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Mortgage Loans may be greater or
less than the remaining principal balance of the Loans at the time of
purchase. If so, the Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan by Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust
Fund will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Trust Fund are sold or
exchanged within a 12-month period. Pursuant to formal Treasury regulations
issued May 8, 1997 under section 708 of the Code, if such a termination
occurs, the Trust Fund (the "old partnership") would be deemed to contribute
its assets to a new partnership (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the holder's share of the Notes and other liabilities of the Trust Fund. A
holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements.
Thus, to avoid those special reporting requirements, the Trust Fund will elect
to include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust Fund's taxable income and losses will be determined monthly and the tax
items for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or
losses of the Trust Fund might be reallocated among the Certificateholders.
The Trust Fund's method of allocation between transferors and transferees may
be revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable
share of items of Trust Fund income and expense to holders and the IRS on
Schedule K-1. The Trust Fund will provide the Schedule K-1 information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, holders must file tax
returns that are consistent with the information return filed by the Trust
Fund or be subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii)
as to each beneficial owner (x) the name, address and identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with
the information described above may be subject to penalties.
The Company will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. Persons because there is no clear authority dealing with
that issue under facts substantially similar to those described herein.
Although it is not expected that the Trust Fund would be engaged in a trade or
business in the United States for such purposes, the Trust Fund will withhold
as if it were so engaged in order to protect the Trust Fund from possible
adverse consequences of a failure to withhold. The Trust Fund expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income
were effectively connected to a U.S. trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other
foreign holders. Subsequent adoption of Treasury regulations or the issuance
of other administrative pronouncements may require the Trust Fund to change
its withholding procedures. In determining a holder's withholding status, the
Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Trust Fund taking the position that no taxes were due because the Trust Fund
was not engaged in a U.S. trade or business. However, interest payments made
(or accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be
subject to United States federal income tax and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable treaty. In
such case, a foreign holder would only be enticed to claim a refund for that
portion of the taxes in excess of the taxes that should be withheld with
respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information reporting
rules described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
Tax Treatment of Certificates as Debt for Tax Purposes
A. Characterization of the Certificates as Indebtedness
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based on
the application of existing law to the facts as set forth in the Trust
Agreement and other relevant documents and assuming compliance with the terms
of the Trust Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor ("Tax
Counsel"), will deliver its opinion that the Certificates will be treated as
debt instruments for federal income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the
Certificates will be indebtedness secured by the related Assets. The Depositor
and the Certificateholders, by accepting the Certificates, and each
Certificate Owner by its acquisition of a beneficial interest in a
Certificate, have agreed to treat the Certificates as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Depositor may treat this transaction as a sale of an interest in the related
Assets for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a
transaction constitutes a sale of property or a loan, the repayment of which
is secured by property, is a question of fact, the resolution of which is
based upon the economic substance of the transaction rather than its form or
the manner in which it is labeled. While the IRS and the courts have set forth
several factors to be take into account in determining whether the substance
of a transaction is a sale of property or a secured loan, the primary factor
in making this determination is whether the transferee has assumed the risk of
loss or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel will analyze and rely on several
factors in reaching its opinion that the weight of the benefits and burdens of
ownership of the Mortgage Loans will be retained by the Depositor and not
transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions of the documents
either accords with the characterization of the Certificates as debt or
otherwise makes the rationale of those cases inapplicable to this situation.
B. Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations
for U.S. federal tax purposes, the Certificates generally will be taxable in
the following manner. While it is not anticipated that the Certificates will
be issued at a greater than de minimus discount, under the OID Regulations it
is possible that the Certificates could nevertheless be deemed to have been
issued with OID if the interest were not treated as "unconditionally payable"
under the OID Regulations. If such regulations were to apply, all of the
taxable income to be recognized with respect to the Certificates would be
includible in income of Certificate owners as OID, but would not be includible
again when the interest is actually received.
