The information in this prospectus supplement is subject to completion or
amendment. We have filed a registration statement relating to these securities
with the Securities and Exchange Commission. No one may sell these securities,
or accept offers to buy, without the delivery of a final prospectus supplement
and accompanying prospectus. This prospectus supplement and the accompanying
prospectus are not an offer to sell or a solicitation of an offer to buy these
securities, nor may anyone sell these securities in any state in which such an
offer, solicitation or sale would be unlawful, prior to the registration and
qualification of these securities under the securities laws of that state.
SUBJECT TO COMPLETION, DATED APRIL 14, 1999
PROSPECTUS SUPPLEMENT DATED APRIL __, 1999
TO PROSPECTUS DATED MARCH 23, 1999
$500,000,000
[PROVIDIAN NATIONAL BANK LOGO]
PROVIDIAN HOME EQUITY LOAN TRUST 1999-1,
PROVIDIAN HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-PNB1
PROVIDIAN NATIONAL BANK
TRANSFEROR AND SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
<TABLE>
<CAPTION>
<S> <C>
THE TRUST
BEFORE YOU DECIDE TO o will issue the certificates.
INVEST, READ THIS o will make payments on the certificates primarily from collections on a pool of
PROSPECTUS SUPPLEMENT variable rate revolving home equity loans made under account agreements the balances
AND THE PROSPECTUS, of which have been assigned to the trust.
ESPECIALLY THE RISK THE CERTIFICATES
FACTORS BEGINNING ON o will accrue interest at a certificate rate, which will adjust monthly, based on
PAGE S-20 HEREIN AND ON one-month LIBOR plus a fixed margin, subject to the maximum rate described herein.
PAGE 13 OF THE o currently have no trading market.
PROSPECTUS. o are not deposits and are not insured or guaranteed by any governmental agency.
CREDIT ENHANCEMENT
The certificates will be o A certificate guaranty insurance policy issued by MBIA Insurance Corporation, which
obligations of the trust will protect holders of the certificates against certain shortfalls in amounts due to
only. The certificates be distributed at the times and to the extent described herein;
and the assets of the [MBIA LOGO]
trust will not be o Subordination of an interest retained by the Transferor to the limited extent
obligations of Providian described herein; and
National Bank, Merrill o Overcollateralization resulting from the application of excess interest, as described
Lynch Mortgage herein.
Investors, Inc., or any
of their respective
affiliates.
</TABLE>
______________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE
TO TELL YOU OTHERWISE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT THE DEPOSITOR(2)
----------- ------------ ----------------
<S> <C> <C> <C>
Per certificate................................. % % %
Total........................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from the date the certificates are issued.
(2) Before deducting expenses, estimated to be approximately $ .
--------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery
Securities LLC are acting as underwriters for the issuance of the certificates.
Delivery of the certificates is expected to be made in book entry form on or
about April , 1999. The certificates will be offered in the United States and
Europe.
--------------------
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
--------------------
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We tell you about the certificates in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series; and (ii) this prospectus supplement,
which describes the specific terms of your series of certificates and may be
different from the information in the prospectus.
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 Terms"
beginning on page S-66 in this prospectus supplement and under the caption
"Index of Principal Definitions" beginning on page 103 in the accompanying
prospectus.
The depositor's principal offices are located at 250 Vesey Street, World
Financial Center, North Tower, New York, New York 10281 and its telephone number
is (212) 449-1000.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF TERMS......................................S-5
RISK FACTORS.........................................S-22
THE HOME EQUITY LOAN POOL............................S-27
General.........................................S-27
The Initial Home Equity Loans...................S-27
Conveyance of Subsequent Home Equity Loans......S-33
THE TRANSFEROR AND SERVICER..........................S-34
General.........................................S-34
Loan Origination................................S-34
Collections.....................................S-35
Underwriting Criteria...........................S-35
Home Protection.................................S-36
Delinquency and Loss Experience.................S-36
PREPAYMENT AND YIELD CONSIDERATIONS..................S-38
General.........................................S-38
Weighted Average Life of the Certificates.......S-39
DESCRIPTION OF THE CERTIFICATES......................S-42
General.........................................S-42
Payments on Home Equity Loans; Deposits to Collection
and Certificate Accounts .....................S-43
Allocations and Collections.....................S-44
Distributions on the Certificates...............S-46
Application of Certificate Interest
Collections ...............................S-46
Certificate Rate............................S-47
Calculation of One-Month LIBOR..............S-47
Transferor Collections......................S-48
Principal Payments from Principal CollectionsS-48
Rapid Amortization Events.......................S-49
The Certificate Insurance Policy................S-50
The Certificate Insurer.....................S-50
The Policy..................................S-52
Limited Subordination of the Transferor's
Interest .....................................S-54
Overcollateralization...........................S-54
Reports to Holders of the Certificates..........S-55
Transfer of Home Equity Loans...................S-56
Amendments to Account Agreements................S-57
Consent to Senior Liens.........................S-57
Optional Retransfers of Home Equity Loans
to the Transferor ............................S-57
Servicing and Hazard Insurance..................S-58
Realization Upon Defaulted Home Equity Loans....S-58
Servicing and Other Compensation and
Payment of Expenses ..........................S-58
Termination; Retirement of the Certificates.....S-59
Miscellaneous...................................S-59
Registration of the Certificates................S-59
DTC and Year 2000 Compliance....................S-62
The Trustee.....................................S-62
Certain Activities..............................S-62
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............S-63
STATE TAXES..........................................S-65
ERISA CONSIDERATIONS.................................S-66
General.........................................S-66
Availability of Exemptions for Certificates.....S-66
Review by Plan Fiduciaries......................S-67
USE OF PROCEEDS......................................S-67
LEGAL INVESTMENT CONSIDERATIONS......................S-67
UNDERWRITING.........................................S-67
EXPERTS..............................................S-68
LEGAL MATTERS........................................S-68
CERTIFICATE RATING...................................S-68
INDEX OF PRINCIPAL TERMS.............................S-70
ANNEX I.............................................A-I-1
<PAGE>
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms used herein but not otherwise defined
have the meanings assigned to them in the Prospectus. Reference is made to the
Index of Principal Terms herein beginning on page S-66 for the location of the
definition of certain capitalized terms used herein, and in the Prospectus
beginning on page 103 therein for the location therein of the definitions of
certain capitalized terms used herein.
SECURITIES OFFERED Providian Home Equity Loan Asset Backed
Certificates, Series 1999-PNB1 (the
"CERTIFICATES").
ISSUER OF THE CERTIFICATES Providian Home Equity Loan Trust 1999-1
(the "TRUST").
DEPOSITOR Merrill Lynch Mortgage Investors, Inc.,
a Delaware corporation and a
wholly-owned, limited purpose
subsidiary of Merrill Lynch Mortgage
Capital Inc., which is a wholly-owned
indirect subsidiary of Merrill Lynch
& Co., Inc. The Depositor is also an
affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, one of
the Underwriters. The Depositor will
acquire the variable rate revolving
home equity loans from the
Transferor, and will transfer and
assign them to the Trust in exchange
for the Certificates.
TRANSFEROR
AND SERVICER Providian National Bank, a national
banking association.
TRUSTEE Bankers Trust Company, a New York
banking corporation.
AGREEMENT The Trust will issue the Certificates
pursuant to a Pooling and Servicing
Agreement (the "AGREEMENT") dated as
of April 1, 1999 among the Depositor,
the Transferor, the Servicer and the
Trustee. The Trust will also issue
the Transferor's Interest (defined
herein), which is not offered hereby.
STATISTICAL CALCULATION DATE The close of business on February 28,
1999.
INITIAL CUT-OFF DATE AND
CLOSING DATE On or about April , 1999.
DESCRIPTION OF THE
CERTIFICATES The Certificates represent an undivided
interest in the Trust Fund. Each
Certificate represents the right to
receive monthly payments of interest
at the variable rate described below
(the "CERTIFICATE RATE") and payments
of principal at the times and to the
extent provided below. The Trustee
will make distributions on the
Certificates on the 25th day of each
month or, if such day is not a
Business Day, on the next succeeding
Business Day (each, a "DISTRIBUTION
DATE"), beginning in June 1999, in an
amount equal to each holder's
Percentage Interest multiplied by the
amount distributed on the
Certificates on such Distribution
Date.
The initial principal balance of the
Certificates will be $500,000,000
(the "ORIGINAL CERTIFICATE PRINCIPAL
BALANCE"). The aggregate principal
balance of the Certificates as of any
date will equal the Original
Certificate Principal Balance minus
the aggregate amount actually
distributed as principal to
Certificateholders (the "CERTIFICATE
PRINCIPAL BALANCE"). The amount
distributed as principal to the
Certificateholders will include
Certificate Interest Collections paid
as Accelerated Principal Distribution
Amounts. See "Description of the
Certificates" herein and "Description
of the Securities" in the Prospectus.
The aggregate undivided interest in
the Trust Fund represented by the
Certificates as of the Closing Date
will equal $500,000,000 (the
"ORIGINAL INVESTED AMOUNT"), which
represents approximately 87.54% of
the Statistical Calculation Date Pool
Balance.
After the Closing Date, the "INVESTED
AMOUNT" with respect to any date will
equal:
o the Original Invested Amount
minus
o the sum of (i) the total of
Principal Collections previously
distributed to Certificateholders
(other than any such collections
applied to reimburse Investor
Loss Amounts), (ii) the Aggregate
Investor Loss Amount as of such
date and (iii) the aggregate
amount of any Excess
Overcollateralization Amounts
released on or before such
Distribution Date.
As of any date, the "AGGREGATE
INVESTOR LOSS AMOUNT" is the
aggregate amount of Investor Loss
Amounts for all prior Distribution
Dates during the Managed and Rapid
Amortization Periods that were
previously allocated to
Certificateholders, exclusive of any
Investor Loss Amounts (or portions
thereof) reallocated on such
Distribution Dates in reduction of
the Transferor's Interest as
described below under "--Limited
Subordination of the Transferor's
Interest."
As to any Distribution Date, the
"EXCESS OVERCOLLATERALIZATION AMOUNT"
will be the amount, if any, by which
the Overcollateralization Amount for
such Distribution Date exceeds the
Required Overcollateralization Amount
for such Distribution Date.
As to any Distribution Date, the
"OVERCOLLATERALIZATION AMOUNT" will
be the excess, if any, of the
Invested Amount over the Certificate
Principal Balance as of such
Distribution Date (after giving
effect to the distribution of
principal on such Distribution Date
(other than any Accelerated Principal
Distribution Amount) to the
Certificateholders).
The Transferor will hold the
remaining undivided interest (the
"TRANSFEROR'S INTEREST") in the Trust
Fund. The Transferor's Interest as of
any date will equal the Pool Balance
minus the Invested Amount, and will
initially equal approximately 12.46%
of the Statistical Calculation Date
Pool Balance.
CERTIFICATE RATE As to any Distribution Date, the per
annum rate equal to One-Month LIBOR
on the second LIBOR Business Day
before the preceding Distribution
Date (or as of the second LIBOR
Business Day before the Closing Date
in the case of the first Distribution
Date) plus %, subject to a maximum
Alternate Certificate Rate described
under "Description of the
Certificates--Distributions on the
Certificates" herein.
DENOMINATIONS The Certificates will be issuable in
minimum denominations of $1,000. The
interest in the Trust Fund evidenced
by a Certificate (the "PERCENTAGE
INTEREST") will equal the percentage
derived by dividing the initial
principal balance of such
Certificate by the Original
Certificate Principal Balance.
THE TRUST FUND The property of the Trust (the "TRUST
FUND") will consist primarily of the
variable rate revolving home equity
loans transferred by the Depositor to
the Trust on the Closing Date (the
"INITIAL HOME EQUITY LOANS") and
certain additional variable rate
revolving home equity loans
transferred by the Transferor to the
Trust Fund after the Closing Date and
prior to the end of the Revolving
Period (the "SUBSEQUENT HOME EQUITY
LOANS"). The term "HOME EQUITY LOANS"
as used in this Prospectus Supplement
refers collectively to the Initial
Home Equity Loans and any Subsequent
Home Equity Loans. See "The Home
Equity Loan Pool" herein.
The "SUBSEQUENT SELECTION DATE" is the
related date as of which any
Subsequent Home Equity Loans are
selected by the Transferor for
inclusion in the Trust. The
"SUBSEQUENT CUT-OFF DATE" is the
related date as of which any
Subsequent Home Equity Loans are
transferred to the Trust.
The term "CUT-OFF DATE" as used in
this Prospectus Supplement refers to
the Initial Cut-off Date for the
Initial Home Equity Loans and the
applicable Subsequent Cut-off Date
for any Subsequent Home Equity Loans.
The Trust will also include any
advances relating to each Home Equity
Loan made pursuant to the related
Account Agreement (an "ADDITIONAL
BALANCE") at any time after the
Initial Cut-off Date or Subsequent
Cut-off Date, as the case may be.
With respect to any date, the "POOL
BALANCE" will be the sum of (i)
aggregate of the unpaid Principal
Balances of all of the Home Equity
Loans, including any Additional
Balances relating thereto, and (ii)
amounts, if any, otherwise allocable
to the Transferor that are required
to be retained in the Collection
Account when the Transferor's
Interest is less than the Minimum
Transferor's Interest.
The assets of the Trust Fund will also
include, among other things:
o all payments of interest
and principal received (x)
after the Initial Cut-off
Date in respect of the
Initial Home Equity Loans
and (y) after the
applicable Subsequent
Cut-off Date in respect of
the Subsequent Home Equity
Loans;
o such assets as shall from time to
time be identified as deposited
in the Collection and Certificate
Accounts in accordance with the
Agreement;
o the interest of
Certificateholders and the
Transferor's Interest in (x)
property that secured a Home
Equity Loan and that has been
acquired by foreclosure or deed
in lieu of foreclosure, (y) any
insurance policies related to the
Home Equity Loans, including
hazard insurance policies, and
(z) the related Mortgage, account
agreement (the "Account
Agreement") and other mortgage
file (the "Mortgage File")
documents for each Home Equity
Loan. The Transferor will
transfer its rights to receive
payments under the Account
Agreements but will retain its
obligations to fund future draws
by borrowers under the Account
Agreements;
o the Policy; and
o the proceeds of each of the
foregoing.
PRINCIPAL BALANCE The "PRINCIPAL BALANCE" of a Home
Equity Loan (other than a Liquidated
Home Equity Loan or a Fully Charged
Off Home Equity Loan which, in both
cases, has a Principal Balance of
zero) on any day is equal to:
o its Initial Cut-off Date
Principal Balance or Subsequent
Cut-off Date Principal Balance,
as applicable, plus
o the Additional Balances, if any,
relating thereto, minus
o all Principal Collections
credited against the Principal
Balance of such Home Equity Loan
in accordance with the related
Account Agreement before such
day, minus
o all Charged Off Amounts, if any,
relating thereto.
As of the Initial Cut-off Date, the
Principal Balance of an Initial Home
Equity Loan is referred to herein as
its "INITIAL CUT-OFF DATE PRINCIPAL
BALANCE". The aggregate of the
Principal Balances of the Initial
Home Equity Loans as of the Initial
Cut-off Date is referred to herein as
the "INITIAL CUT-OFF DATE POOL
BALANCE".
As of any Subsequent Cut-off Date, the
unpaid Principal Balance of a
Subsequent Home Equity Loan is
referred to herein as its "SUBSEQUENT
CUT-OFF DATE PRINCIPAL BALANCE".
A "LIQUIDATED HOME EQUITY LOAN" is a
Home Equity Loan that was in default
during the related Collection Period
and with respect to which the
Servicer has determined that all
related Liquidation Proceeds that it
expects to recover from that Home
Equity Loan have been recovered. A
Liquidated Home Equity Loan will be
deemed to have a Principal Balance
equal to the Principal Balance of the
related Home Equity Loan immediately
prior to the final recovery of
related Liquidation Proceeds and a
Principal Balance of zero thereafter.
A "CHARGED OFF AMOUNT" with respect
to any Distribution Date is the
portion of the Principal Balance of a
Partially Charged Off Home Equity
Loan or the entire remaining
Principal Balance of a Home Equity
Loan that became a Fully Charged Off
Home Equity Loan during the related
Collection Period that the Servicer
has charged off on its servicing
records during the related Collection
Period in accordance with the
Servicer's normal servicing
procedures.
A "PARTIALLY CHARGED OFF HOME EQUITY
LOAN" is a defaulted Home Equity Loan
that is not a Liquidated Home Equity
Loan and as to which (i) collection
procedures by the Servicer are
ongoing and (ii) the Servicer has
charged off a portion, but not all,
of the related Principal Balance.
A "FULLY CHARGED OFF HOME EQUITY
LOAN" is a defaulted Home Equity Loan
that is not a Liquidated Home Equity
Loan and as to which (i) collection
procedures by the Servicer are
ongoing and (ii) the Servicer has
charged off the related Principal
Balance in its entirety.
"LIQUIDATION LOSS AMOUNT" means with
respect to any Distribution Date and
the related Collection Period, the
amount charged off, either in full or
in part, by the Servicer in
accordance with its normal servicing
procedures, including (i) as to any
Liquidated Home Equity Loan, the
unrecovered Principal Balance thereof
at the end of such Collection Period
in which such loan became a
Liquidated Home Equity Loan (after
giving effect to the application of
the principal portion of any Net
Liquidation Proceeds realized in
connection therewith) and (ii) as to
any Partially or Fully Charged Off
Home Equity Loan, the Charged Off
Amount for such Collection Period.
SUBSEQUENT HOME EQUITY
LOANS AND ADDITIONAL BALANCES On each Distribution Date during the
Revolving Period, Principal
Collections for the related
Collection Period will be retained by
the Transferor to acquire Additional
Balances and Subsequent Home Equity
Loans, to the extent available. All
Additional Balances will be
transferred to and become the
property of the Trust Fund.