C. Possible Classification of the Trust Fund as a
Partnership or Association Taxable as a Corporation
Based on application of existing laws to the facts as set forth in
the Trust Agreement and other relevant documents and assuming compliance with
the terms of the Trust Agreement, Tax Counsel will deliver its opinion that
the transaction will not be treated as a partnership or an association taxable
as a corporation. The opinion of Tax Counsel is not binding on the courts or
the IRS. It is possible that the IRS could assert that, for purposes of the
Code, the transaction contemplated by this Prospectus Supplement with respect
to the Certificates constitutes a sale of the Mortgage Loans (or an interest
therein) to the Certificate Owners and that the proper classification of the
legal relationship between the Depositor and the Certificate Owners resulting
form this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be
treated as indebtedness in the hands of the Certificateholders for U.S.
federal income tax purposes and that the entity constituted by the Trust will
not be a publicly traded partnership treated as a corporation or an
association taxable as a corporation, the Depositor will not attempt to comply
with U.S. federal income tax reporting requirements applicable to partnerships
or corporations as such requirements would apply if the Certificates were
treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable
as a corporation), the Trust Fund would be subject to U.S. federal income tax
at corporate income tax rates on the income it derives form the Mortgage
Loans, which would reduce the amounts available for distribution to the
Certificate Owners. Cash distributions to the Certificate Owners generally
would be treated as dividends for tax purposes to the extent of such
corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any
entity (or portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Any
entity (or portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50% of
which are real estate mortgages, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such
debt obligations bear a relationship to the debt instruments held by the
entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that
all of the provisions of the Trust Agreement, as in effect on the date of
issuance, will be complied with, Tax Counsel will deliver its opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts.
If the IRS were to contend successfully (or future regulations were to
provide) that the arrangement created by the Trust Agreement is a taxable
mortgage pool, such arrangement would be subject to U.S. federal corporate
income tax on its taxable income generated by ownership of the Mortgage Loans.
Such a tax might reduce amounts available for distributions to Certificate
Owners. The amount of such a tax would depend upon whether distributions to
Certificate Owners would be deductible as interest expense in computing the
taxable income of such an arrangement as a taxable mortgage pool.
E. Foreign Investors
In general, subject to certain exception, interest (including OID)
paid on a Certificate to a nonresident alien individual, foreign corporation
or other non-United States person is not subject to U.S. federal income tax,
provided that such interest is not effectively connected with a trade or
business of the recipient in the United sates and the Certificate Owner
provides the required foreign person information certification.
If the interest of the Certificate Owners were deemed to be
partnership interest, the partnership would be required, on a quarterly basis,
to pay withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S.
income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. Backup Withholding
Certain Certificate owners may be subject to backup withholding at
the rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance of the Certificates, fail to supply the
Trustee or the Certificate Owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as defined
in the Code) properly, or, under certain circumstances, fail to provide the
Trustee of the Certificate Owners' brokers with certified statements, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to
each Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Certificates (and the amount of interest withheld for
U.S. federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on the Certificates
owned from Participants and Indirect Participants rather than from the
Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Indirect Participants and certain other
persons to complete their reports.) Each non-exempt Certificate Owner will be
required to provide, under penalty of perjury, a certificate on IRS Form W-9
containing his or her name, address, correct federal taxpayer identification
number and a statement that he or she is not to subject to backup withholding.
Should a non-exempt Certificate Owner fail to provide the required
certification, the Participants or Indirect Participants (or the Paying Agent)
will be required to withhold 31% of the interest (and principal) otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's federal income tax liability.
G. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New regulations will generally be effective for payments made
after December 31, 1999, 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.
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."
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 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 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 Credit
Rating Co., Fitch IBCA, Inc., Moody's Investors Service, Inc. and
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
(4) The Trustee is not an affiliate of the Underwriter, the
Asset Seller, the Master Servicer, any insurer of the Mortgage
Assets, any borrower whose obligations under one or more Assets
constitute more than 5% of the aggregate unamortized principal
balance of the assets in the Trust Fund, or any of their respective
affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting
such Certificates; the sum of all payments made to and retained by
the Asset Seller pursuant to the sale of the Assets to the Trust Fund
represents not more than the fair market value of such Assets; the
sum of all payments made to and retained by the Master Servicer
represent not more than reasonable compensation for the Master
Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933
as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of
the Exemption and (b) that the specific and general conditions set forth in
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
particular, in connection with a contemplated purchase of Securities
representing a beneficial ownership interest in a pool of single family
residential first mortgage loans, such Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Securities may
contain additional information regarding the application of the Exemption,
PTCE 83-1, or any other exemption, with respect to the Securities offered
thereby. PTCE 83-1 is not applicable to manufactured housing contract pool
investment trusts or multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust & Savings Bank (decided December 13, 1993).
In John Hancock, the Supreme Court ruled that assets held in an insurance
company's general account may be deemed to be "plan assets" for ERISA purposes
under certain circumstances. Prospective purchasers should determine whether
the decision affects their ability to make purchases of the Securities. In
particular, such an insurance company should consider the exemptive relief
granted by Labor for transactions involving insurance company general accounts
in Prohibited Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12,
1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of
issuance in one of the four highest rating categories by at least one Rating
Agency. The related Prospectus Supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" ("SMMEA
Securities") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). SMMEA Securities will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee retirement
systems) created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Maryland,
Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina, Ohio,
South Dakota, Utah, Virginia and West Virginia enacted legislation before the
October 4, 1991 cutoff established by SMMEA for such enactments, limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities, in most cases by
requiring the affected investors to rely solely upon existing state law, and
not SMMEA. Investors affected by such legislation will be authorized to invest
in SMMEA Certificates only to the extent provided in such legislation. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest
in "mortgage related securities," or require the sale or other disposition of
such securities, so long as such contractual commitment was made or such
securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities, and the
NCUA's regulation "Investment and Deposit Activities" (12 C.F.R. Part 703),
which sets forth certain restrictions on investment by federal credit unions
in mortgage related securities.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of
Thrift Supervision ("OTS"), the NCUA or other federal or state agencies with
similar authority should review any applicable rules, guidelines and
regulations prior to purchasing any Offered Security. The Federal Financial
Institutions Examination Council, for example, has issued a Supervisory Policy
Statement on Securities Activities effective February 10, 1992 (the "Policy
Statement") setting forth guidelines for and significant restrictions on
investments in "high-risk mortgage securities." The Policy Statement has been
adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC, the OTS and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement generally
indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the Policy Statement, prior to purchase, a
depository institution will be required to determine whether a mortgage
derivative product that it is considering acquiring is high-risk, and if so
that the proposed acquisition would reduce the institution's overall interest
rate risk. Reliance on analysis and documentation obtained from a securities
dealer or other outside party without internal analysis by the institution
would be unacceptable. There can be no assurance that any classes of Offered
Securities will not be treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions
Reform, Recovery and Enhancement Act of 1989, the foregoing bulletin will
remain in effect unless and until modified, terminated, set aside or
superseded by the FDIC. Similar policy statements have been issued by
regulators having jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this Offered Security under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase such
Offered Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of
the investor's assets. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Securities of any class constitute legal investments or are subject to
investment, capital or other restrictions.
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.
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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request
by any person to whom this prospectus is delivered in connection with the
offering of one or more Classes of Offered Securities, the Depositor will
provide or cause to be provided without charge a copy of any of the documents
and/or reports incorporated herein by reference, in each case to the extent
the documents or reports relate to such Classes of Offered Securities, other
than the exhibits to such documents (unless those 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, telephone number (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Investors may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
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.