Additional Balances will be initially
funded by the Transferor. The Pool
Balance will generally fluctuate
during a Collection Period because
the amount of draws by borrowers
representing Additional Balances and
the amount of principal payments by
borrowers will usually differ from
day to day. Because the Transferor's
Interest represents the interest in
the Trust Fund not represented by the
Certificates, the amount of the
Transferor's Interest will generally
fluctuate during a Collection Period
as borrowers make draws and pay
principal under the Home Equity
Loans.
THE HOME EQUITY LOANS The statistical information presented
in this Prospectus Supplement
reflects the pool of Initial Home
Equity Loans as of the Statistical
Calculation Date. The aggregate
Principal Balance of the Initial Home
Equity Loans as of the Statistical
Calculation Date is $571,157,597.32
(the "STATISTICAL CALCULATION DATE
POOL BALANCE"). With respect to the
pool of Initial Home Equity Loans as
to which statistical information is
presented herein, some amortization
of the pool balance will occur prior
to the Closing Date. As a result of
the foregoing, the statistical
distribution of certain
characteristics as of the Closing
Date for the final pool of Initial
Home Equity Loans may vary somewhat
from the statistical distribution of
such characteristics as of the
Statistical Calculation Date as
presented in this Prospectus
Supplement. Unless otherwise noted,
all statistical percentages in this
Prospectus Supplement are measured
either as a percentage of the
Statistical Calculation Date Pool
Balance or the number of Initial Home
Equity Loans in the pool as of the
Statistical Calculation Date.
The Initial Home Equity Loans are,
and the Subsequent Home Equity Loans
will be, variable rate revolving home
equity loans secured by Mortgages on
residential one- to four-family
properties. Substantially all of the
Mortgages relating to the Initial
Home Equity Loans are junior
Mortgages, and the remainder are
first Mortgages. The Initial Home
Equity Loans were, and the Subsequent
Home Equity Loans will be, originated
or acquired by the Transferor in the
ordinary course of its business. See
"The Home Equity Loan Pool" herein
for a description of the Home Equity
Loans.
The Trust Fund will include Home
Equity Loans that are less than 90
days delinquent as of the Statistical
Calculation Date or the applicable
Subsequent Selection Date, as the
case may be. As of the Statistical
Calculation Date, approximately 1.55%
of the Home Equity Loans (by
principal balance) were between 30
and 59 days delinquent and
approximately 0.33% of the Home
Equity Loans (by principal balance)
were between 60 and 89 days
delinquent.
Each Initial Home Equity Loan bears,
and each Subsequent Home Equity Loan
will bear, interest at a variable
rate that may change monthly (or,
during a Home Equity Loan's
amortization period, every six
months), subject to a lifetime
minimum and maximum per annum
interest rate. The combined
loan-to-value ratio (the "COMBINED
LOAN-TO-VALUE RATIO") (computed as a
percentage, the numerator of which is
the Home Equity Loan's maximum
permitted principal amount or "CREDIT
LIMIT" plus the outstanding balances
or credit limits, as applicable, of
any related senior mortgage loans,
and the denominator of which is the
valuation of the Mortgaged Property
used by the Transferor to underwrite
the Home Equity Loan) of each Initial
Home Equity Loan did not exceed 125%
at the time of execution of the
related Account Agreement, based upon
a valuation of the related Mortgaged
Property obtained by the Transferor
in the course of processing the loan
application. The term to maturity of
each Initial Home Equity Loan at
origination was approximately fifteen
years. During the first ten years
following the origination of a Home
Equity Loan, the loan is a revolving
line of credit, but such revolving
period may be extended at the
Transferor's sole discretion. The
Transferor's decision to extend the
revolving period may include a review
of specific credit criteria. Any
principal amounts outstanding on a
date that is approximately ten years
following the origination of a Home
Equity Loan (the "CONVERSION DATE")
will convert to a non-revolving,
fully-amortizing five year term loan.
After the Conversion Date, the
interest rate on a Home Equity Loan
will adjust on each six-month
anniversary of the Conversion Date,
rather than monthly, and will be
rounded up to the nearest 0.125%.
Required payments on each Home Equity
Loan are payable on varying days of
the month and are computed daily at a
floating rate per annum (the "LOAN
RATE") equal, at any time and for
each monthly billing cycle (to the
extent not limited by its applicable
interest rate cap) to a specified
margin (the "MARGIN") over the "prime
rate" as published on the last
business day of the month preceding
the current billing cycle in the
"Money Rates" section of The Wall
Street Journal. Interest is billed
monthly in arrears based on the daily
outstanding Principal Balance of the
related Home Equity Loan during the
related billing cycle. Borrowers may
draw down (up to the Credit Limit) or
repay principal under each Home
Equity Loan from time to time. There
are no required payments of principal
during the first ten years following
the origination of a Home Equity
Loan. During the Home Equity Loan's
five year amortization period,
principal payments are required to be
made in approximately equal monthly
installments. The entire remaining
outstanding Principal Balance of each
Home Equity Loan is due in the
fifteenth year following origination.
See "The Home Equity Loan Pool"
herein.
The Statistical Calculation Date
Principal Balances of the Initial
Home Equity Loans ranged from $0 to
$245,488.00, and averaged $31,580.09
for those Initial Home Equity Loans
with a Statistical Calculation Date
Principal Balance greater than $0.
Credit Limits ranged from $10,000.00
to $250,000.00 and averaged
$35,591.64. The weighted average
Credit Limit utilization rate
(computed by dividing the Statistical
Calculation Date Principal Balance by
the related Credit Limit) was 86.94%
for those Initial Home Equity Loans
with a Statistical Calculation Date
Principal Balance greater than $0.
The weighted average remaining term
to stated maturity as of the
Statistical Calculation Date was
151.64 months, and the latest
scheduled maturity of any Initial
Home Equity Loan was October 1, 2013.
The weighted average Combined
Loan-to-Value Ratio of the Initial
Home Equity Loans at origination was
approximately 90.40%. The weighted
average Junior Lien Ratio of the
Initial Home Equity Loans in a junior
lien position was 30.41%. The "JUNIOR
LIEN RATIO" of a Home Equity Loan is
the ratio, expressed as a percentage,
calculated by dividing:
o its Credit Limit by
o the sum of its Credit Limit and
the outstanding balances or
credit limits, as applicable, of
any related senior mortgages as
of the date of the origination of
such Home Equity Loan.
<TABLE>
<CAPTION>
SUMMARY OF INITIAL HOME EQUITY LOAN
CHARACTERISTICS AS OF THE STATISTICAL CALCULATION DATE
<S> <C>
Statistical Calculation Date Pool Balance $571,157,597.32
Number of Initial Home Equity Loans 18,458
Weighted Average Loan Rate 12.14%
Weighted Average Maximum Loan Rate 19.90%
Range of Margins 0.90% to 7.00%
Weighted Average Margin 4.38%
Weighted Average Combined Loan-to-Value Ratio at Origination 90.40%
Range of Remaining Terms to Stated Maturity 64 to 175 months
Weighted Average Remaining Term to Stated Maturity 151.64 months
Weighted Average Seasoning 28.36 months
Range of Principal Balances $0 to $245,488.00
Average Principal Balance (1) $31,580.09
Latest Maturity Date October 1, 2013
Weighted Average Credit Limit Utilization Rate (1) 86.94%
Weighted Average Junior Lien Ratio(2) 30.41%
______________
(1) For those Initial Home Equity Loans with a Statistical Calculation Date
Principal Balance greater than $0.
(2) For those Initial Home Equity Loans in a junior lien position.
</TABLE>
REMOVAL OF CERTAIN
HOME EQUITY LOANS The Transferor may, but will not be
obligated to, remove from the Trust
Fund on the last Business Day of any
Collection Period prior to the
commencement of the Rapid
Amortization Period (a "REMOVAL
DATE"), the entire Principal Balance
of certain Home Equity Loans without
notice to the Certificateholders.
The Transferor is permitted to
designate the Home Equity Loans to
be so removed. Home Equity Loans so
designated will only be removed upon
satisfaction of certain conditions
specified in the Agreement,
including:
o the Transferor's Interest as of
the Removal Date (after giving
effect to such removal) exceeds
the Minimum Transferor's
Interest;
o the Transferor shall have
delivered to the Trustee a Home
Equity Loan Schedule containing a
list of all Home Equity Loans
remaining in the Trust Fund after
such removal;
o the Transferor shall represent
and warrant that no selection
procedures that the Transferor
reasonably believes are adverse
to the interests of the
Certificateholders or the
Certificate Insurer were used by
the Transferor in selecting such
Home Equity Loans;
o in connection with the first such
removal of Home Equity Loans,
each Rating Agency shall have
been notified of the proposed
transfer and, prior to the
Removal Date, shall have notified
the Transferor in writing that
such transfer would not result in
a qualification, reduction or
withdrawal of the ratings
assigned to the Certificates
without regard to the Policy; and
o the Transferor shall have
delivered to the Trustee and the
Certificate Insurer an officer's
certificate confirming the
conditions set forth in the above
clauses.
The "MINIMUM TRANSFEROR'S INTEREST"
as of any date is an amount equal to
the greater of (i) 2.00% of the
Invested Amount on such date and (ii)
the Transferor Subordinated Amount on
such date.
COLLECTIONS Collections on the Home Equity Loans
will be allocated in accordance with
the related Account Agreements
between amounts collected in respect
of interest and amounts collected in
respect of principal.
As to any payment on a Home Equity
Loan during a Collection Period,
"INTEREST COLLECTIONS" will be the
amount collected during such
Collection Period that is allocated
to interest in accordance with the
terms of the related Account
Agreement, including Net Liquidation
Proceeds allocable to interest on
such Home Equity Loan and certain
other amounts described herein.
As to any Distribution Date other
than the first Distribution Date, the
"COLLECTION PERIOD" is the calendar
month preceding the month in which
such Distribution Date occurs. The
Collection Period for the first
Distribution Date will begin on the
Closing Date and end on May 31, 1999.
As to any Home Equity Loan and
Collection Period, "PRINCIPAL
COLLECTIONS" will be the sum of:
o the portion of the payment
received from the borrower during
such Collection Period and
applied in reduction of the
Principal Balance of such Home
Equity Loan in accordance with
the terms of the related Account
Agreement;
o the principal portion of Net
Liquidation Proceeds and
Insurance Proceeds for such
Collection Period; and
o the principal portion of any
Transfer Deposit Amount of a
retransferred Home Equity Loan.
"NET LIQUIDATION PROCEEDS" with
respect to any Liquidated Home Equity
Loan and Collection Period will be
the Liquidation Proceeds (net of
related Liquidation Expenses)
realized by the Servicer during such
Collection Period.
"INSURANCE PROCEEDS" with respect to
any Home Equity Loan and Collection
Period will be insurance proceeds
paid to the Servicer during such
Collection Period pursuant to any
insurance policy covering such Home
Equity Loan (net of any expenses
incurred by or on behalf of the
Servicer in connection with obtaining
such insurance proceeds) that are
not:
o Liquidation Proceeds;
o applied to the restoration or
repair of the related one- to
four-family residential property
securing such Home Equity Loan
(the "MORTGAGED PROPERTY"); or
o released to the related borrower
in accordance with the normal
servicing procedures of the
Servicer.
Insurance Proceeds will be applied by
the Servicer in reduction of the
Principal Balance of the related Home
Equity Loan.
"TRANSFER DEPOSIT AMOUNT" with
respect to any Distribution Date is
the amount of any cash that the
Transferor is required to deposit
into the Certificate Account to
maintain the Minimum Transferor's
Interest with respect to a
repurchased Defective Home Equity
Loan, after taking into account any
transfer of an Eligible Substitute
Home Equity Loan to the Trust in
replacement of such Defective Home
Equity Loan.
APPLICATION OF
CERTIFICATE INTEREST
COLLECTIONS As to any Distribution Date,
interest allocable to the
Certificates ("CERTIFICATE INTEREST
COLLECTIONS") will equal the product
of Interest Collections for the
related Collection Period and the
Floating Allocation Percentage. The
remaining amount of Interest
Collections will be allocated to the
Transferor's Interest, as more fully
described herein.
With respect to any Distribution
Date, the "FLOATING ALLOCATION
PERCENTAGE" is the percentage
equivalent (but not in excess of
100%) of a fraction determined by
dividing the Invested Amount by the
Pool Balance as of the beginning of
the related Collection Period.
On each Distribution Date,
Certificate Interest Collections will
be applied in the following order of
priority:
o first, to pay the Servicer any
accrued and unpaid Servicing
Fees;
o second, to pay the premium for
the Policy;
o third, as payment for the accrued
interest due at the Certificate
Rate on the Certificate Principal
Balance for the related Accrual
Period and any overdue accrued
interest;
o fourth, to pay to the Transferor
during the Revolving Period and
to pay to Certificateholders
during the Managed and Rapid
Amortization Periods, the
"INVESTOR LOSS AMOUNT" equal to
the Floating Allocation
Percentage of the aggregate
amount of any Liquidation Loss
Amounts for such Distribution
Date;
o fifth, to pay to the Transferor
during the Revolving Period and
to pay to Certificateholders
during the Managed and Rapid
Amortization Periods any Investor
Loss Amount that was not
previously:
- paid from Certificate Interest
Collections;
- paid from Interest Collections
and Principal Collections
allocable to the Transferor's
Interest or reallocated to
reduce the Transferor's
Interest up to the Transferor
Subordinated Amount as
described under "--Limited
Subordination of the
Transferor's Interest" below;
or
- funded by draws on the Policy;
o sixth, to reimburse prior draws
from the Policy, together with
interest thereon, and to pay any
amounts owed to the Certificate
Insurer pursuant to the Insurance
Agreement, together with interest
thereon;
o seventh, to pay principal on the
Certificates (such payment is
referred to as the "ACCELERATED
PRINCIPAL DISTRIBUTION AMOUNT")
until the Invested Amount exceeds
the Certificate Principal Balance
by an amount equal to the
Required Overcollateralization
Amount; and
o eighth, to or at the direction of
the owner of the Transferor's
Interest.
Payments to Certificateholders
pursuant to the third item above will
be interest payments on the
Certificates. Payments to
Certificateholders under the fourth,
fifth and seventh items above will be
principal payments on the
Certificates and will reduce the
Certificate Principal Balance.
However, payments to
Certificateholders of the Accelerated
Principal Distribution Amount
pursuant to the seventh item above
will not reduce the Invested Amount.
In addition, payments to
Certificateholders pursuant to the
fifth item above will not reduce the
Invested Amount. Payments to
Certificateholders of Interest
Collections and Principal Collections
allocable to the Transferor's
Interest as described under "--
Limited Subordination of the
Transferor's Interest" below will
also reduce the Certificate Principal
Balance of the related Certificates.
Payments of the Accelerated Principal
Distribution Amount are neither
guaranteed by the Policy nor
supported by the Transferor
Subordinated Amount. No interest will
accrue on any Investor Loss Amount
not paid to Certificateholders on a
Distribution Date.
An "ACCRUAL PERIOD" for any
Distribution Date will be the actual
number of days (based on a 360-day
year) in the period beginning on the
preceding Distribution Date (or the
Closing Date in the case of the first
Distribution Date) and ending on the
day before such Distribution Date.
With respect to any Distribution
Date, the "REQUIRED
OVERCOLLATERALIZATION AMOUNT" will be
the amount, if any, by which the
Required Enhancement Amount for such
Distribution Date exceeds the
Transferor Subordinated Amount for
such Distribution Date.
On the Closing Date, the "REQUIRED
ENHANCEMENT AMOUNT" will be
$10,000,000 (2.00% of the Original
Certificate Principal Balance). For
each Distribution Date thereafter,
the Required Enhancement Amount will
be an amount equal to the product of
the Required Enhancement Percentage
and the Certificate Principal
Balance; provided that in no event
will the Required Enhancement Amount
be less than a floor amount equal to
the greater of (i) $7,500,000 (1.50%
of the Original Certificate Principal
Balance) and (ii) the sum of (a)
1.00% of the Original Certificate
Principal Balance and (b) aggregate
Principal Balance of all Home Equity
Loans that are 180 or more days
delinquent.
With respect to any Distribution
Date, the "REQUIRED ENHANCEMENT
PERCENTAGE" will be the percentage
specified in the Insurance Agreement.
PRINCIPAL PAYMENTS FROM
PRINCIPAL COLLECTIONS For the period (the "REVOLVING PERIOD")
beginning on the Closing Date and
ending on the day immediately
preceding the day on which the
Managed Amortization Period begins
(or, if earlier, upon the occurrence
of a Rapid Amortization Event), no
principal will be distributed to
Certificateholders other than
Accelerated Principal Distribution
Amounts described below under
"--Overcollateralization." Instead,
during such period Principal
Collections will be available to the
Transferor to acquire Additional
Balances and Subsequent Home Equity
Loans. For the period (the "MANAGED
AMORTIZATION PERIOD") beginning on
the earlier of (i) September 1, 1999
and (ii) the first day of the
calendar month during which a
Deficiency Amount exists, and ending
on August 31, 2004 (or, if earlier,
upon the occurrence of a Rapid
Amortization Event), the amount of
Principal Collections payable to
Certificateholders on each
Distribution Date will be, to the
extent funds are available therefor
from Principal Collections, the
Scheduled Principal Collections
Payment for such Distribution Date.
On any Distribution Date during the
Managed Amortization Period, the
"SCHEDULED PRINCIPAL COLLECTIONS
PAYMENT" will be the lesser of the
Maximum Principal Payment and the
Alternative Principal Payment.
For the period (the "RAPID
AMORTIZATION PERIOD") beginning on
September 1, 2004 (or, if earlier,
upon the occurrence of a Rapid
Amortization Event) and ending upon
the termination of the Trust, the
amount of Principal Collections
payable to Certificateholders on each
Distribution Date will be, to the
extent funds are available therefor
from Principal Collections, the
Maximum Principal Payment.
With respect to any Distribution Date
after the end of the Revolving
Period, the "MAXIMUM PRINCIPAL
PAYMENT" will be the product of
Principal Collections for the related
Collection Period and the Fixed
Allocation Percentage. With respect
to any Distribution Date during the
Managed Amortization Period, the
"ALTERNATIVE PRINCIPAL PAYMENT" will
be the amount (but not less than
zero) of Principal Collections for
the related Collection Period less
the aggregate of Additional Balances
created during the related Collection
Period.
With respect to any date of
determination, the "FIXED ALLOCATION
PERCENTAGE" will be the greater of
(i) 98.00% and (ii) the percentage
equivalent (but not in excess of
100%) of a fraction, the numerator of
which is the Invested Amount and the
denominator of which is the Pool
Balance as of the beginning of the
related Collection Period.
On the Distribution Date in June 2025
(the "SCHEDULED MATURITY DATE"), to
the extent funds are available for
such purpose, Certificateholders will
be entitled to receive as payment of
principal an amount equal to the
Certificate Principal Balance. To the
extent funds are not available for
all or a portion of such payment, the
Trustee will make a draw on the
Policy on the Scheduled Maturity Date
for the amount of the insufficiency.
Distributions of Principal
Collections based upon the Fixed
Allocation Percentage may result in
distributions of principal to
Certificateholders in amounts that
are greater relative to the declining
Pool Balance than would be the case
if the Floating Allocation Percentage
were used to determine the percentage
of Principal Collections distributed
to Certificateholders.
The aggregate distributions of
principal to Certificateholders will
not exceed the Original Certificate
Principal Balance.
The Transferor will be entitled to
the portion of Principal Collections
on each Distribution Date that is not
distributable on the Certificates, so
long as such distribution will not
reduce the Transferor's Interest
below the Minimum Transferor's
Interest as of such Distribution
Date. See "Description of the
Certificates--Distributions on the
Certificates--Transferor Collections"
herein
CERTIFICATE INSURANCE
POLICY On or before the Closing Date, the
Certificate Insurer will issue the
Certificate Insurance Policy (the
"POLICY") pursuant to the Insurance
and Reimbursement Agreement (the
"INSURANCE AGREEMENT") among the
Transferor, the Servicer, the
Depositor, the Trustee and the
Certificate Insurer.
The Policy will unconditionally and
irrevocably guarantee principal and
interest payments on the Certificates
at the times and in the amounts
described below. On each Distribution
Date, the Trustee will make a draw on
the Policy equal to the sum of:
o the amount, if any, by which
accrued and unpaid interest due
on the Certificates at the
Certificate Rate exceeds all
amounts on deposit in the
Certificate Account available to
be distributed therefor
(including any Interest
Collections and Principal
Collections otherwise allocable
to the Transferor's Interest
applied to cover any Deficiency
Amount); and
o after the Transferor Subordinated
Amount has been reduced to zero,
the amount, if any, by which the
Certificate Principal Balance as
of such Distribution Date exceeds
the Invested Amount as of such
Distribution Date, in each case
after giving effect to all other
amounts distributed as principal
on the Certificates.
In addition, the Policy will
guarantee the payment of the
Certificate Principal Balance on the
Scheduled Maturity Date, after giving
effect to all other amounts
distributable as principal on the
Certificates.
In the absence of payments under the
Policy, Certificateholders will
directly bear the credit and other
risks associated with their undivided
interest in the Trust Fund.
The Policy does not guarantee to
Certificateholders, and does not
protect against any adverse
consequences caused by, any specified
rate of prepayments of the Home
Equity Loans. See "Description of the
Certificates--The Certificate
Insurance Policy" herein.
CERTIFICATE INSURER MBIA Insurance Corporation. See
"Description of the Certificates--The
Certificate Insurance Policy--The
Certificate Insurer" herein.
LIMITED SUBORDINATION
OF THE TRANSFEROR'S
INTEREST If Certificate Interest Collections on
any Distribution Date are
insufficient (such insufficiency is
referred to as the "DEFICIENCY
AMOUNT") to pay the sum of:
1. accrued and unpaid
Servicing Fees;
2. the premium for the
Policy;
3. accrued interest due and
any overdue interest on
the Certificates;
4. the Investor Loss Amount
on such Distribution Date;
and
5. the Investor Loss Amounts
for previous Distribution
Dates not previously paid;
then Interest Collections and
Principal Collections otherwise
allocable to the Transferor's
Interest (but not in excess of the
then current Transferor Subordinated
Amount, determined as described
below) will be applied to cover the
Deficiency Amount. The portion of the
Deficiency Amount in respect of the
fourth and fifth items above not
covered by such collections (up to
the remaining Transferor Subordinated
Amount and not in excess of the
Investor Loss Amount) will be
reallocated to the Transferor's
Interest and will reduce the
Transferor Subordinated Amount as
described below. If such Certificate
Interest Collections plus the amount
of collections allocable to the
Transferor's Interest that have been
so applied to cover the Deficiency
Amount are together insufficient to
pay the amount in respect of the
third item above, then the Trustee
will make a draw on the Policy to
cover such shortfall. After the
Transferor Subordinated Amount has
been reduced to zero, the Deficiency
Amount will no longer be covered by
the Transferor's Interest as
described above.
With respect to any Distribution
Date, the "TRANSFEROR SUBORDINATED
AMOUNT" will be the least of:
o $10,000,000 (2.00% of the
Original Invested Amount) minus
the sum of (i) the aggregate
amount of Transferor Interest
Collections and Transferor
Principal Collections otherwise
allocable to the Transferor's
Interest that previously have
been distributed to
Certificateholders to cover a
Deficiency Amount as described
above and (ii) the aggregate
amount of Investor Loss Amounts
that previously have been
reallocated in reduction of the
Transferor's Interest as
described above;
o the Transferor Subordinated
Amount on the previous
Distribution Date; and
o the Required Enhancement Amount.
OVERCOLLATERALIZATION The payment of Accelerated Principal
Distribution Amounts to
Certificateholders will result in the
Invested Amount being greater than
the Certificate Principal Balance,
thereby creating
overcollateralization. On any
Distribution Date, such
overcollateralization will be
available to absorb any Investor Loss
Amount not covered either by:
o Certificate Interest Collections
remaining after the payment of
Servicing Fees, the premium for
the Policy and the distribution
of interest on the Certificates;
or
o the limited subordination of the
Transferor's Interest as
described above.
Any Investor Loss Amounts not covered
by Certificate Interest Collections,
the limited subordination of the
Transferor's Interest or such
overcollateralization will be covered
by draws on the Policy to the extent
provided therein.
Overcollateralization will arise or
increase primarily as a result of the
payment of Accelerated Principal
Distribution Amounts. As of the
Closing Date, the Invested Amount
will be equal to the Original
Certificate Principal Balance and,
accordingly, there will not be any
initial overcollateralization.
Commencing with the first
Distribution Date, the Trustee will
pay the Accelerated Principal
Distribution Amount, to the extent
Certificate Interest Collections are
available therefor on each
Distribution Date, up to an amount
equal to the excess, if any, of the
Required Overcollateralization Amount
over the Overcollateralization
Amount.
SERVICING FEE On each Distribution Date, the Servicer
will be entitled to receive a monthly
fee (the "SERVICING FEE") at a
specified annual rate (the "SERVICING
FEE RATE") on the Invested Amount as
of the first day of the immediately
preceding Collection Period. The
Servicing Fee Rate will be 0.65% per
annum. The portion of the Servicing
Fee allocable to the Certificates
will be payable from Certificate
Interest Collections and certain
other amounts. See "Description of
the Certificates--Servicing and Other
Compensation and Payment of Expenses"
and "--Distributions on the
Certificates" herein.
SUBSTITUTION OR
REPURCHASE OF
HOME EQUITY LOANS The Transferor has the option either to
substitute one or more new Home
Equity Loans or to repurchase a Home
Equity Loan immediately prior to a
Distribution Date if:
o there is a breach of a
representation or warranty of the
Transferor regarding such Home
Equity Loan that materially and
adversely affects the interests
of the Certificateholders; or
o there is a material defect in the
related loan documentation (each
Home Equity Loan described in
these two clauses is a "DEFECTIVE
HOME EQUITY LOAN").
Any Home Equity Loan so substituted
(each, an "ELIGIBLE SUBSTITUTE HOME
EQUITY LOAN") must have, among other
things:
o a Principal Balance substantially
the same as the Principal Balance
of the Defective Home Equity Loan
it replaces; and
o a Margin not less than the Margin
of the Defective Home Equity Loan
it replaces.
TERMINATION; RETIREMENT
OF THE CERTIFICATES The Trust Fund will terminate on the
Distribution Date following the later
of (i) payment in full of all amounts
owing to the Certificate Insurer, and
(ii) the earliest of:
o the Distribution Date on which
the Certificate Principal Balance
has been reduced to zero;
o the final payment or other
liquidation of the last Home
Equity Loan in the Trust Fund;
o the optional purchase of all
remaining Home Equity Loans, as
described below; and
o the Scheduled Maturity Date.
At any time when the Certificate
Principal Balance is less than or
equal to 5% of the Original
Certificate Principal Balance, the
Servicer, or in the absence of the
exercise thereof by the Servicer, the
Certificate Insurer, may purchase
from the Trust all remaining Home
Equity Loans and other property held
by the Trust. The purchase price will
be the sum of the Certificate
Principal Balance and accrued and
unpaid interest thereon at the
Certificate Rate through the day
before the Distribution Date on which
such purchase is made. See
"Description of the
Certificates--Termination; Retirement
of the Certificates" herein.
In addition, the Trust may be
liquidated as a result of certain
events of insolvency, receivership or
conservatorship relating to the
Transferor. See "Description of the
Certificates--Rapid Amortization
Events" herein.
TAX STATUS In the opinion of special tax counsel
to the Depositor and counsel to the
Underwriters, the Certificates will
be properly characterized as
indebtedness for federal income tax
purposes. Under the Agreement, the
Depositor and the Certificateholders
will agree to treat the Certificates
as indebtedness for all federal,
state and local income and franchise
tax purposes. Furthermore, special
tax counsel to the Depositor and
counsel to the Underwriters is of the
opinion that the Trust will not be
treated as either an association or a
publicly traded partnership taxable
as a corporation or as a taxable
mortgage pool. See "Certain Federal
Income Tax Considerations" herein and
"Material Federal Income Tax
Consequences" in the Prospectus.
ERISA CONSIDERATIONS An employee benefit plan (a "PLAN")
subject to the requirements of the
fiduciary responsibility provisions
of the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the provisions of
Section 4975 of the Internal Revenue
Code of 1986, as amended,
contemplating the purchase of the
Certificates should consult its
counsel before making a purchase, and
the fiduciary and such legal advisor
should consider whether the
Certificates will satisfy all of the
requirements of the "publicly offered
securities" exception described
herein and the possible application
of other ERISA prohibited transaction
exemptions described herein. Although
the Depositor expects that the
"publicly offered securities"
exception will apply to certain
purchases of the Certificates by or
with plan assets of Plans, there can
be no assurance that such exception
will apply or that there will be an
exemption for all prohibited
transactions that may arise in
connection with purchases of the
Certificates by or with plan assets
of Plans. See "ERISA Considerations"
herein and in the Prospectus.
LEGAL INVESTMENT
CONSIDERATIONS The Certificates will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended, because, among other
reasons, a majority of the Mortgages
securing the Home Equity Loans are
not first Mortgages. Accordingly,
many institutions with legal
authority to invest in comparably
rated securities based on first
mortgages may not be legally
authorized to invest in the
Certificates. See "Legal Investment
Considerations" herein.
USE OF PROCEEDS The Depositor will apply substantially
all of the net proceeds from the sale
of the Certificates to the purchase
price of the Initial Home Equity
Loans and to pay expenses connected
with pooling the Initial Home Equity
Loans and issuing the Certificates.
CERTIFICATE RATING It is a condition to the issuance of
the Certificates that Standard &
Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc.
("S&P"), rates them "AAA", and that
Moody's Investors Service, Inc.
("MOODY'S" and, together with S&P,
the "RATING AGENCIES") rates them
"Aaa". A security rating is not a
recommendation to buy, sell or hold
securities, and the assigning Rating
Agency may revise or withdraw it at
any time. There can be no assurance
that the assigning Rating Agencies
will not lower or withdraw the
ratings assigned to the Certificates
on the date the Certificates are
initially issued. A security rating
does not address the frequency of
prepayments on the Home Equity Loans
or the corresponding effect on yield
to investors. See "Certificate
Rating" herein.
REGISTRATION OF THE
CERTIFICATES The Trust will initially issue the
Certificates in book-entry form.
Persons acquiring beneficial
ownership interests in the
Certificates ("CERTIFICATE OWNERS")
may elect to hold their Certificate
interests through The Depository
Trust Company ("DTC") in the United
States or through Cedelbank or the
Euroclear System ("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. So
long as the Certificates are
Book-Entry Certificates, such
Certificates will be evidenced by one
or more Certificates registered in
the name of Cede & Co. ("CEDE"), as
the nominee of DTC, or one of the
other relevant depositaries
(collectively, the "EUROPEAN
DEPOSITARIES"). The Certificates will
initially be registered in the name
of Cede. The interests of
Certificateholders will be
represented by book entries on the
records of DTC and participating
members thereof. Cross-market
transfers between persons holding
directly or indirectly through DTC,
on the one hand, and counterparties
holding directly or indirectly
through Cedelbank or Euroclear, on
the other, will be effected within
DTC through Citibank N.A. or Morgan
Guaranty Trust Company of New York,
the relevant depositaries of
Cedelbank or Euroclear, respectively,
and each a participating member of
DTC.
No Certificate Owner will be entitled
to receive a definitive certificate
representing such person's interest,
except in the event that the Trust
issues Definitive Certificates under
the limited circumstances described
herein. All references herein to
"holders" or "Certificateholders"
will reflect the rights of
Certificate Owners only as such
rights may be exercised through DTC
and participating members of DTC for
so long as such Certificates are held
by DTC. See "Risk Factors -- There
May Be Difficulty in Pledging the
Certificates" and "Description of the
Certificates -- Registration of the
Certificates" herein and "Annex I"
hereto.
<PAGE>
RISK FACTORS
THE CERTIFICATES HAVE LIMITED LIQUIDITY
There is currently no market for the Certificates. While the Underwriters
currently intend to make a market in the Certificates, they are under no
obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide holders of
the Certificates with liquidity of investment or that it will continue for the
life of the Certificates. The Certificates will not be listed on any securities
exchange.
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
See "Description of the Certificates--Registration of the Certificates"
herein.
THERE ARE RISKS INHERENT IN THE NATURE OF SUBORDINATE HOME EQUITY LOANS AS
SECURITY
Substantially all of the Home Equity Loans are secured by junior mortgages
on residential properties. In the case of liquidations, Home Equity Loans
secured by junior mortgages are entitled to proceeds that remain from the sale
of the related Mortgaged Property after any related senior mortgages have been
satisfied in full (including any related foreclosure costs). In the event that
such proceeds are insufficient to satisfy all loans in the aggregate, the Trust,
as the holder of the junior mortgage (and, accordingly, each Certificateholder),
bears the risk of loss unless a deficiency judgment is obtained and realized
upon and, even if there is full realization upon a deficiency judgment, the risk
of delay in distributions pending such realization. In addition, deficiency
judgments may not be legally permitted or practical in some states.
See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
When a Home Equity Loan begins its amortization period, the borrower may
not be able to make the required principal payments and repayment may be
dependent on the borrower's ability to refinance the Home Equity Loan. In
general, each Home Equity Loan is a revolving line of credit for the first ten
years following origination, but such revolving period may be extended at the
Transferor's sole discretion. The Transferor's decision to extend the revolving
period may include a review of specific credit criteria.
In addition, an increase in interest rates over the Loan Rate applicable at
the time a Home Equity Loan was originated may have an adverse effect on the
related borrower's ability to pay the required monthly interest payment. Such an
increase in interest rates may also reduce such borrower's ability to obtain
refinancing and to pay the balance of such Home Equity Loan at its maturity.
Even assuming that the Mortgaged Properties provide adequate security for
the Home Equity Loans, substantial delays could be encountered in connection
with the liquidation of defaulted Home Equity Loans and corresponding delays in
the receipt of related proceeds by Certificateholders could occur. Further,
liquidation expenses (such as legal fees, appraisals, real estate taxes, and
maintenance and preservation expenses) will reduce the proceeds payable to
Certificateholders and thereby reduce the security for the Home Equity Loans. In
the event any Mortgaged Properties fail to provide adequate security for the
related Home Equity Loans, required payments under the Policy were not made, and
the protection provided by the limited subordination of the Transferor's
Interest and the availability of overcollateralization has been exhausted,
Certificateholders could experience a loss on their investment.
THERE IS A RISK THAT LOCAL REAL ESTATE MARKETS MAY DECLINE
An overall decline in the residential real estate markets in the states in
which the Mortgaged Properties are located could adversely affect their values
such that the outstanding Principal Balances of the related Home Equity Loans,
together with the outstanding balances of any senior liens thereon, may exceed
the values of the Mortgaged Properties. Such declines would adversely affect the
position of a junior mortgage before having such an effect on that of the
related senior mortgage and could extinguish the interest of the holder of a
junior mortgage on the related Mortgaged Property. Residential real estate
markets in many states have softened or declined in recent years. The Transferor
can neither quantify the impact of such declines in property values nor predict
how long such decline may continue or when such declines will end. In addition,
there have been recent indications that the United States economy may be
entering a period of slower growth and predictions that an economic recession
may occur. These developments could also adversely effect real estate values.
During a period of such declines, the rates of delinquencies, foreclosures and
losses on the Home Equity Loans would be expected to be higher than those
experienced in the mortgage lending industry in general.
Moreover, in many cases, borrowers have primary residences with above
average values, and those properties may experience greater relative declines in
value than other properties with lower values. A rise in interest rates over a
period of time and the general condition of a Mortgaged Property as well as
other factors may have the effect of reducing the value of such Mortgaged
Property from the value at the time the related Home Equity Loan was originated.