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
1986 Act........................................... 70, 74
Accrual Securities................................. 9, 27
Accrued Security Interest.......................... 29
adjusted issue price............................... 71, 83
Agreement.......................................... 36
Agreements......................................... 9
Amortizable Bond Premium Regulations............... 67
an accrual period.................................. 76
Applicable Amount.................................. 83
ARM Loans.......................................... 20, 70
Asset Seller....................................... 19
Assets............................................. 1, 6, 18
Available Distribution Amount...................... 28
Balloon Mortgage Loans............................. 17
benefit plan investors............................. 100
Book-Entry Securities.............................. 28
Buydown Mortgage Loans............................. 26
Buydown Period..................................... 26
capital asset...................................... 72, 79
Cash Flow Agreement................................ 8, 22
Cash Flow Agreements............................... 1
Cede............................................... 3, 33
CEDEL.............................................. 34
CEDEL Participants................................. 34
Certificateholder.................................. 95
Certificates....................................... 1, 6, 101
clearing agency.................................... 33
clearing corporation............................... 33, 38
Closing Date....................................... 74
Code............................................... 11
Collection Account................................. 40
Commission......................................... 3
Contributions Tax.................................. 84
Cooperative........................................ 35, 56
Cooperative Loans.................................. 56
Cooperatives....................................... 19
Covered Trust...................................... 16, 53
CPR................................................ 25
Credit Support..................................... 1, 8, 22
Crime Control Act.................................. 64
Cut-off Date....................................... 10
daily accruals..................................... 83
Daily portions..................................... 71, 75
Deferred Interest.................................. 71
Definitive Securities.............................. 28, 36
Depositor.......................................... 6, 19
Determination Date................................. 28
disqualified organization.......................... 86
Distribution Date.................................. 10
DTC................................................ 3, 33
Due Period......................................... 28
Eligible Corporations.............................. 97
equity of redemption............................... 59
ERISA.............................................. 12, 99
Euroclear.......................................... 34
Euroclear operator................................. 34
Euroclear Participants............................. 34
Events of Default.................................. 49
Evidences of indebtedness.......................... 72, 73, 79, 84
Excess inclusion................................... 83
excess inclusions.................................. 86
excess servicing................................... 69
Exchange Act....................................... 4
Exemption.......................................... 100
FASIT Qualification Test........................... 96
FDIC............................................... 40, 102
Federal long-term rate............................. 83
FHLMC.............................................. 47
foreign person..................................... 87, 89
Government Securities.............................. 1, 7, 19, 73, 98
Grantor Trust Certificates......................... 11
High-Yield Interest................................ 97
Home Equity Loans.................................. 7, 20
Home Improvement Contracts......................... 7, 20
Indenture.......................................... 27, 36
Indenture Trustee.................................. 36
Indirect Participants.............................. 34
Insurance Proceeds................................. 40
L/C Bank........................................... 54
Labor.............................................. 100
Legislative History................................ 70
Liquidation Proceeds............................... 40
Loan-to-Value Ratio................................ 19
Mark-to-Market Regulations......................... 82
Master REMIC....................................... 73
Master Servicer.................................... 6
MBS................................................ 1, 6, 18
MBS Agreement...................................... 21
MBS Issuer......................................... 21
MBS Servicer....................................... 21
MBS Trustee........................................ 21
Merrill Lynch...................................... 103
Model Law.......................................... 103
Mortgage Assets.................................... 1, 19
Mortgage Loan Group................................ 9, 27
Mortgage Loans..................................... 1, 6, 18
Mortgage Notes..................................... 19
Mortgage Rate...................................... 7, 20
Mortgage related securities........................ 101-103
Mortgages.......................................... 19, 56
mortgagor.......................................... 56
NCUA............................................... 102
new partnership.................................... 91
New Regulations.................................... 72, 81, 93, 96
Nonrecoverable Advance............................. 31
Notes.............................................. 1, 6
Offered Securities................................. 1
OID................................................ 65, 67
OID Regulations.................................... 67
Old partnership.................................... 91
Originator......................................... 19
OTS................................................ 102
Ownership interests................................ 96
Participants....................................... 33, 35
Parties in interest................................ 99
pass-through entity................................ 86
pass-through interest holder....................... 83
pass-through interest holders...................... 80
Pass-Through Rate.................................. 9, 29
passive losses..................................... 81
Payment Lag Certificates........................... 79
Permitted Investments.............................. 40
phantom income..................................... 81
plan assets........................................ 101