If there is a reduction in the value of a Mortgaged Property, the ratio of the
Principal Balance of the related Home Equity Loan to the value of such Mortgaged
Property may increase over what it was at the time such Home Equity Loan was
originated. Such an increase may reduce the likelihood of liquidation or other
proceeds being sufficient to satisfy such Home Equity Loan after satisfaction of
any senior liens. In addition, if the borrower has an adjustable rate senior
mortgage loan, any increase in the interest rate thereon may adversely affect
such borrower's ability to make payments on the related Home Equity Loan.
THERE ARE ASPECTS OF CASH FLOW YOU SHOULD CONSIDER
The rights of the holder of the Transferor's Interest to receive
Certificate Interest Collections remaining after the payment of accrued interest
due and any overdue accrued interest on the Certificates, along with certain
other expenses, and to receive Interest Collections and Principal Collections
allocable to the Transferor's Interest are subordinated to certain rights of
holders of the Certificates in order to enhance the likelihood of receipt by
holders of the Certificates of the full amount of their scheduled distributions
of interest on each Distribution Date and the ultimate receipt by such holders
of principal equal to the Original Certificate Principal Balance. This
subordination feature must absorb the risks associated with a possible narrowing
of the spread between the prime rate (which is the index for determining the
Loan Rate for each Home Equity Loan) and the Certificate Rate (which is based
upon One-Month LIBOR plus a specified margin). If this spread disappears (i.e.,
the Certificate Rate derived from the One-Month LIBOR formula exceeds the
Alternate Certificate Rate derived from the prime rate formula), the Certificate
Rate for the related Distribution Date will be the Alternate Certificate Rate.
The Certificate Rate could also be limited if all or a significant portion of
the Loan Rates were prevented by their lifetime interest rate caps from
increasing in accordance with increases in the prime rate as described herein.
THERE MAY BE VARIATIONS IN SUBSEQUENT HOME EQUITY LOANS FROM INITIAL HOME EQUITY
LOANS
Each Subsequent Home Equity Loan will satisfy the eligibility criteria
referred to herein at the time of its conveyance to the Trust. However,
Subsequent Home Equity Loans may be originated or acquired by the Transferor
using credit criteria different from those applied to the Initial Home Equity
Loans and may be of a different credit quality. Therefore, following the
transfer and assignment of Subsequent Home Equity Loans to the Trust, the
aggregate characteristics of the Home Equity Loans then part of the Trust Fund
may vary from those of the Initial Home Equity Loans.
See "The Home Equity Loan Pool --Conveyance of Subsequent Home Equity
Loans".
THERE ARE ASPECTS OF THE MATURITY AND PREPAYMENT OF THE HOME EQUITY LOANS YOU
SHOULD CONSIDER
Substantially all of the Initial Home Equity Loans may be prepaid in whole
or in part at any time without penalty. There is limited data available on the
rate of prepayment of home equity loans such as the Initial Home Equity Loans.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Home Equity Loans may experience a higher rate of prepayment
than traditional mortgage loans. On the other hand, it can be expected that a
portion of borrowers will not prepay their Home Equity Loans to any significant
degree. Borrowers who treat the amounts borrowed as a long-term loan are more
likely to allow their Home Equity Loans to remain outstanding until maturity.
The presence or absence of these two types of loans in the Trust Fund may have a
significant impact on the rate and timing of principal payments (including
prepayments) on the Home Equity Loans and, as a result, the weighted average
lives of the Certificates. In addition, any future limitations on the right of
borrowers to deduct interest payments on the Home Equity Loans for federal
income tax purposes may result in a higher rate of prepayments of the Home
Equity Loans. The Trust Fund's prepayment experience may also be affected by a
wide variety of factors, including general economic conditions, the level of
prevailing interest rates, the availability of alternative financing,
competition from other lenders and homeowner mobility. In addition, all of the
Initial Home Equity Loans contain due-on-sale provisions. The Servicer is under
no obligation to enforce such provisions and will refrain therefrom if such
exercise will impair or threaten to impair any recovery under any related
insurance policy or is not permitted by applicable law. The Servicer also will
refrain from enforcing such provisions under other circumstances it deems
appropriate.
The rates at which payments of principal on the Certificates will be made
will be affected by the inclusion in the Trust Fund of Home Equity Loans with
Principal Balances as of the Statistical Calculation Date or Subsequent
Selection Date, as the case may be, of $0 or that are otherwise less than the
Home Equity Loan's Credit Limit, since if the related borrowers draw down on
such lines of credit during the Managed Amortization Period, payments of
principal, if any, on the Certificates will be likewise reduced.
In the event a large number of Home Equity Loans are prepaid, the weighted
average life of the Certificates will be substantially shorter than the weighted
average life calculated on the assumption that all payments on the Home Equity
Loans are made only as scheduled. The weighted average life of the Certificates
will be sensitive to the rate and timing of principal payments (including
prepayments) on the Home Equity Loans, which may fluctuate significantly from
time to time or be zero.
See "Prepayment and Yield Considerations" herein.
No assurance can be given as to the level of prepayments that the Trust
Fund will experience. Under the Agreement, the Transferor will be obligated to
purchase or provide substitutions for Defective Home Equity Loans, Home Equity
Loans as to which the Transferor consented to increases in the related Credit
Limits exceeding certain limitations specified in the Insurance Agreement, Home
Equity Loans as to which the Transferor has reduced the related Margins below
certain levels specified in the Insurance Agreement, and Home Equity Loans as to
which the Transferor has consented to the placement of a new senior mortgage on
the related Mortgaged Property and such senior mortgage did not satisfy certain
requirements specified in the Insurance Agreement. In such event, the Transferor
will be obligated to accept the retransfer of such Home Equity Loans from the
Trust and, depending on the size of the Transferor's Interest following such
retransfers, may be required to make deposits into the Certificate Account.
Amounts so deposited will be distributed to Certificateholders as a partial or
full prepayment of such Home Equity Loans, further accelerating payments on the
Certificates.
In addition, during the Revolving Period, if the Transferor is unable to
transfer Subsequent Home Equity Loans to the Trust so that the Transferor's
Interest is at least equal to the Minimum Transferor's Interest and Principal
Collections would otherwise be retained by the Transferor as permitted by the
Agreement, then an amount of Principal Collections equal to the excess of the
Minimum Transferor's Interest over the Transferor's Interest will be deposited
by the Transferor into the Collection Account. At the end of the Revolving
Period, if the Transferor's Interest is still less than the Minimum Transferor's
Interest, then any such Principal Collections remaining on deposit in the
Collection Account will be distributed to Certificateholders as a principal
distribution, which distribution will accelerate the payments on the
Certificates.
THERE MAY BE DELAYS AND/OR EXPENSES ASSOCIATED WITH REALIZATION UPON DEFAULTED
HOME EQUITY LOANS
An action to foreclose a home equity loan is regulated by statutes and
rules of the state where the related mortgaged property is located and generally
is subject to a court's equitable powers. A foreclosure action is subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete. Furthermore, an
action to obtain a deficiency judgment with respect to a mortgage loan also is
regulated by statutes and rules of the state where the related mortgaged
property is located, and the amount of a deficiency judgment may be limited by
law. In the event of a default by a borrower on a Home Equity Loan, these
restrictions, among others, may impede the ability of the Servicer to foreclose
on or to sell the related Mortgaged Property or to obtain a deficiency judgment
in connection therewith. If required payments under the Policy were not made and
the protection afforded the Certificateholders by the limited subordination of
the Transferor's Interest and the availability of overcollateralization has been
exhausted, such restrictions may delay distributions to the Certificateholders
and may ultimately limit the amounts distributed with respect to such defaulted
Home Equity Loans and result in a loss to the Certificateholders on their
investments.
See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
THERE MAY BE DIFFICULTY IN PLEDGING THE CERTIFICATES
Since transactions in Certificates can be effected only through DTC,
Cedelbank, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge a Certificate to
persons or entities that do not participate in the DTC, Cedelbank or Euroclear
systems, or otherwise to take actions in respect of such Certificate, may be
limited due to lack of a physical certificate representing such Certificate.
See "Description of the Certificates -- Registration of the Certificates"
herein.
THERE MAY BE DELAYS IN RECEIPT OF DISTRIBUTIONS ON THE CERTIFICATES
Certificate Owners may experience some delay in their receipt of
distributions of interest on and principal of their Certificates since the
Trustee will forward such distributions to DTC, and DTC will credit such
distributions to the accounts of its Participants (as defined herein), which
will thereafter credit them to the accounts of Certificate Owners either
directly or indirectly through indirect participants.
See "Description of the Certificates--Registration of the Certificates"
herein.
THERE ARE LIMITATIONS TO THE RATINGS ASSIGNED TO THE CERTIFICATES
The ratings of the Certificates will depend primarily on an assessment by
the Rating Agencies of the underlying Home Equity Loans, the Policy and the
limited subordination of the Transferor's Interest. A security rating by a
Rating Agency is not a recommendation to purchase, hold or sell the
Certificates, inasmuch as such rating does not comment as to the market price or
suitability for a particular investor. There is no assurance that the ratings
will remain for any given period of time or that the ratings will not be
reduced, suspended or withdrawn by the Rating Agencies. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
THERE IS A RISK THAT THE CERTIFICATE INSURER MAY NOT MAKE PAYMENTS ON THE POLICY
Credit enhancement with respect to the Certificates will be provided by the
Policy.
If required payments under the Policy are not made, the Certificateholders
will be at greater risk with respect to losses on the Home Equity Loans and
nonpayment of interest on the Certificates.
See "Description of the Certificates--The Certificate Insurance Policy"
herein.
THERE IS A RISK ASSOCIATED WITH NOT RECORDING MORTGAGE ASSIGNMENTS
So long as certain conditions specified by the Certificate Insurer are met,
assignments to the Trustee of the mortgages securing the Home Equity Loans will
not be required to be recorded. The failure to record assignments to the Trustee
of the mortgages in some states in which the related mortgaged properties are
located may have the result of making the sale thereof ineffective against (i)
creditors of a prior owner of a Home Equity Loan, the Depositor or the
Transferor, (ii) a purchaser to whom a prior owner of a Home Equity Loan, the
Depositor or the Transferor fraudulently, negligently or inadvertently sells a
Home Equity Loan, or (iii) any bankruptcy trustee or similar official appointed
for a prior owner of a Home Equity Loan, the Depositor or the Transferor.
If the conditions specified by the Certificate Insurer are not met,
assignments of the mortgages in favor of the Trustee will be required to be
recorded (or opinions of counsel acceptable to the Certificate Insurer and the
Rating Agencies will be obtained to the effect that recording is not required to
protect the Trustee's interest in the related Home Equity Loans).
THERE ARE OTHER LEGAL MATTERS YOU SHOULD CONSIDER
Applicable state laws generally regulate interest rates and other charges,
and require certain disclosures. In addition, many states have other laws, such
as consumer protection laws, unfair and deceptive practices acts and debt
collection practices acts, which may apply to the origination or collection of
the Home Equity Loans. Depending on the provisions of applicable law, violations
of these laws may limit the ability of the Servicer to collect all or part of
the principal of or interest on the Home Equity Loans, may entitle the borrowers
to a refund of amounts previously paid and, in addition, could subject the
Servicer or the Transferor to damages and administrative enforcement.
See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Home Equity Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans, may subject the Servicer or the Transferor to damages
and administrative enforcement and in addition could be raised by borrowers as a
recoupment or setoff in a collection or foreclosure action.
See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
INSOLVENCY OF THE TRANSFEROR
Notwithstanding the characterization of the Certificates as debt for
federal, state and local income and franchise tax purposes, the Transferor and
the Depositor will treat the transfer of the Initial Home Equity Loans by the
Transferor to the Depositor as a sale and the Depositor and the Trust will treat
the transfer of the Initial Home Equity Loans from the Depositor to the Trust as
a sale. As a sale of the Home Equity Loans by the Transferor to the Depositor,
the Home Equity Loans would not be part of the Transferor's bankruptcy estate
and would not be available to the Transferor's creditors. However, in the event
of the insolvency of the Transferor, it is possible that the bankruptcy trustee
or a creditor of the Transferor or the Transferor as debtor in possession may
attempt to recharacterize the sale of the Initial Home Equity Loans as a
borrowing by, or as debt of, the Transferor, secured by a pledge of the Initial
Home Equity Loans. This position, if argued before or accepted by a court, could
prevent timely payments of amounts due on the Certificates and result in a
reduction of payments due on the Certificates. The Depositor will warrant in the
Agreement that the transfer of the Initial Home Equity Loans is either a valid
transfer and assignment of the Initial Home Equity Loans or the grant of a
security interest therein.
In addition, cash collections may be commingled with the Transferor's own
funds prior to each Distribution Date. In the event of the insolvency of the
Transferor, the Trust will likely not have a perfected interest in such
collections since they would not have been deposited in a segregated account
within 10 days after the collection thereof, and the inclusion thereof in the
bankruptcy estate of the Transferor may result in delays in payment and failure
to pay amounts due on the Certificates.
If a conservator, receiver or trustee were appointed for the Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Subsequent Home Equity Loans and Additional Balances
would not be sold to the Trust. In such an event, the Rapid Amortization Period
would commence. If directed by the Certificate Insurer or by Certificateholders
holding Certificates evidencing undivided interests aggregating at least 51% of
the Certificate Principal Balance of the Certificates, with the consent of the
Certificate Insurer, the Trustee will attempt to sell the Home Equity Loans,
thereby causing early payment of the Certificate Principal Balance. The net
proceeds of such sale will first be paid to the Certificate Insurer to the
extent of unreimbursed draws under the Policy and other amounts owing to the
Certificate Insurer pursuant to the Insurance Agreement. The Fixed Allocation
Percentage of remaining amounts will be distributed to the Certificateholders.
The Policy will be available to cover any shortfalls in the event such remaining
net proceeds are insufficient to pay the Certificate Principal Balance in full.
In the event of a bankruptcy or insolvency of the Servicer, the bankruptcy
trustee or receiver may have the power to prevent the Trustee or the
Certificateholders from appointing a successor Servicer.
YEAR 2000 READINESS DISCLOSURE
The Transferor/Servicer is aware of the year 2000 issues associated with
existing computer systems as the year 2000 approaches. Many computer programs
created in the past used two digits, rather than four, to refer to a year,
creating a risk that they will not properly recognize date-sensitive information
when the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data, fail or cause another system to fail.
The Transferor/Servicer is heavily dependent on computer systems for its
operations. These include its own systems and the systems of third party vendors
on which it relies.
The Transferor/Servicer has advised the Depositor that it is has commenced
and is currently in the process of carrying out a year 2000 project which, in
accordance with applicable regulatory guidelines, is designed to identify and
make any modifications necessary to avoid potential disruptions to its computer
systems arising from year 2000 issues. Any reprogramming or other modifications
to the systems used or relied upon by the Transferor/Servicer (including any
such systems supplied by third parties on which it is dependent) and the related
testing are scheduled to be completed by July 31, 1999. Neither the
Transferor/Servicer nor any of its affiliates has made any independent
investigation of the computer systems of the Trustee. In the event that computer
problems arise out of a failure of such efforts to be completed on time, or in
the event that the computer systems of the Trustee or the Transferor/Servicer
are not fully year 2000 compliant, the resulting disruptions in the collection
or distribution of receipts on the Home Equity Loans could materially adversely
affect the Certificates.
THE HOME EQUITY LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement relates
only to the Initial Home Equity Loans only as of the Statistical Calculation
Date. Unless otherwise noted, all statistical percentages set forth in this
Prospectus Supplement are measured either as a percentage of the Statistical
Calculation Date Pool Balance or the number of Initial Home Equity Loans in the
pool as of the Statistical Calculation Date. Subsequent Home Equity Loans, if
any, will be selected using generally the same criteria used to select the
Initial Home Equity Loans, and generally the same representations and warranties
will be made with respect thereto. See "--Conveyance of Subsequent Home Equity
Loans" herein.
THE INITIAL HOME EQUITY LOANS
The Initial Home Equity Loans are evidenced by Account Agreements and
secured by mortgages or deeds of trust (of which substantially all are junior
liens and the remainder are first liens) on Mortgaged Properties located in 25
states. The term to maturity of each Initial Home Equity Loan at origination was
approximately fifteen years. The Statistical Calculation Date Principal Balances
of the Initial Home Equity Loans ranged from $0 to $245,488.00, and averaged
$31,580.09 (for those Initial Home Equity Loans with a Statistical Calculation
Date Principal Balance greater than $0). Credit Limits of the Initial Home
Equity Loans ranged from $10,000.00 to $250,000.00 and averaged $35,591.64. As
of the Statistical Calculation Date, the weighted average credit limit
utilization rate of the Initial Home Equity Loans (computed by dividing the
Principal Balance for each Initial Home Equity Loan by the Credit Limit) was
approximately 86.94%. The weighted average remaining term to stated maturity of
the Initial Home Equity Loans as of the Statistical Calculation Date was 151.64
months and the latest scheduled maturity of any Initial Home Equity Loan is in
October 2013. The weighted average Junior Lien Ratio for Initial Home Equity
Loans in a junior lien position was 30.41%.
Each Initial Home Equity Loan was, and each Subsequent Home Equity Loan
will be, selected by the Transferor for inclusion in the Trust Fund from among
those that met the following criteria as of the Statistical Calculation Date or
Subsequent Selection Date, as the case may be: (i) the payment on such Home
Equity Loan was not more than 90 days delinquent and (ii) there was not less
than three months left to contractual maturity of such Home Equity Loan. The
Initial Home Equity Loans were, and each Subsequent Home Equity Loan will be,
selected from the home equity loans in the Transferor's portfolio that met the
above criteria using a selection process believed by the Transferor not to be
adverse to Certificateholders.
The Initial Home Equity Loans were originated between July 1989 and October
1998 in the ordinary course of the Transferor's business. As of the Statistical
Calculation Date, the weighted average Margin was approximately 4.38% and the
weighted average Loan Rate was approximately 12.14%. The weighted average
Combined Loan-to-Value Ratio (computed as a percentage, the numerator of which
is the Home Equity Loan's Original Credit Limit plus the principal balances or
credit limits, as applicable, of any related senior mortgage loans, and the
denominator of which is the valuation of the Mortgaged Property used by the
Transferor to underwrite the Home Equity Loan) of the Initial Home Equity Loans
at origination was approximately 90.40%.