Plans.............................................. 99
Policy Statement................................... 102
Pooling and Servicing Agreement.................... 36
portfolio income................................... 81
portfolio interest................................. 85, 89, 93
Pre-Funded Amount.................................. 8, 22
pre-issuance accrued interest...................... 79
prepayment......................................... 24
Prepayment Assumption.............................. 70
Prohibited Transactions............................ 84, 99
Prohibited Transactions Tax........................ 84
PTCE 83-1.......................................... 101
Purchase Price..................................... 39
qualified mortgage................................. 73
qualified stated interest.......................... 74, 88
Rating Agency...................................... 13
real estate assets................................. 11, 69, 73, 74, 98
Record Date........................................ 28
Refinance Loans.................................... 19
Regular interests.................................. 11, 96
Related Proceeds................................... 31
Relief Act......................................... 64
REMIC.............................................. 11
REMIC Certificates................................. 73
REMIC Regular Certificateholders................... 74
REMIC Regular Certificates......................... 11, 73
REMIC Regulations.................................. 65
REMIC Residual Certificateholder................... 80
REMIC Residual Certificates........................ 11, 73
Restricted Group................................... 101
Retained Interest.................................. 47
RICO............................................... 64
Securities......................................... 1, 6
Securities Act..................................... 3
Security........................................... 37
Security Balance................................... 9, 30
Security Owners.................................... 34
Securityholder..................................... 34
Securityholders.................................... 3, 18
senior lien........................................ 16
Senior Securities.................................. 9, 27
Servicing Agreement................................ 36
Servicing Standard................................. 43
Short-Term Note.................................... 88
Single Family Mortgage Loan........................ 19
Single Family Properties........................... 6
Single Family Property............................. 19
single family residences........................... 73
single-class REMIC................................. 80
SMMEA.............................................. 13, 101
SMMEA Securities................................... 101
SPA................................................ 25
Stripped ARM Obligations........................... 71
Stripped Bond Certificates......................... 68
stripped bonds..................................... 66, 68
Stripped Coupon Certificates....................... 68
stripped coupons................................... 66, 68
Stripped Interest Securities....................... 9, 27
Stripped Principal Securities...................... 9, 27
Sub-Servicer....................................... 43
Sub-Servicing Agreement............................ 43
Subordinate Securities............................. 9, 27
Subsequent Assets.................................. 8, 22
Subsidiary REMIC................................... 73
Super-Premium Certificates......................... 75
tax avoidance potential............................ 87
Tax Counsel........................................ 93
taxable mortgage pool.............................. 84, 94
Terms and Conditions............................... 35
Title V............................................ 63
Title VIII......................................... 64
Trust Agreement.................................... 36
Trust Assets....................................... 3
Trust Fund......................................... 1, 6
Trustee............................................ 6
U.S. Person........................................ 65, 87
UCC................................................ 33
Underlying MBS..................................... 19
Underlying Mortgage Loans.......................... 19
Value.............................................. 19
Voting Rights...................................... 49
Warranting Party................................... 38
Whole Loans........................................ 19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The following table sets forth the estimated expenses in connection
with the offering of the Securities being registered under this Registration
Statement, other than underwriting discounts and commissions:
SEC Registration Fee $1,112,000**
Printing and Engraving $ 400,000
Legal Fees and Expenses $ 900,000
Trustee Fees and Expenses $ 900,000
Blue Sky Fees and Expenses $ 80,000
Rating Agency Fees $ 920,000
Miscellaneous $ 800,000
Total $5,112,000
_____________________
* All amounts, except the SEC Registration Fee, are estimates of aggregate
expenses incurred or to be incurred in connection with the issuance and
distribution of Securities in an aggregate principal amount assumed for these
purposes to be equal to $5,489,472,767 of Securities registered hereby.
** This amount relates to the additional $4,000,000,000 registered hereby,
$278 of which has been previously paid. The remaining $1,489,472,767 of Asset
Backed Securities relates to registration statement No. 333-39127, and the
registration fee with respect thereto has been previously paid.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's By-Laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement (filed as exhibit 1.1 to Registration
Statement on Form S-3 (File No. 333-24327) and incorporated herein by
reference).
3.1 Certificate of Incorporation of Merrill Lynch Mortgage Investors,
Inc., as amended (filed as exhibit 1.1 to Registration Statement on
Form S-3 (File No. 333-24327) and incorporated herein by reference).
3.2 By-laws of Merrill Lynch Mortgage Investors, Inc. as currently in
effect (filed as exhibit 3.2 to Registration Statement on Form S-3
(File No. 333-07569) and incorporated herein by reference).
4.1 Form of Pooling and Servicing Agreement (including form of
Certificate as an exhibit thereto) (filed as exhibit 4.1 to
Registration Statement on Form S-3 (File No. 333-07569) and
incorporated herein by reference).
4.2 Form of Pooling and Servicing Agreement (Contracts) (including form
of Certificate as an exhibit thereto) (filed as exhibit 4.2 to
Registration Statement on Form S-3 (File No. 333-07569) and
incorporated herein by reference).
4.3 Form of Trust Agreement (including form of Certificate as an exhibit
thereto) (filed as exhibit 4.3 to Registration Statement on Form S-3
(File No. 333-07569) and incorporated herein by reference).
4.4 Form of Indenture (including form of Note as an exhibit thereto)
(filed as exhibit 4.4 to Registration Statement on Form S-3 (File No.
333-07569) and incorporated herein by reference).
4.5 Form of Pooling and Servicing Agreement (revolving home equity loans)
(including form of Certificate as an exhibit thereto) (filed as
exhibit 4.5 to Registration Statement on Form S-3 (File No.
333-24327) and incorporated by reference).
5.1 Opinion of Brown & Wood LLP as to legality of certain Certificates
and Notes (including consent of such firm).*
5.2 Opinion of Richards, Layton & Finger, P.A., Wilmington, Delaware, as
to legality of certain Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).*
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1
hereof).*
23.2 Consent of Richards, Layton & Finger, P.A., Wilmington, Delaware
(included in exhibit 5.2).
24.1 Power of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification of Trustee.**
99.1 Form of Sale and Servicing Agreement(filed as exhibit 99.1 to
Registration Statement on Form S-3 (File No. 333-07569) and
incorporated herein by reference).
99.2 Form of Mortgage Loan Purchase Agreement (filed as an exhibit 99.2 to
the Registration Statement on Form S-3 (File No. 333-07569)(and
incorporated herein by reference).
99.3 Form of Mortgage Loan Purchase Agreement (revolving home equity
loans) (filed as an exhibit 99.3 to the Registration Statement on
Form S-3 (File No. 333-24327) (and incorporated herein by reference).
* Previously filed.
** To be filed on Form 8-K, as applicable.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 9th day of July, 1999.
Merrill Lynch Mortgage Investors, Inc.
By: /s/ Michael M. McGovern
--------------------------------
Name: Michael M. McGovern
Title: Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael M. McGovern his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to Registration Statement has been signed below
by the following persons in the capacities indicated and on this 23rd day of
June, 1999.
SIGNATURE TITLE
President and Director (Chief Executive
/s/ Andrew Peisch Officer)
- -------------------------------------
(Andrew Peisch)
Treasurer (Principal Financial Officer
/s/ Thomas W. Layton and Principal Accounting Officer)
- -------------------------------------
(Thomas W. Layton)
/s/ Barry S. Blattman Director
- -------------------------------------
(Barry S. Blattman)
/s/ Donald J. Puglisi Director
- -------------------------------------
(Donald J. Puglisi)
/s/ Michael M. McGovern Director
- -------------------------------------
(Michael M. McGovern)
Registration No. 333-81429
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Exact name of registrant as specified in its governing instrument)
---------------------
EXHIBIT VOLUME
EXHIBIT INDEX
Exhibit Description
1.1 Form of Underwriting Agreement (filed as exhibit 1.1 to Registration
Statement on Form S-3 (file no. 333-24327) and incorporated herein by
reference).
3.1 Certificate of Incorporation of Merrill Lynch Mortgage Investors,
Inc., as amended (filed as exhibit 1.1 to Registration Statement on
Form S-3 (file no. 333-24327) and incorporated herein by reference).
3.2 By-laws of Merrill Lynch Mortgage Investors, Inc. as currently in
effect (filed as exhibit 3.2 to Registration Statement on Form S-3
(No. 333-07569) and incorporated herein by reference).
4.1 Form of Pooling and Servicing Agreement (including form of
Certificate as an exhibit thereto) (filed as exhibit 4.1 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
4.2 Form of Pooling and Servicing Agreement (Contracts) (including form
of Certificate as an exhibit thereto) (filed as exhibit 4.2 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
4.3 Form of Trust Agreement (including form of Certificate as an exhibit
thereto) (filed as exhibit 4.3 to Registration Statement on Form S-3
(No. 333-07569) and incorporated herein by reference).
4.4 Form of Indenture (including form of Note as an exhibit thereto)
(filed as exhibit 4.4 to Registration Statement on Form S-3 (no,
333-07569) and incorporated herein by reference).
4.5 Form of Pooling and Servicing Agreement (revolving home equity loans)
(including form of Certificate as an exhibit thereto) (filed as
exhibit 4.5 to Registration Statement on Form S-3 (No. 333-24327) and
incorporated by reference).