As of the Statistical Calculation Date, substantially all of the Initial
Home Equity Loans have a lifetime interest rate cap of 19.90%.
The Trust Fund will include Home Equity Loans that are fewer than 90 days
delinquent as of the Statistical Calculation Date or related Subsequent
Selection Date for such Home Equity Loans, as the case may be. As of the
Statistical Calculation Date, approximately 1.55% of the Home Equity Loans (by
principal balance) were between 30 and 59 days delinquent and approximately
0.33% of the Home Equity Loans (by principal balance) were between 60 and 89
days delinquent.
Set forth below is a description of certain additional characteristics of
the Initial Home Equity Loans as of the Statistical Calculation Date. The sum of
the percentages in each table below may not equal the total of 100% due to
rounding.
<PAGE>
<TABLE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES
<CAPTION>
NUMBER OF STATISTICAL
INITIAL CALCULATION DATE PERCENT OF
HOME EQUITY PRINCIPAL STATISTICAL CALCULATION
STATE LOANS BALANCE DATE POOL BALANCE
- --------------------------------------------- ----------- ---------------- ------------------------
<S> <C> <C> <C>
California................................... 2,437 $ 91,930,465.70 16.10%
Illinois..................................... 1,467 45,174,613.78 7.91
Michigan..................................... 1,792 53,827,995.29 9.42
New Jersey................................... 1,716 57,988,535.24 10.15
New York..................................... 1,575 52,143,249.48 9.13
Ohio......................................... 1,614 44,867,302.55 7.86
Other(1)..................................... 7,857 225,225,435.28 39.43
------- ---------------- ------
Total........................ 18,458 $571,157,597.32 100.00%
======= ================ ======
</TABLE>
______________
(1) Includes 19 other states (none of which have a concentration of Initial
Home Equity Loans in excess of 5.00% of the Statistical Calculation Date
Pool Balance).
<PAGE>
<TABLE>
CREDIT LIMIT(1)
<CAPTION>
STATISTICAL
NUMBER OF CALCULATION DATE PERCENT OF
INITIAL PRINCIPAL STATISTICAL CALCULATION
RANGE OF CREDIT LIMITS ($) HOME EQUITY LOANS BALANCE DATE POOL BALANCE
- --------------------------------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
0.00 to 24,999.99............ 6,786 $107,860,274.81 18.88%
25,000.00 to 49,999.99............ 8,073 248,200,895.05 43.46
50,000.00 to 74,999.99............ 2,462 125,293,377.12 21.94
75,000.00 to 99,999.99............ 678 47,766,401.57 8.36
100,000.00 to 124,999.99............ 277 23,320,410.59 4.08
125,000.00 to 149,999.99............ 97 9,906,361.36 1.73
150,000.00 to 174,999.99............ 80 8,208,237.66 1.44
175,000.00 to 274,999.99............ 5 601,639.16 0.11
---------- ------------------- --------
Total......................... 18,458 $571,157,597.32 100.00%
========== =================== ========
</TABLE>
______________
(1) The minimum and maximum Credit Limits as of the Statistical Calculation
Date were $10,000.00 and $250,000.00, respectively, and the weighted
average Credit Limit was $35,591.64.
<TABLE>
OCCUPANCY STATUS(1)
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
INITIAL CALCULATION DATE STATISTICAL CALCULATION
OCCUPANCY STATUS HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- --------------------------------------------- ----------------- ----------------- -----------------------
<S> <C> <C> <C>
Owner occupied............................... 18,205 $563,627,171.57 98.68%
Non-owner occupied........................... 253 7,530,425.75 1.32
-------- ------------------ --------
Total........................ 18,458 $571,157,597.32 100.00%
======== ================== ========
</TABLE>
______________
(1) Based upon representation by the borrowers at the time of origination.
<PAGE>
<TABLE>
PRINCIPAL BALANCE(1)
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
INITIAL CALCULATION DATE STATISTICAL CALCULATION
RANGE OF PRINCIPAL BALANCES ($) HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- ------------------------------------------------ ----------------- ----------------- -----------------------
<S> <C> <C> <C>
0.00 to 24,999.99............. 8,576 $137,788,868.82 24.12%
25,000.00 to 49,999.99............. 7,416 259,369,911.07 45.41
50,000.00 to 74,999.99............. 1,750 104,165,330.65 18.24
75,000.00 to 99,999.99............. 491 42,070,624.67 7.37
100,000.00 to 124,999.99.............. 135 14,974,908.47 2.62
125,000.00 to 249,999.99.............. 90 12,787,953.64 2.24
--------- ----------------- --------
Total......................... 18,458 $571,157,597.32 100.00%
========= ================= ========
</TABLE>
______________
(1) The minimum and maximum Principal Balances as of the Statistical
Calculation Date were $0 and $245,488.00, respectively, and the average
Principal Balance was $31,580.09 for those Initial Home Equity Loans with a
Statistical Calculation Date Principal Balance greater than $0.
<TABLE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO(1)
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
RANGE OF ORIGINAL COMBINED INITIAL CALCULATION DATE STATISTICAL CALCULATION
LOAN-TO-VALUE RATIOS HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- ----------------------------------------------- ----------------- ----------------- -----------------------
<S> <C> <C> <C>
0.01% to 10.00%.............. 9 $ 267,309.92 0.05%
10.01% to 20.00%.............. 42 1,384,699.02 0.24
20.01% to 30.00%.............. 55 1,682,035.09 0.29
30.01% to 40.00%.............. 101 3,795,505.90 0.66
40.01% to 50.00%.............. 155 6,563,326.56 1.15
50.01% to 60.00%.............. 202 8,400,057.96 1.47
60.01% to 70.00%.............. 717 27,969,898.98 4.90
70.01% to 80.00%.............. 2,288 76,816,976.22 13.45
80.01% to 90.00%.............. 4,197 124,848,001.25 21.86
90.01% to 100.00%.............. 8,970 265,669,745.00 46.51
100.01% to 110.00%.............. 769 23,993,499.26 4.20
110.01% to 120.00%.............. 465 16,216,044.11 2.84
120.01% to 125.00%.............. 488 13,550,498.05 2.37
-------- ----------------- --------
Total........................ 18,458 $571,157,597.32 100.00%
======== ================= ========
</TABLE>
______________
(1) The minimum and maximum Original Combined Loan-to-Value Ratios as of the
Statistical Calculation Date were 4.81% and 125.00%, respectively, and the
weighted average Original Combined Loan-to-Value Ratio was approximately
90.40%.
<PAGE>
<TABLE>
CREDIT LIMIT UTILIZATION RATE(1)
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
RANGE OF CREDIT LIMIT INITIAL CALCULATION DATE STATISTICAL CALCULATION
UTILIZATION RATES HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- ----------------------------------------------- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
0.00% to 9.99%................... 511 $ 203,859.35 0.04%
10.00% to 19.99%................... 99 685,678.97 0.12
20.00% to 29.99%................... 159 2,082,619.86 0.36
30.00% to 39.99%................... 167 2,797,685.82 0.49
40.00% to 49.99%................... 283 5,843,391.02 1.02
50.00% to 59.99%................... 405 9,685,748.18 1.70
60.00% to 69.99%................... 503 13,975,039.47 2.45
70.00% to 79.99%................... 854 25,105,538.72 4.40
80.00% to 89.99%................... 1,627 49,046,472.84 8.59
90.00% to 99.99%................... 13,033 433,988,861.58 75.98
100.00% to 109.99%................... 817 27,742,701.51 4.86
-------- ----------------- --------
Total.......................... 18,458 $571,157,597.32 100.00%
======== ================= ========
</TABLE>
______________
(1) The minimum and maximum credit limit utilization rates as of the
Statistical Calculation Date were 0.00% and 101.82%, respectively, and the
weighted average credit limit utilization rate was approximately 86.94%.
The credit limit utilization rate is computed by dividing the Principal
Balance of each Home Equity Loan by the related Credit Limit.
<TABLE>
MARGIN(1)
<CAPTION>
NUMBER OF STATISTICAL
INITIAL CALCULATION DATE PERCENT OF
HOME EQUITY PRINCIPAL STATISTICAL CALCULATION
RANGE OF MARGINS LOANS BALANCE DATE POOL BALANCE
- ------------------------------------------------ ----------- ---------------- ------------------------
<S> <C> <C> <C>
0.50% to 0.99%................... 32 $ 2,490,543.37 0.44%
1.00% to 1.49%................... 39 1,928,384.93 0.34
1.50% to 1.99%................... 196 8,675,718.20 1.52
2.00% to 2.49%................... 197 8,183,003.68 1.43
2.50% to 2.99%................... 1,988 80,623,620.83 14.12
3.00% to 3.49%................... 328 12,175,610.10 2.13
3.50% to 3.99%................... 3,685 122,392,683.89 21.43
4.00% to 4.49%................... 474 14,806,806.49 2.59
4.50% to 4.99%................... 7,456 243,180,880.20 42.58
5.00% to 5.49%................... 158 5,389,128.95 0.94
5.50% to 5.99%................... 3,079 47,444,192.77 8.31
6.00% to 6.49%................... 232 7,804,078.21 1.37
6.50% to 6.99%................... 588 15,859,602.87 2.78
7.00% to 7.49%................... 6 203,342.83 0.04
---------- ------------------- --------
Total........................... 18,458 $571,157,597.32 100.00%
========== =================== ========
</TABLE>
______________
(1) The minimum and maximum Margins as of the Statistical Calculation Date were
0.90% and 7.00%, respectively, and the weighted average Margin was
approximately 4.38%.
<TABLE>
SEASONING(1)
<CAPTION>
NUMBER OF STATISTICAL
INITIAL CALCULATION DATE PERCENT OF
HOME EQUITY PRINCIPAL STATISTICAL CALCULATION
RANGE OF SEASONING (MONTHS) LOANS BALANCE DATE POOL BALANCE
- ------------------------------------------------ ------------ ----------------- ------------------------
<S> <C> <C> <C>
5 to 12.......................... 3,165 $105,205,559.11 18.42%
13 to 24.......................... 6,478 209,016,230.05 36.60
25 to 36.......................... 4,192 119,365,219.81 20.90
37 to 48.......................... 2,347 65,613,222.96 11.49
49 to 60.......................... 761 23,665,962.03 4.14
61 to 72.......................... 528 16,484,922.75 2.89
73 to 84.......................... 406 12,801,557.56 2.24
85 to 96.......................... 234 7,672,947.44 1.34
97 to 108.......................... 278 8,827,578.37 1.55
109 to 116.......................... 69 2,504,397.24 0.44
--------- ------------------ --------
Total............................... 18,458 $571,157,597.32 100.00%
========= ================= ========
</TABLE>
______________
(1) The minimum and maximum number of months since origination as of the
Statistical Calculation Date were 5 months and 116 months, respectively,
and the weighted average number of months since origination was
approximately 28.36 months.
<PAGE>
<TABLE>
REMAINING TERM TO STATED MATURITY(1)
<CAPTION>
NUMBER OF STATISTICAL
INITIAL CALCULATION DATE PERCENT OF
RANGE OF REMAINING TERMS HOME EQUITY PRINCIPAL STATISTICAL CALCULATION
TO STATED MATURITY (MONTHS) LOANS BALANCE DATE POOL BALANCE
- --------------------------------------------- ----------- ---------------- -----------------------
<S> <C> <C> <C>
61 to 72......................... 82 $ 2,899,381.83 0.51%
73 to 84......................... 280 8,946,276.32 1.57
85 to 96......................... 239 7,855,949.30 1.38
97 to 108......................... 438 13,666,967.93 2.39
109 to 120......................... 521 16,213,618.20 2.84
121 to 132......................... 781 24,398,064.13 4.27
133 to 144......................... 2,483 69,195,621.22 12.11
145 to 156......................... 4,341 124,670,892.93 21.83
157 to 168......................... 6,610 214,874,944.61 37.62
169 to 180......................... 2,683 88,435,880.85 15.48
------- ----------------- -------
Total.............................. 18,458 $571,157,597.32 100.00%
======= ================= =======
</TABLE>
______________
(1) The minimum and maximum remaining terms to stated maturity as of the
Statistical Calculation Date were 64 months and 175 months, respectively,
and the weighted average remaining term to stated maturity was
approximately 151.64 months.
<PAGE>
<TABLE>
JUNIOR LIEN RATIO(1)(2)
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
INITIAL CALCULATION DATE STATISTICAL CALCULATION
RANGE OF JUNIOR LIEN RATIOS HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- ------------------------------------------------ ----------------- ----------------- -----------------------
<S> <C> <C> <C>
0.00% to 9.99%.................... 1,095 $ 15,858,502.44 2.78%
10.00% to 19.99%.................... 6,081 142,250,896.17 24.91
20.00% to 29.99%.................... 5,456 174,269,926.34 30.51
30.00% to 39.99%.................... 2,460 92,849,557.97 16.26
40.00% to 49.99%.................... 1,182 50,243,506.81 8.80
50.00% to 59.99%.................... 561 24,737,448.27 4.33
60.00% to 69.99%.................... 325 14,078,550.99 2.46
70.00% to 79.99%.................... 245 10,630,268.87 1.86
80.00% to 89.99%.................... 179 8,688,008.65 1.52
90.00% to 99.99%.................... 118 5,811,687.40 1.02
-------- ------------------ ------
Total.............................. 17,702 $ 539,418,353.91 94.44%
======== ================== ======
</TABLE>
______________
(1) The minimum and maximum Junior Lien Ratios as of the Statistical
Calculation Date were 2.20% and 99.85%, respectively, and the weighted
average Junior Lien Ratio was approximately 30.41%.
(2) The Junior Lien Ratio of a Home Equity Loan is the ratio (expressed as a
percentage) computed by dividing its Credit Limit by the sum of its Credit
Limit and the outstanding balances or credit limits, as applicable, of any
senior mortgages as of the date of the origination of such Home Equity
Loan. The Junior Lien Ratio is calculated only with respect to those Home
Equity Loans in a junior lien position.
<TABLE>
LIEN POSITION
<CAPTION>
NUMBER OF STATISTICAL PERCENT OF
INITIAL CALCULATION DATE STATISTICAL CALCULATION
LIEN POSITION HOME EQUITY LOANS PRINCIPAL BALANCE DATE POOL BALANCE
- ---------------------------------------------- ----------------- ----------------- -----------------------
<S> <C> <C> <C>
Senior........................................ 756 $ 31,739,243.41 5.56%
Junior........................................ 17,702 539,418,353.91 94.44
------ ---------------- -------
Total............................... 18,458 $571,157,597.32 100.00%
====== ================ =======
</TABLE>
<TABLE>
PROPERTY TYPE
<CAPTION>
NUMBER OF STATISTICAL
INITIAL CALCULATION PERCENT OF
HOME EQUITY DATE PRINCIPAL STATISTICAL CALCULATION
PROPERTY TYPE LOANS BALANCE DATE POOL BALANCE
- ---------------------------------------------- ----------- -------------- ------------------------
<S> <C> <C> <C>
Single-Family................................. 18,099 $557,936,690.23 97.69%
Other......................................... 359 13,220,907.09 2.31
-------- ----------------- --------
Total............................... 18,458 $571,157,597.32 100.00%
======== ================= ========
</TABLE>
<PAGE>
The Transferor will transfer to the Depositor all of its right, title and
interest in the Initial Home Equity Loans and any Additional Balances relating
thereto, and the Depositor in turn will transfer the same to the Trust. The
Servicer will continue to service the Home Equity Loans pursuant to the
Agreement, and will receive the monthly Servicing Fee for such services. See
"Description of the Certificates -- Transfer of Home Equity Loans" and
"--Servicing and Other Compensation and Payment of Expenses" herein.
The Transferor will make certain representations and warranties regarding
the Home Equity Loans, but its transfer of the Home Equity Loans to the
Depositor will be without recourse, other than its obligation to repurchase or
substitute for breach of certain representations and warranties with respect
thereto. See "Description of the Certificates -- Transfer of Home Equity Loans"
herein. The Servicer's obligations with respect to the Home Equity Loans will
consist principally of its contractual servicing obligations under the
Agreement.
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
The Agreement permits the Trust Fund to acquire Subsequent Home Equity
Loans during the Revolving Period. Accordingly, the statistical characteristics
of the Home Equity Loans upon the addition of Subsequent Home Equity Loans to
the Trust may vary somewhat from the statistical characteristics of the Initial
Home Equity Loans.
Each Subsequent Home Equity Loan will have been underwritten substantially
in accordance with the criteria set forth herein under "The Transferor and
Servicer -- Underwriting Criteria." Subsequent Home Equity Loans will be
transferred to the Trust by the Transferor pursuant to subsequent transfer
instruments (the "SUBSEQUENT TRANSFER AGREEMENTS") between the Transferor and
the Trust. In connection with the transfer of Subsequent Home Equity Loans to
the Trust by the Transferor on any dates during the Revolving Period (the
"SUBSEQUENT TRANSFER DATES"), the Transferor's Interest will increase on the
date of transfer by an amount equal to the Principal Balance of each Subsequent
Home Equity Loan so transferred. In each instance in which Subsequent Home
Equity Loans are transferred to the Trust pursuant to a Subsequent Transfer
Agreement, the Transferor will designate (i) a selection date (such date, the
"SUBSEQUENT SELECTION DATE") with respect to the Subsequent Home Equity Loans
selected by the Transferor for inclusion in the Trust and (ii) a cut-off date
(such date, the "SUBSEQUENT CUT-OFF DATE") as of which such Subsequent Home
Equity Loans will be transferred to the Trust. As of any Subsequent Cut-off
Date, the Principal Balance of the related Subsequent Home Equity Loan will be
the "SUBSEQUENT CUT-OFF DATE PRINCIPAL BALANCE". Upon any transfer of Subsequent
Home Equity Loans on the related Subsequent Transfer Date, the aggregate
Principal Balance of the Home Equity Loans will increase by an amount equal to
the aggregate Subsequent Cut-off Date Principal Balance of the Subsequent Home
Equity Loans so transferred.