5.1 Opinion of Brown & Wood LLP as to legality of certain Certificates
and Notes (including consent of such firm).*
5.2 Opinion of Richards, Layton & Finger, P.A., Wilmington, Delaware, as
to legality of certain Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including
consent of such firm).*
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1 hereof).*
23.2 Consent of Richards, Layton & Finger, P.A., Wilmington, Delaware
(included in exhibit 5.2).
24.2 Power of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification of Trustee.**
99.1 Form of Sale and Servicing Agreement(filed as exhibit 99.1 to
Registration Statement on Form S-3 (No. 333-07569) and incorporated
herein by reference).
99.2 Form of Mortgage Loan Purchase Agreement (filed as an exhibit 99.2 to
the Registration Statement on Form S-3 (No. 333-07569)(and
incorporated herein by reference).
99.3 Form of Mortgage Loan Purchase Agreement (revolving home equity
loans)(filed as an exhibit 99.3 to the Registration Statement on Form
S-3 (No. 333-24327) (and incorporated herein by reference).
* Previously filed.
** To be filed on Form 8-K, as applicable.
Exhibit 5.2
[LETTERHEAD OF RICHARDS, LAYTON & FINGER]
July 8, 1999
Merrill Lynch Mortgage Investors, Inc.
250 Vesey Street
World Financial Center
North Tower - 10th Floor
New York, New York 10281
Re: Merrill Lynch Mortgage Investors, Inc.
Registration Statement on Form S-3 (File No. 333-81429)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for Merrill Lynch Mortgage
Investors, Inc. (the "Registrant") in connection with the Registration
Statement on Form S-3 (File No. 333-81429) (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of up to
$4,000,000,000.00 aggregate principal amount of Asset Backed Certificates (the
"Securities"). Each series of such Securities may be issued pursuant to a
trust agreement (the "Trust Agreement") among a trustee named in the related
prospectus supplement, the Registrant and another entity named in such
prospectus supplement. This opinion is being delivered to you at your request.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The form of Trust Agreement (including the form of Certificate of
Trust (the "Certificate") attached as Exhibit 4.3 thereto); and
(b) The Registration Statement.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed above, and we have assumed that there exists no
provision in any document that we have not reviewed that bears upon or is
inconsistent with the opinions stated herein. We have conducted no independent
factual investigation of our own but rather have relied solely upon the
foregoing documents, the statements and information set forth therein and the
additional matters recited or assumed herein, all of which we have assumed to
be true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust
Agreement will constitute the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the creation,
operation and termination of the Trust, (ii) the due creation or due
organization or due formation, as the case may be, and valid existence in good
standing of each party to the documents examined by us under the laws of the
jurisdiction governing its creation, organization or formation, (iii) the
legal capacity of natural persons who are parties to the documents examined by
us, and (iv) that each of the parties to the documents examined by us has the
power and authority to execute and deliver, and to perform its obligations
under, such documents. We have not participated in the preparation of the
Registration Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opiTnion on the laws of any other jurisdiction, including federal
laws and rules and regulations relating thereto. Our opinions are rendered
only with respect to Delaware laws and rules, regulations and orders
thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. When each Trust Agreement in respect of which we have participated as
your counsel has been duly authorized by all necessary corporate action and
has been duly executed and delivered, it will constitute a valid and binding
obligation of the Registrant enforceable in accordance with its terms; and
2. When the issuance, execution and delivery of the Securities in respect
of which we have participated as your counsel have been duly authorized by all
necessary corporate action, and when such Securities have been duly executed
and delivered and sold as described in the Registration Statement, such
Securities will be legally and validly issued and the holders of such
Securities will be entitled to the benefits provided by the Trust Agreement
pursuant to which such Securities were issued.
The foregoing opinions regarding enforceability are subject to (i)
applicable bankruptcy, insolvency, moratorium, reorganization, receivership,
fraudulent conveyance and similar laws relating to or affecting the rights and
remedies of creditors generally, (ii) principles of equity (regardless of
whether considered and applied in a proceeding in equity or at law) and (iii)
the effect of applicable public policy on the enforceability of provisions
relating to indemnification or contribution.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7
of the Act, or the rules and regulations of the Securities and Exchange
Commission thereunder with respect to any part of the Registration Statement,
including this exhibit.
Very truly yours,
EAM