Any conveyance of Subsequent Home Equity Loans on a Subsequent Transfer
Date will be subject to certain conditions, including, but not limited to: (a)
each such Subsequent Home Equity Loan must satisfy the representations and
warranties specified in the related Subsequent Transfer Agreement and the
Agreement; (b) the Transferor will select such Subsequent Home Equity Loans in a
manner that it reasonably believes is not adverse to the interests of the
Certificateholders or the Certificate Insurer; (c) the Transferor will deliver
certain opinions of counsel acceptable to the Certificate Insurer and the
Trustee with respect to the validity of the conveyance of such Subsequent Home
Equity Loans; and (d) as of each Subsequent Selection Date, each Subsequent Home
Equity Loan will satisfy the following criteria: (i) such Subsequent Home Equity
Loan may not be more than 90 days delinquent as of the related Subsequent
Selection Date; (ii) the original stated term to maturity of such Subsequent
Home Equity Loan will not exceed 180 months; (iii) such Subsequent Home Equity
Loan must have an outstanding Principal Balance of not less than $0 and no more
than $150,000 as of the Subsequent Selection Date; (iv) such Subsequent Home
Equity Loan will have been underwritten substantially in accordance with the
criteria set forth under "The Transferor and Servicer -- Underwriting Criteria"
herein; (v) such Subsequent Home Equity Loan must have a Combined-Loan-to-Value
Ratio at origination of no more than 125%; and (vi) such Subsequent Home Equity
Loan must not by its terms provide for negative amortization.
In addition, any transfer of Subsequent Home Equity Loans will require the
approval of the Certificate Insurer, which approval shall not be unreasonably
withheld; provided, however that within five Business Days of request the
Certificate Insurer will provide notice of approval or disapproval, or such
Subsequent Home Equity Loans will be deemed approved by the Certificate Insurer.
Notwithstanding the foregoing conditions, Subsequent Home Equity Loans with
characteristics varying materially from those set forth above may be transferred
to the Trust and included in the Trust Fund with the approval of the Certificate
Insurer.
THE TRANSFEROR AND SERVICER
GENERAL
Providian Financial Corporation, through its subsidiaries (collectively,
"PROVIDIAN"), provides lending and deposit products to consumers nationwide.
Providian National Bank (formerly known as First Deposit National Bank) is a
national bank headquartered in Tilton, New Hampshire and is a wholly-owned
subsidiary of Providian Financial Corporation. Providian offers a range of loan
products, including credit cards, revolving lines of credit, home loans, secured
credit cards, and fee-based products. As of December 31, 1998, Providian had
more than eight million customers and over $14 billion in assets under
management. Providian is one of the ten largest bankcard issuers in the United
States.
Providian offers its home loan products through its Home Loan Business.
Providian's Home Loan Business offers home equity lines of credit and home
equity loans originated primarily through mail, telemarketing and other direct
marketing channels. Providian's Home Loan Business currently serves customers in
44 states plus the District of Columbia, which jurisdictions represent
approximately 87.5% of the United States population. Providian had $1.085
billion of home equity lines of credit and home equity loans under management at
year end 1998 and $1.030 billion at year end 1997.
The primary focus of Providian's Home Loan Business is to target homeowners
with high levels of unsecured debt and offer them an opportunity to consolidate
their debt through a home equity line of credit or home equity loan. Customers
are able to consolidate their debt and benefit from a lower interest rate than
would be available through their credit cards, and may also gain tax advantages.
Providian's Home Loan Business strategy focuses on the following: (i)
evaluating the customers' credit history in addition to real estate which
secures the loan; (ii) marketing directly to customers, which permits both
customer and regional selectivity and allows Providian to react quickly to local
economic and real estate market changes; (iii) utilizing a two-step process of
lead generation and lead conversion with a universal offer and customization of
loan terms; and (iv) establishing primary lender relationships by successfully
targeting customers likely to consolidate debt. Many of the skills used by
Providian to execute its Home Loan Business strategy were originally developed
for its Credit Card Business. These skills, including database marketing,
customer targeting and risk management, have been adapted by Providian
specifically for its Home Loan Business.
LOAN ORIGINATION
Providian's home equity line of credit product is structured with a 15-year
term, consisting of a 10-year revolving period followed by a five-year
amortization period. Borrowers are required to take an initial cash advance or
transfer balances of at least $10,000 at the time they open the account.
Borrowers primarily use checks to access additional draws, up to the applicable
Credit Limit. Interest rates on Providian's home equity lines of credit are
variable and are indexed to the prime rate, as published in The Wall Street
Journal. Providian determines the Credit Limits and pricing based on the
customer's credit profile, loan feature preferences and other risk parameters.
In 1998, Providian's Home Loan Business began offering customers the option of
paying upfront origination fees to reduce the interest rate applicable to their
lines, and also introduced an early closure fee payable by borrowers who prepay
their loans and close their accounts within the first three years.
Providian uses internally developed proprietary models to prescreen and
target individuals it believes are creditworthy and have an appetite for debt
consolidation. Using its proprietary underwriting criteria, Providian segments
prospective customers according to their risk profile. In this process,
Providian assesses the prospective customer's probability of default before
determining combined loan-to-value ("CLTV") limits. Providian offers higher CLTV
ratios when a customer's historical credit performance and other factors
warrant. Lines of credit with a CLTV above 100% are only offered to lower risk
customers, and the maximum CLTV for lines of credit is currently 125%. The goal
of Providian's pricing strategy is to ensure that Providian is appropriately
compensated for risks incurred.
A key tool in Providian's overall strategy is the flexibility offered by
the use of mail, telemarketing and other direct marketing channels, in lieu of a
branch-based system. This direct marketing approach enables Providian to avoid
the high overhead costs associated with a branch system.
Another key tool in Providian's strategy is the ability to tailor each line
of credit to a customer's individual needs. Proprietary transaction
profitability models provide Providian's telemarketers with guidelines for
customizing account features directly with loan applicants. Each loan parameter,
including credit limit, balance transfer or cash advance level, and pricing, is
analyzed in the profitability model to ensure that the account will meet
Providian's business profitability and risk guidelines. Once terms have been
finalized with the customer, Providian prints each customer's documentation in
its operations center to reflect the specific terms of the customer's account.
Providian uses credit bureau prescreening as part of its customer targeting
process. Providian supplies its prescreening criteria to one or more credit
bureaus, which screen their databases and generate a list of names. Providian
refines the list according to its targeting criteria, which are derived from
statistical models of data that it gathers from previous response patterns,
funding experience and other sources. Providian then provides the list to a
third party company specializing in developing lists of consumers with desired
attributes. Providian verifies the final list and periodically audits it to
ensure that it complies with the criteria supplied.
Consumers who receive a solicitation package may respond by completing and
returning a reply card or by calling a toll-free number provided in the
solicitation package. A telemarketer takes application information over the
telephone, including the applicant's income and information relating to the
applicant's property. Primary source income is generally verified before
funding. Loan balance information is generally obtained from credit bureaus and
verified with the customer.
Leads have also been obtained from other sources, such as existing
customers of Providian's Credit Card Business and through the Internet.
COLLECTIONS
In the collections area, Providian attempts to bring delinquent accounts
current and identify accounts that are at risk to become losses. The principal
strategies of collection are early intervention and event driven escalation of
collection efforts. An account is considered to be in default the day after the
statement due date, but payment will be accepted without assessment of late
charges during a grace period following the statement due date. After the grace
period expires, a late charge is assessed and collections activity is initiated,
unless an account is in bankruptcy. Initial written correspondence is followed
by telephone contact. Additional attempts to contact the borrower by telephone
are made and letters may be used to supplement calls. An economic analysis is
performed on delinquent accounts to determine the equity in the property and the
legal remedies which may be utilized. For those accounts with sufficient equity
to foreclose, senior mortgage holders are contacted to verify the status of
their loans and any impound account. If a senior loan is past due, the collector
verifies the length of the delinquency, the status of the account and the amount
required to bring the loan current. When these actions are completed, the
collector recommends a course of action which must be approved by the
Collections Manager. Except in the event of the bankruptcy or the death of the
borrower, collection efforts continue until Providian determines that no further
recovery is likely to be made. In the event of the bankruptcy or the death of
the borrower, claims are pursued to the extent legally permitted.
Providian's Home Loan Business prepares a projection of potential charge
offs as soon as a loss of all or part of the principal of any account is
anticipated. Prior to March 1999, charge offs were recorded by Providian when
final resolution occurred, generally upon liquidation of the mortgaged property.
Effective March 1999, Providian adopted changes to its charge-off policies for
loans such as the Home Equity Loans. Rather than charging off loans upon the
final resolution of defaulted loans, Providian charges off anticipated loss
amounts when payments on such loans become 180 days delinquent.
Providian's OREO (Other Real Estate Owned) unit institutes eviction
proceedings if needed, selects a realtor to sell the property, manages the
cleaning, repair and security of the property and actively markets the property.
As of December 31, 1998, the OREO unit had 16 properties under management.
Providian originated the Home Equity Loans in its ordinary course of
business. The information set forth in the foregoing paragraphs has been
provided by Providian and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
UNDERWRITING CRITERIA
The information set forth in the following paragraphs has been provided by
Providian and neither the Depositor nor any other party makes any representation
as to the accuracy or completeness of such information.
All of the Home Equity Loans were originated by Providian and were
underwritten in accordance with its Home Loan Business credit policy, which has
been approved by Providian's loan committee. The focus of the Providian Home
Loan Business underwriting criteria is on the customer's credit history and
ability to repay rather than on the value of the real estate securing the loan.
Providian's Home Loan Business operations center, located in Pleasanton,
California, processes all of its lines of credit, from application through
funding. Providian's Home Loan Business currently offers lines of credit to
customers with margins ranging from 2.0% to 10.24% over the prime rate, based on
factors such as points paid, CLTV, loan size and the customer's risk profile.
Providian may grant rate reductions which reduce the margins to as low as 0.5%
over the prime rate, depending on its profitability model.
Under certain circumstances, a policy exception to decline or approve an
application may be granted. Providian's management reviews all policy
exceptions, which are subject to approval by Providian's loan committee. Policy
exception trends and the performance of policy exception loans provide feedback
to be used when considering future modifications to Providian's credit policy.
Providian tracks the results of its direct marketing and continually tests
new product features. The information collected enables management to monitor
the effectiveness of the Home Loan Business prescreening and underwriting
criteria and to modify the criteria based on the results of such monitoring.
Each Providian Home Loan Business customer is subject to an account
agreement governing the terms and conditions of the customer's line of credit.
In general, the account agreements are governed by New Hampshire law, but the
mortgage documents securing the related Mortgaged Property are governed by the
laws of the state in which such Mortgaged Property is located. Under the account
agreement, Providian reserves the right to terminate or limit access to the
account under certain circumstances, such as a material change in the customer's
financial condition or value of the underlying collateral or when a customer is
in default.
HOME PROTECTION
Providian makes available to borrowers a payment deferral product called
"Home Protection". This product allows borrowers to defer payments on their Home
Equity Loans in certain situations. It is not insurance and does not reduce any
of the borrowers' outstanding balances, but finance charges do not accrue on the
outstanding balances during the deferral period. Providian charges each borrower
who enrolls in the plan a monthly fee that is added to the monthly payment due
on the related Home Equity Loan each month. Home Protection is a registered
service mark of Providian Financial Corporation.
The Home Protection payment deferral feature is activated by the following
occurrences: involuntary unemployment, hospitalization, accident, sickness or
disability. During the period that the payment deferral is in effect, borrowers
are not considered to be delinquent with regard to their payment obligations
under their Home Equity Loans. In no event does the payment deferral extend
beyond 18 months or the number of months the borrower has been enrolled in Home
Protection, whichever is less. Home Equity Loans with respect to which payments
have been deferred pursuant to Home Protection will not be considered delinquent
or in default for any purpose under the Agreement.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth information relating to the delinquency and
loss experience on the home equity loans serviced by the Servicer for its own
account or for the account of affiliates and included in the Servicer's
servicing portfolio as of and for each of the five years in the period ended
December 31, 1998. The delinquency and loss experience set forth in the
following tables represents the historical experience of the Servicer for the
dates and periods given, and there can be no assurance that the future
experience on the Home Equity Loans in the Trust Fund will be the same as, or
more favorable than, that of the total home equity loans in the Servicer's
servicing portfolio.
Due to the change in charge off policy implemented in March 1999 described
in "--Collections" above, the Servicer is likely to recognize losses earlier
than it would have under its previous policy. This may result in Investor Loss
Amounts being paid to Certificateholders sooner than would have been the case
under the previous policy reflected in the tables below. Providian will
recognize a one time charge off of $10,099,691.78 for the first quarter of 1999
to reflect this change in its charge off policy.
<PAGE>
<TABLE>
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<CAPTION>
AS OF DECEMBER 31,
-------------- -------------- -------------- -------------- --------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Aggregate loan balance of home
equity loans in the serviced
portfolio (1): $462,335 $709,636 $883,043 $1,032,792 $1,084,794
Delinquent loan balances (2)(3):
30-59 days $2,341 $8,996 $12,237 $17,936 $17,251
60-89 days $881 $3,165 $3,766 $6,131 $6,962
90 or more days $3,137 $7,890 $15,750 $23,263 $26,111
90 or more days as a
percentage of aggregate
loan balance (4): 0.68% 1.11% 1.78% 2.25% 2.41%
</TABLE>
______________
(1) Aggregate loan balance at the end of the reporting period.
(2) The total period of delinquency is based on the number of days payments are
contractually past due.
(3) Does not include properties in foreclosure but does include mortgage loans
for which the mortgagor is in bankruptcy.
(4) The delinquency percentage represents the principal balance of home equity
loans with payments contractually past due.
<TABLE>
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<CAPTION>
AS OF DECEMBER 31,
-------------- ------------- --------------- -------------- --------------
1994 1995 1996 1997 1998
-------------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Aggregate loan balance of home
equity loans in the serviced
portfolio (1)(2): $379,895 $579,314 $807,268 $959,946 $1,028,039
Gross charge-offs (3): $1,342 $1,554 $3,933 $5,496 $7,973
Recoveries (4): 13 157 88 372 282
Net charge-offs (5): $1,329 $1,397 $3,845 $5,124 $7,691
Net charge-offs as a
percentage of aggregate
loan balances (5)(6): 0.35% 0.24% 0.48% 0.53% 0.75%
</TABLE>
______________
(1) Average aggregate loan balance of home equity loans serviced during the
period is the arithmetic average of the outstanding balances of the home
equity loans outstanding on the last business day of each month during the
period.
(2) Average aggregate loan balance includes real estate owned balances.
(3) Gross charge-offs are amounts recorded as charge-offs by the Servicer
during the related period with respect to loans and real estate owned
properties.
(4) Recoveries are recoveries from liquidation proceeds, deficiency judgments,
and other amounts recovered with respect to previously recorded charged off
amounts.
(5) Net charge-offs represent gross charge-offs less recoveries.
(6) Includes real estate owned properties.
No assurance can be given that the values of the Mortgaged Properties as of
the dates of origination of the related Home Equity Loans have remained or will
remain constant. If residential real estate markets experience a decline in
property values such that the outstanding Principal Balances of the Home Equity
Loans, together with any senior mortgage loans on the Mortgaged Properties,
equal or exceed the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those currently
experienced in the mortgage lending industry in general. To the extent that the
Mortgaged Properties are concentrated in areas that experience declining
residential real estate values, the delinquencies, foreclosures and losses with
respect to the Home Equity Loan pool may be particularly affected. See "The Home
Equity Loan Pool" herein. The likelihood that borrowers will become delinquent
in the payment of the Home Equity Loans, the rate of any subsequent
foreclosures, and the severity of any losses, also may be affected by a number
of factors related to each borrower's personal circumstances, including, but not
limited to, unemployment or change in employment and marital separation. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of scheduled payments of
principal and interest on the Home Equity Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Home Equity
Loans. To the extent that such losses are not covered by the Policy or through
the availability of the limited subordination of the Transferor's Interest and
overcollateralization, they will be borne, at least in part, by holders of the
Certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
There is limited data available on the rate of prepayment of home equity
loans such as the Home Equity Loans. Generally, home equity loans are not viewed
by borrowers as permanent financing. Accordingly, the Home Equity Loans may
experience a higher rate of prepayment than traditional mortgage loans. On the
other hand, because the Home Equity Loans are nonamortizing during the first 10
years following origination, in the absence of significant voluntary borrower
prepayments they would experience slower rates of principal payment than
traditional fully amortizing first mortgages. The Trust Fund's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, the level of prevailing interest rates, the availability of
alternative financing, competition from other lenders, borrower cash flow,
homeowner mobility and changes affecting the deductibility for federal income
tax purposes of interest payments on the Home Equity Loans. Substantially all of
the Initial Home Equity Loans may be prepaid in whole or in part at any time
without penalty. The prepayment experience with respect to the Home Equity Loans
will affect the life of the Certificates.
Because principal payments on the Home Equity Loans will be distributed to
Certificateholders as they are collected after the Revolving Period, the rate of
principal payments and the aggregate amount of each interest payment on the
Certificates and the yields to maturity of the Certificates will vary in
relation to the rate and timing of losses sustained by the Certificateholders
resulting from the liquidation of Home Equity Loans or otherwise. Principal
prepayments on the Certificates may be in the form of prepayments on the Home
Equity Loans, payments under the Policy, Accelerated Principal Distributions,
repurchases by the Transferor and liquidations due to default, casualty,
condemnation and the like. The weighted average life of the Certificates will be
sensitive to the rate and timing of principal payments (including prepayments)
on the Home Equity Loans, which may fluctuate significantly from time to time or
be zero.
If the actual amount of losses in respect of the Home Equity Loans
experienced by the Trust Fund exceeds the amount of Certificate Interest
Collections available to cover such losses, subject to the protection provided
by the Policy and the availability of the limited subordination of the
Transferor's Interest and overcollateralization, Certificateholders may
experience a loss on their investment.
The Trust Fund's prepayment experience will be affected by any repurchases
of Home Equity Loans by the Transferor. Although substantially all of the Home
Equity Loans contain due-on-sale provisions, the Servicer is under no obligation
to enforce such provisions and will refrain therefrom in circumstances deemed
appropriate by the Servicer or if such exercise is not permitted by applicable
law or will impair or threaten to impair any recovery under any related
insurance policy. However, transfers of Mortgaged Properties resulting in the
voluntary prepayment of the full amount due under the related Account Agreements
will affect the level of prepayments on the Home Equity Loans. See "Description
of the Agreements -- Collection and Other Servicing Procedures" and "Certain
Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses" in the Prospectus for a
description of certain provisions of the Agreement referred to below that may
affect the prepayment experience on the Home Equity Loans.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Home Equity Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Home Equity Loans may vary because, among other things,
borrowers may make payments during any month (other than the month in which the
Home Equity Loan matures) as low as the scheduled principal payment for such
month, which may be zero during the account's revolving period or as high as the
entire outstanding balance plus accrued interest thereon. Collections on the
Home Equity Loans may also vary due to seasonal purchasing and payment habits of
borrowers.
Although the Servicer is restricted under the Agreement from increasing the
Credit Limit under an Account Agreement above a certain level without
repurchasing the related Home Equity Loan, it is not prohibited from entering
into a new loan agreement with the borrower providing for the increased credit
limit and simultaneously prepaying the Principal Balance on behalf of the
borrower from amounts advanced under such new loan agreement. Any such
prepayments would be passed through to holders of the Certificates after the
Revolving Period and may affect the weighted average life of the Certificates.
From time to time, the Transferor may solicit the refinancing of Home
Equity Loans by offering new loans to the related borrowers. Any such
refinancing of a Home Equity Loan would have the effect of a prepayment in full.
Any such prepayments would be passed through to holders of the Certificates
after the Revolving Period and may affect the weighted average life of the
Certificates.
No assurance can be given as to the level of prepayments that the Trust
Fund will experience, but it is expected that a portion of borrowers will not
prepay their Home Equity Loans to any significant degree.
During the Managed Amortization Period, Certificateholders will receive, to
the extent of the availability thereof, amounts from Principal Collections
either based upon the Fixed Allocation Percentage of principal received or the
principal received less amounts drawn under the Account Agreements, whichever is
less. Upon the commencement of the Rapid Amortization Period, Certificateholders
will receive amounts from Principal Collections based solely upon the Fixed
Allocation Percentage. Because prior distributions of Principal Collections to
Certificateholders serve to reduce the Floating Allocation Percentage but do not
change the Fixed Allocation Percentage, allocations of Principal Collections
based on the Fixed Allocation Percentage may result in distributions of
principal to the Certificateholders in amounts that are, in most cases, greater
relative to the declining balance of the Home Equity Loans than would be the
case if the Floating Allocation Percentage were used to determine the percentage
of Principal Collections distributed to Certificateholders. This is especially
true during the Rapid Amortization Period when the Certificateholders are
entitled to receive the Maximum Principal Payment and not a lesser amount. In
addition, Certificate Interest Collections may be distributed as principal to
Certificateholders in connection with the Accelerated Principal Distribution
Amounts. Furthermore, to the extent of losses allocable to the
Certificateholders, Certificateholders may also receive as payment of principal
the amount of such losses either from (i) Certificate Interest Collections, (ii)
Interest Collections and Principal Collections otherwise allocable to the
Transferor's Interest up to the Transferor Subordinated Amount or (iii), in some
circumstances, draws under the Policy. The level of losses may therefore affect
the rate of payment of principal on the Certificates.
To the extent borrowers make more draws than principal payments, the
Transferor's Interest may grow. Because during the Rapid Amortization Period the
Certificateholders' share of Principal Collections is based upon the Fixed
Allocation Percentage (without reduction), an increase in the Transferor's
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate. The Agreement permits the Transferor, at its
option, but subject to the satisfaction of certain conditions specified in the
Agreement, including the conditions described below, to remove certain Home
Equity Loans from the Trust prior to the commencement of the Rapid Amortization
Period, so long as the Transferor's Interest (after giving effect to such
removal) is not less than the Minimum Transferor's Interest. Such removals may
affect the rate at which principal is distributed to Certificateholders by
reducing the overall Pool Balance and thus the amount of Principal Collections.
See "Description of the Certificates -- Optional Retransfers of Home Equity
Loans to the Transferor."
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Home Equity Loans on the weighted average lives of the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Home Equity Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average lives of the Certificates will be
affected by the rate at which principal of the Home Equity Loans is paid.
Principal payments on Home Equity Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to default or other dispositions of Home Equity
Loans). Prepayments on Home Equity Loans may be measured by a prepayment
standard or model. The model used in this Prospectus Supplement is a Constant
Prepayment Rate ("CPR"). CPR represents an assumed constant rate of prepayment
each month, expressed as a per annum percentage of the scheduled Principal
Balance of the pool of Home Equity Loans for that month. The columns headed
"20%", "30%", "40%", "50%" and "60%" assume that prepayments on the Home Equity
Loans are made at CPRs of "20%", "30%", "40%", "50%" and "60%", respectively.
CPR DOES NOT PURPORT TO BE AN HISTORICAL DESCRIPTION OF PREPAYMENT EXPERIENCE OR
A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF HOME EQUITY
LOANS, INCLUDING THE HOME EQUITY LOANS.
There is no assurance, however, that prepayments of the Home Equity Loans
will conform to any level of CPR, and no representation is made that the Home
Equity Loans will prepay at the CPRs shown or any other prepayment rate. The
rate of principal payments on the Home Equity Loans will be influenced by a
variety of economic, geographic, social and other factors, including the level
of interest rates and the rate at which homeowners sell their homes or default
on their Home Equity Loans. Other factors affecting prepayment of the Home
Equity Loans will include changes in borrowers' housing needs, job transfers,
unemployment and borrowers' net equity in their homes.
For the purpose of the tables on the following pages, the aggregate pool
has been assumed to have a Statistical Calculation Date Principal Balance of
$571,157,597.32, a weighted average remaining months to maturity of 152 months
and a weighted average loan rate of 12.14%. The weighted average remaining
months to maturity represent the number of months remaining until the final
maturity date. The weighted average loan rate does not vary.
In addition, such tables assume that (i) the distributions are made in
accordance with the description set forth under "Description of the
Certificates--Distributions on the Certificates" herein, (ii) the Servicing Fee
Rate plus the premium rate on the Policy is assumed to be 0.85% per annum, the
Servicing Fee is calculated monthly on the Invested Amount as of the first day
of the immediately preceding Collection Period and the premium on the Policy is
calculated monthly on the Certificate Principal Balance at the beginning of the
immediately preceding Collection Period, (iii) distributions of principal and
interest on the Certificates will be made on the 25th day of each calendar month
regardless of the day on which the Distribution Date actually occurs, commencing
in June 1999, (iv) monthly draws are calculated under each of the assumptions as
set forth in the tables below before giving effect to prepayments, (v) no
extension past the scheduled maturity date of a Home Equity Loan is made, (vi)
no delinquencies occur, (vii) all prepayments are prepayments in full and
include 30 days of interest thereon, (viii) the scheduled due date for each Home
Equity Loan is the first day of each month, (ix) the Closing Date is April 27,
1999, (x) no losses on the Home Equity Loans will be realized and (xi) the
Original Certificate Principal Balance is $500,000,000.
Since the tables were prepared on the basis of the assumptions in the
preceding paragraphs, there are discrepancies between the characteristics of the
actual Initial Home Equity Loans and the characteristics of the Initial Home
Equity Loans assumed in preparing the tables. Any such discrepancy may have an
effect upon the percentages of the Original Certificate Principal Balance
outstanding and the weighted average lives of the Certificates set forth in the
tables. In particular, the Loan Rates are adjustable and will most likely vary
from the assumed constant interest rates, which may have a significant effect on
the percentages of the Original Certificate Principal Balance outstanding and
the weighted average lives. In addition, since the actual Initial Home Equity
Loans in the Trust Fund have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Certificates may be made earlier or later than as indicated in the tables.
It is not likely that the Home Equity Loans will prepay at any constant CPR
to maturity or that all Home Equity Loans will prepay at the same rate. In
addition, the diverse remaining terms to maturity of the Home Equity Loans could
produce slower distributions of principal than as indicated in the related
tables at the various CPRs specified even if the weighted average remaining
months to maturity of the Home Equity Loans are as assumed above.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
The following tables set forth below are based on a CPR and constant draw
rate (which for purposes of these assumptions is the amount of Additional
Balances on the Initial Home Equity Loans drawn each month expressed as an
annualized percentage of the total principal of the pool of Initial Home Equity
Loans outstanding at the beginning of such month) indicated in the tables below.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Certificates and sets forth the
percentage of the Original Certificate Principal Balance that would be
outstanding after each of the dates shown at the indicated CPR.
<PAGE>
<TABLE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE--AMORTIZATION SCHEDULE (1)
<CAPTION>
DISTRIBUTION DATE 20% CPR 30% CPR 40% CPR 50% CPR 60% CPR
- --------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Closing Date............... 100 100 100 100 100
May 25, 2000............... 85 78 71 62 53
May 25, 2001............... 72 57 44 31 20
May 25, 2002............... 61 42 27 14 5
May 25, 2003............... 51 30 15 5 0
May 25, 2004............... 43 20 8 0 0
May 25, 2005............... 33 12 0 0 0
May 25, 2006............... 23 5 0 0 0
May 25, 2007............... 12 0 0 0 0
May 25, 2008............... 0 0 0 0 0
Weighted Average Life
(years) (1)(2)............. 4.44 3.06 2.26 1.74 1.40
Weighted Average Life
(years) (1)(3)............. 4.45 3.08 2.29 1.77 1.42
</TABLE>
______________
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each principal payment by the number of years from the date
of issuance to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the Original Certificate Principal Balance.
(2) Assumes (i) that an optional termination is exercised when the Certificate
Principal Balance is less than or equal to 5% of the Original Certificate
Principal Balance and (ii) a constant draw rate of 8%.
(3) Assumes (i) that the Certificates remain outstanding to their maturity date
and (ii) a constant draw rate of 8%.
<TABLE>
WEIGHTED AVERAGE LIFE (1) AND FINAL SCHEDULED DISTRIBUTION DATE (2)
SENSITIVITY OF THE CERTIFICATES TO PREPAYMENTS AND DRAWS
<CAPTION>
CONSTANT PREPAYMENT RATE -- OPTIONAL TERMINATION (3)
20% CPR 30% CPR 40% CPR 50% CPR 60% CPR
CONSTANT DRAW RATE (4) WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ---------------------- --- ---- --- ---- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0% 3.65 1/25/2008 2.71 5/25/2006 2.04 6/25/2004 1.64 1.36 6/25/2002
5% 4.06 12/25/2007 2.87 4/25/2006 2.14 7/25/2004 1.68 1.37 5/25/2002
8% 4.44 1/25/2008 3.06 6/25/2006 2.26 11/25/2004 1.74 1.40 6/25/2002
15% 5.65 1/25/2008 3.64 10/25/2006 2.64 8/25/2005 1.93 12/25/2003 1.51 10/25/2002
20% 6.89 12/25/2007 4.25 12/25/2006 2.94 11/25/2005 2.13 7/25/2004 1.60 1/25/2003
</TABLE>
<PAGE>
<TABLE>
CONSTANT PREPAYMENT RATE -- NO OPTIONAL TERMINATION (5)
<CAPTION>
20% CPR 30% CPR 40% CPR 50% CPR 60% CPR
CONSTANT DRAW RATE (4) WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
- ---------------------- --- ---- --- ---- --- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0% 3.68 1/25/2009 2.75 1/25/2008 2.08 12/25/2005 1.66 6/25/2004 1.38 5/25/2003
5% 4.07 8/25/2008 2.90 6/25/2007 2.17 9/25/2005 1.70 3/25/2004 1.38 2/25/2003
8% 4.45 6/25/2008 3.08 5/25/2007 2.29 12/25/2005 1.77 6/25/2004 1.42 3/25/2003
15% 5.65 4/25/2008 3.65 4/25/2007 2.66 6/25/2006 1.96 1/25/2005 1.53 8/25/2003
20% 6.89 2/25/2008 4.26 3/25/2007 2.95 6/25/2006 2.15 5/25/2005 1.62 12/25/2003
</TABLE>
______________
(1) The weighted average life ("WAL") of a Certificate is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the Original Certificate Principal
Balance.
(2) The final scheduled Distribution Date of the Certificates is the date on
which the Certificate Principal Balance is expected to be reduced to zero.
(3) Assumes that an optional termination is exercised when the Certificate
Principal Balance is less than or equal to 5% of the Original Certificate
Principal Balance.
(4) Assumes that each Initial Home Equity Loan has a monthly draw rate equal to
the constant draw rate indicated.
(5) Assumes that no optional termination is exercised.
The Servicer, or if the Servicer fails to exercise its option, the
Certificate Insurer, has the option of purchasing all remaining Home Equity
Loans and other assets of the Trust Fund at such time as the Certificate
Principal Balance is less than or equal to 5% of the Original Certificate
Principal Balance. Under these circumstances, distributions allocable to
principal will be made to Certificateholders in advance and possibly
significantly in advance of the time that the aggregate amount of such
distributions would otherwise have been made to Certificateholders. See
"Description of the Certificates -- Termination; Retirement of the Certificates"
herein.
See "Risk Factors -- There are Aspects of the Maturity and Prepayment of
the Home Equity Loans You Should Consider" herein for certain additional
prepayment considerations.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement among the
Depositor, the Transferor, the Servicer and the Trustee. A copy of the Agreement
(exclusive of the list of Initial Home Equity Loans) will be attached as an
exhibit to the Current Report on Form 8-K to be filed with the Securities and
Exchange Commission after the date of delivery of the Certificates. Reference is
made to the Prospectus for additional information regarding the terms and
conditions of the Agreement to the extent not revised by the following
description. To the extent that the statements in this Prospectus Supplement
modify statements in the Prospectus, the statements in this Prospectus
Supplement control.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Agreement. When particular provisions or terms used in the Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
GENERAL
The Certificates will be available for purchase in denominations of $1,000
and will evidence specified beneficial ownership interests in the Trust Fund.
The Trust Fund will consist of (i) the Initial Home Equity Loans and the
Subsequent Home Equity Loans, and any Additional Balances transferred to the
Trust; (ii) all payments of interest and principal received (x) after the
Initial Cut-off Date in respect of the Initial Home Equity Loans and (y) after
the applicable Subsequent Cut-off Date in respect of the Subsequent Home Equity
Loans; (iii) property that secured a Home Equity Loan and that has been acquired
by foreclosure or deed in lieu of foreclosure or otherwise, and the related
Mortgage, Account Agreement and other Mortgage File documents for each Home
Equity Loan; (iv) such assets as shall from time to time be identified as
deposited in the Collection and Certificate Accounts in accordance with the
Agreement; (v) the benefits of the Policy; (vi) any insurance policies related
to the Home Equity Loans, including hazard insurance policies; and (vii) certain
other property relating to the Home Equity Loans as described herein. Definitive
Certificates, if issued, will be transferable and exchangeable at the corporate
trust office of the Trustee, acting as Certificate Registrar. No service charge
will be made for any registration of exchange or transfer, but the Trustee may
require payment of a sum sufficient to cover any related tax or other
governmental charge.
The initial principal balance of the Certificates will be $500,000,000 (the
"ORIGINAL CERTIFICATE PRINCIPAL BALANCE"). The aggregate principal balance of
the Certificates as of any date is equal to the Original Certificate Principal
Balance minus the aggregate amounts actually distributed as principal to
Certificateholders (the "CERTIFICATE PRINCIPAL BALANCE"). Each Certificate
represents the right to receive payments of interest at the Certificate Rate and
payments of principal as described below.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $500,000,000 (the "ORIGINAL
INVESTED AMOUNT"), which represents approximately 87.54% of the Statistical
Calculation Date Pool Balance. Following the Closing Date, the "INVESTED AMOUNT"
with respect to any date will be an amount equal to the Original Invested Amount
minus the sum of (i) the total of Principal Collections previously distributed
to Certificateholders (other than any such collections applied to reimburse
Investor Loss Amounts), (ii) the Aggregate Investor Loss Amount as of such date
and (iii) the aggregate amount of any Excess Overcollateralization Amounts
released on or before such Distribution Date.
As of any date, the "AGGREGATE INVESTOR LOSS AMOUNT" is the aggregate
amount of Investor Loss Amounts for all prior Distribution Dates during the
Managed and Rapid Amortization Periods that were previously allocated to
Certificateholders, exclusive of any Investor Loss Amounts (or portions thereof)
reallocated on such Distribution Dates in reduction of the Transferor's
Interest.
As to any Distribution Date, the "EXCESS OVERCOLLATERALIZATION AMOUNT" will
be the amount, if any, by which the Overcollateralization Amount for such
Distribution Date exceeds the Required Overcollateralization Amount for such
Distribution Date.
With respect to any Distribution Date, the "OVERCOLLATERALIZATION AMOUNT"
will be the excess, if any, of the Invested Amount over the Certificate
Principal Balance as of such Distribution Date (after giving effect to the
distribution of principal on such Distribution Date (other than any Accelerated
Principal Distribution Amount) to the Certificateholders).
The Transferor will hold the remaining undivided interest (the
"TRANSFEROR'S INTEREST") in the Trust Fund, which interest is equal to the Pool
Balance minus the Invested Amount and initially will equal approximately 12.46%
of the Statistical Calculation Date Pool Balance. In general, the Pool Balance
will vary as principal is paid on the Home Equity Loans, liquidation losses are
incurred and Additional Balances are created.
The Transferor has the right to sell or pledge the Transferor's Interest at
any time, provided (i) each Rating Agency has notified the Transferor and the
Trustee in writing that such action will not result in the qualification,
reduction or withdrawal of the ratings assigned to the Certificates, and (ii)
certain other conditions specified in the Agreement are satisfied.
PAYMENTS ON HOME EQUITY LOANS; DEPOSITS TO COLLECTION AND CERTIFICATE ACCOUNTS
The Collection and Certificate Accounts will each be created and maintained
with the Trustee on behalf of the holders of the Certificates. The Servicer will
deposit into the Collection Account, within two Business Days of processing, all
Interest Collections and, except during the Revolving Period, all Principal
Collections with respect to the related Collection Period (generally net of new
draws during the Managed Amortization Period), except that, for so long as
Providian National Bank remains the Servicer under the Agreement and at such
future time as Providian National Bank receives a certificate of deposit rating
of "P-1" by Moody's and of "A-1" or better by S&P, then the Servicer may deposit
such amounts in the Collection Account on a monthly basis on the Business Day
prior to the related Distribution Date. Subject to the foregoing, during the
Managed Amortization Period, deposits of Principal Collections into the
Collection Account for any Collection Period and day during such Collection
Period will be made in an amount (but only if such amount is greater than $0)
equal to the aggregate amount of Principal Collections for such Collection
Period through such day less the sum of (i) the aggregate amount of draws by
borrowers for such Collection Period through such day and (ii) the aggregate
amount of Principal Collections for such Collection Period previously deposited
into the Collection Account prior to such day.
Not later than 2:00 p.m., New York time, on the Business Day immediately
prior to each Distribution Date, the Trustee will transfer from the Collection
Account for deposit into the Certificate Account an amount in same day funds
equal to the aggregate of the amounts described below, as well as any net
investment earnings on funds on deposit in the Collection Account.
Notwithstanding the foregoing and regardless of whether deposits are required to
be made by the Servicer on a daily or monthly basis, so long as the Transferor's
Interest exceeds the Minimum Transferor's Interest, the Servicer maintains
investment grade ratings and certain other conditions are satisfied, the
Servicer will only be required to deposit funds in the Collection Account in an
amount up to, but not in excess of, the amount to be distributed to
Certificateholders on the related Distribution Date.
The Trustee will deposit any amounts drawn under the Policy into the
Certificate Account.
ALLOCATIONS AND COLLECTIONS
All collections on the Home Equity Loans will be allocated in accordance
with the related Account Agreements between amounts collected in respect of
interest and amounts collected in respect of principal.
As to any payment on a Home Equity Loan during a Collection Period,
"INTEREST COLLECTIONS" will be the amount collected during such Collection
Period that is allocated to interest in accordance with the terms of the related
Account Agreement, including Net Liquidation Proceeds allocable to interest on
such loan. In addition, Interest Collections will also include all assumption
fees, late payment charges, returned payment check fees, returned cash advance
check fees, overlimit fees, annual fees, Home Protection and other fee-based
product fees, post-liquidation recoveries and other recoveries with respect to
Liquidation Loss Amounts. Interest Collections will also include net investment
earnings on funds on deposit in the Collection and Certificate Accounts.
As to any Distribution Date other than the first Distribution Date, the
"COLLECTION PERIOD" is the calendar month preceding the month in which such
Distribution Date occurs. The Collection Period for the first Distribution Date
will begin on the Closing Date and end on May 31, 1999.
As to any Home Equity Loan and Collection Period, "PRINCIPAL COLLECTIONS"
will equal the sum of (i) the portion of the payment received from the borrower
during such Collection Period and applied in reduction of the Principal Balance
of the Home Equity Loan in accordance with the terms of the related Account
Agreement, (ii) the principal portion of Net Liquidation Proceeds and Insurance
Proceeds for such Collection Period, and (iii) the principal portion of any
Transfer Deposit Amount of a repurchased Home Equity Loan.
"NET LIQUIDATION PROCEEDS" with respect to any Liquidated Home Equity Loan
and Collection Period will be the Liquidation Proceeds realized by the Servicer
during such Collection Period, net of related Liquidation Expenses.
"LIQUIDATED HOME EQUITY LOAN" means a Home Equity Loan that was in default
during the related Collection Period and with respect to which the Servicer has
determined that all related Liquidation Proceeds that it expects to recover from
that Home Equity Loan have been recovered. A Liquidated Home Equity Loan will be
deemed to have a Principal Balance equal to the Principal Balance of the related
Home Equity Loan immediately prior to the final recovery of related Liquidation
Proceeds and a Principal Balance of zero thereafter.
"CHARGED OFF AMOUNT" with respect to any Distribution Date means the
portion of the Principal Balance of a Partially Charged Off Home Equity Loan or
the entire remaining Principal Balance of a Home Equity Loan that became a Fully
Charged Off Home Equity Loan during the related Collection Period that the
Servicer has charged off on its servicing records during the related Collection
Period in accordance with the Servicer's normal servicing procedures.
"PARTIALLY CHARGED OFF HOME EQUITY LOAN" means a defaulted Home Equity Loan
that is not a Liquidated Home Equity Loan and as to which (i) collection
procedures by the Servicer are ongoing and (ii) the Servicer has charged off a
portion, but not all, of the related Principal Balance.
"FULLY CHARGED OFF HOME EQUITY LOAN" means a defaulted Home Equity Loan
that is not a Liquidated Home Equity Loan and as to which (i) collection
procedures by the Servicer are ongoing and (ii) the Servicer has charged off the
related Principal Balance in its entirety.
"LIQUIDATION LOSS AMOUNT" means with respect to any Distribution Date and
the related Collection Period, the amount charged off, either in full or in
part, by the Servicer in accordance with its normal servicing procedures,
including (i) as to any Liquidated Home Equity Loan, the unrecovered Principal
Balance thereof at the end of such Collection Period in which such loan became a
Liquidated Home Equity Loan (after giving effect to the application of the
principal portion of any Net Liquidation Proceeds realized in connection
therewith) and (ii) as to any Partially or Fully Charged Off Home Equity Loan,
the Charged Off Amount for such Collection Period.
"LIQUIDATION PROCEEDS" with respect to any Home Equity Loan and Collection
Period are cash or funds (including Insurance Proceeds) received in connection
with the liquidation of any defaulted Home Equity Loan, whether through
trustee's sale, foreclosure sale or otherwise, during such Collection Period.
"LIQUIDATION EXPENSES" with respect to any Home Equity Loan and Collection
Period are expenses incurred by the Servicer during such Collection Period in
connection with the liquidation of any defaulted Home Equity Loan and not
recovered under any insurance policy or from the related borrower, including
legal fees and expenses, real estate brokerage commissions, certain unreimbursed
amounts set forth in the Agreement expended by the Servicer with respect to such
Home Equity Loan (including amounts advanced to correct defaults on any mortgage
on the Mortgaged Property that is senior to such defaulted Home Equity Loan) and
certain other related previously unreimbursed expenses set forth in the
Agreement.
"INSURANCE PROCEEDS" with respect to any Home Equity Loan and Collection
Period are the insurance proceeds paid to the Servicer during such Collection
Period pursuant to any insurance policy covering such Home Equity Loan, reduced
by related expenses, that (i) are not Liquidation Proceeds, (ii) are not applied
to the restoration or repair of the related Mortgaged Property or released to
the related borrower in accordance with the normal servicing procedures of the
Servicer. Insurance Proceeds will be applied by the Servicer in reduction of the
Principal Balance of the related Home Equity Loan, but not including the
portion, if any, of such amount that exceeds the Principal Balance of such Home
Equity Loan at the end of the related Collection Period.
"TRANSFER DEPOSIT AMOUNT" with respect to any Distribution Date is the
amount of cash required to be deposited to the Certificate Account by the
Transferor to maintain the Minimum Transferor's Interest with respect to a
repurchased Defective Home Equity Loan after taking into account any transfer of
an Eligible Substitute Home Equity Loan to the Trust in replacement of such
Defective Home Equity Loan.
As to any Distribution Date, interest allocable to the Certificates
("CERTIFICATE INTEREST COLLECTIONS") will equal the product of Interest
Collections for such Distribution Date and the Floating Allocation Percentage.
The remaining amount of Interest Collections will be allocated to the
Transferor's Interest. With respect to any Distribution Date, the "FLOATING
ALLOCATION PERCENTAGE" will be the percentage equivalent (but not in excess of
100%) of a fraction determined by dividing the Invested Amount by the Pool
Balance as of the beginning of the related Collection Period.
With respect to any date, the "POOL BALANCE" will be equal to the sum of
(i) the aggregate of the Principal Balances of all of the Home Equity Loans
(including any Additional Balances relating thereto) as of such date, and (ii)
amounts, if any, otherwise allocable to the Transferor that are required to be
retained in the Collection Account when the Transferor's Interest is less than
the Minimum Transferor's Interest. The "PRINCIPAL BALANCE" of a Home Equity Loan
(other than a Liquidated Home Equity Loan or a Fully Charged Off Home Equity
Loan which, in both cases, has a Principal Balance of zero) on any day is equal
to its Initial Cut-off Date Principal Balance or Subsequent Cut-off Date
Principal Balance, as applicable, plus any related Additional Balances, minus
all collections credited against the Principal Balance of such Home Equity Loan
in accordance with the related Account Agreement prior to such day and any
Insurance Proceeds received prior to such day and applied to the reduction of
the Principal Balance of such Home Equity Loan, minus all Charged Off Amounts,
if any, with respect to such Home Equity Loan. In certain cases, the Principal
Balance of a Home Equity Loan as of the Statistical Calculation Date or
Subsequent Selection Date, as the case may be, will be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the June 1999 Distribution Date, distributions of interest
and, beginning on the first Distribution Date after the commencement of the
Managed Amortization Period (or the Rapid Amortization Period if a Rapid
Amortization Event occurs during the Revolving Period), distributions of
principal, on Certificates will be made by the Trustee on each Distribution Date
(i.e., the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day) to holders of record (which, in the case of
Book-Entry Certificates, will be Cede as nominee of DTC) on the last Business
Day of the month prior to the month in which such Distribution Date occurs (or,
in the case of interest on the first Distribution Date, on the date of issuance
of the Certificates) (the "RECORD DATE").
Distributions to Certificateholders will be made in an amount equal to each
holder's respective Percentage Interest multiplied by the amount distributed in
respect of the Certificates on each Distribution Date. The undivided percentage
interest (the "PERCENTAGE INTEREST") evidenced by any Certificate will be equal
to the percentage obtained by dividing the initial principal balance of such
Certificate by the Original Certificate Principal Balance.
Each distribution with respect to a Book-Entry Certificate will be paid to
DTC, which will credit the amount of such distribution to the accounts of its
Participants in accordance with its normal procedures. Each Participant will be
responsible for disbursing such distribution to the Certificate Owners that it
represents and to each indirect participating brokerage firm (a "BROKERAGE FIRM"
or "INDIRECT PARTICIPATING FIRM") for which it acts as agent. Each brokerage
firm will be responsible for disbursing funds to the Certificate Owners that it
represents. All such credits and disbursements with respect to a Book-Entry
Certificate are to be made by DTC and the Participants in accordance with the
provisions of the Certificates. For purposes of the Agreement, a "BUSINESS DAY"
is defined as any day other than (i) a Saturday or a Sunday or (ii) a day on
which banks in the states of New York, New Hampshire or California are required
or authorized by law to be closed.
Application of Certificate Interest Collections
On each Distribution Date, the Certificate Interest Collections will be
applied in the following order of priority:
(i) to pay the Servicer accrued and unpaid Servicing Fees;
(ii) to pay the premium for the Policy;
(iii) to pay Certificateholders the accrued interest due at the
Certificate Rate on the Certificate Principal Balance for the
related Accrual Period and any overdue accrued interest;
(iv) to pay to the Transferor during the Revolving Period and to pay to
Certificateholders during the Managed and Rapid Amortization Periods
the "INVESTOR LOSS AMOUNT" equal to the product of the Floating
Allocation Percentage and the aggregate amount of any Liquidation
Loss Amounts for such Distribution Date;
(v) to pay to the Transferor during the Revolving Period and to pay to
Certificateholders during the Managed and Rapid Amortization Periods
any Investor Loss Amount that was not previously (a) paid from
Certificate Interest Collections, (b) paid from Interest Collections
and Principal Collections allocable to the Transferor's Interest or
reallocated to reduce the Transferor's Interest up to the Transferor
Subordinated Amount as described under "-- Limited Subordination of
the Transferor's Interest" below, or (c) funded by draws on the
Policy;
(vi) to reimburse prior draws from the Policy, together with interest
thereon, and to pay any amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement, together with interest thereon;
(vii) to pay principal on the Certificates (such payment is referred to as
the "ACCELERATED PRINCIPAL DISTRIBUTION Amount") until the Invested
Amount exceeds the Certificate Principal Balance by an amount equal
to the Required Overcollateralization Amount; and
(viii) to or at the direction of the owner of the Transferor's Interest.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the Certificates and will
reduce the Certificate Principal Balance. However, payments to
Certificateholders of the Accelerated Principal Distribution Amount pursuant to
clause (vii) will not reduce the Invested Amount. In addition, payments to
Certificateholders pursuant to clause (v) will not reduce the Invested Amount.
Payments to Certificateholders of Interest Collections and Principal Collections
allocable to the Transferor's Interest will reduce the Certificate Principal
Balance. Payments of the Accelerated Principal Distribution Amount are neither
guaranteed by the Policy nor supported by the Transferor Subordinated Amount. No
interest will accrue on any Investor Loss Amount not paid to Certificateholders
on a Distribution Date.
An "ACCRUAL PERIOD" for any Distribution Date will be the actual number of
days (based on a 360-day year) included in the period beginning on the preceding
Distribution Date (or the Closing Date in the case of the first Distribution
Date) and ending on the day preceding such Distribution Date.
With respect to any Distribution Date, the "REQUIRED OVERCOLLATERALIZATION
AMOUNT" will be the amount, if any, by which the Required Enhancement Amount for
such Distribution Date exceeds the Transferor Subordinated Amount for such
Distribution Date.
On the Closing Date, the "REQUIRED ENHANCEMENT AMOUNT" will be $10,000,000
(2.00% of the Original Certificate Principal Balance). For each Distribution
Date thereafter, the Required Enhancement Amount will be an amount equal to the
product of the Required Enhancement Percentage and the Certificate Principal
Balance; provided that in no event will the Required Enhancement Amount be less
than a floor amount equal to the greater of (i) $7,500,000 (1.50% of the
Original Certificate Principal Balance) and (ii) the sum of (a) $5,000,000
(1.00% of the Original Certificate Principal Balance) and (b) the aggregate
Principal Balance of all Home Equity Loans that are 180 or more days delinquent.
The Required Enhancement Amount may be increased or decreased for any
Distribution Date based on the performance of the Home Equity Loans.
With respect to any Distribution Date, the "REQUIRED ENHANCEMENT
PERCENTAGE" will be the percentage specified in the Insurance Agreement.
Certificate Rate
On each Distribution Date, the "CERTIFICATE RATE" will be equal to
One-Month LIBOR (as described below) on the second LIBOR Business Day prior to
the preceding Distribution Date (or as of the second LIBOR Business Day before
the Closing Date in the case of the first Distribution Date) plus %.
Notwithstanding the foregoing, in no event will the Certificate Rate exceed
the Alternate Certificate Rate. As to any Distribution Date, the "ALTERNATE
CERTIFICATE RATE" is the rate, expressed as an annualized percentage, equal to
the Weighted Average Loan Rate for such Distribution Date after subtracting an
amount, expressed as an annual rate, equal to 0.50% per annum, the monthly
Servicing Fee and the monthly premium due on the Policy (all of which amounts,
expressed as an annual rate, will not exceed 1.40% per annum). The "WEIGHTED
AVERAGE LOAN RATE" for any Distribution Date shall be the weighted average of
the applicable Loan Rates on the Home Equity Loans as of the last Business Day
of the third calendar month preceding such Distribution Date, weighted based on
the outstanding Principal Balances of the Home Equity Loans as of the last
Business Day of the third calendar month preceding such Distribution Date.
Calculation of One-Month LIBOR
"ONE-MONTH LIBOR" with respect to any Distribution Date following the
initial Distribution Date will be determined by the Trustee and will equal the
posted rate for United States dollar deposits for one month that appears on
Telerate Page 3750 (as defined below) as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the immediately preceding Distribution Date
(as of the second LIBOR Business Day before the Closing Date in the case of the
first Distribution Date). If no such posted rate appears, One-Month LIBOR will
be determined on such date as described in the paragraph below. "TELERATE PAGE
3750" means the display page designated on the Bridge Information Systems
Telerate Service (or such other page as may replace such page on such service,
or such other service as may be nominated as the information vendor, for the
purpose of displaying London interbank offered rates of major banks). "LIBOR
BUSINESS DAY", for purposes of the Agreement, is a Business Day and a day on
which banking institutions in the city of London, England, are not required or
authorized by law to be closed.
If on such date no posted rate appears on the Telerate Page 3750 as
described above, the Trustee will request the principal London office of each of
the reference banks (which shall be four major banks specified in the Agreement
that are engaged in transactions in the London interbank market) (the "REFERENCE
BANKS") to provide the Trustee with such bank's offered quotation for United
States dollar deposits for one month to prime banks in the London interbank
market as of 11:00 a.m., London time, on such date. If at least two Reference
Banks provide the Trustee with such offered quotations, then One-Month LIBOR on
such date will be the arithmetic mean (rounded, if necessary, to the nearest
1/100th of a percent (0.0001), with a 5/1,000th of a percent (0.00005) rounded
upwards) of all such quotations. If on such date fewer than two of the Reference
Banks provide the Trustee with such an offered quotation, One-Month LIBOR on
such date will be the arithmetic mean (rounded, if necessary, to the nearest
1/100,000th of a percent (0.0000001), with five one-millionths of a percent
(0.00000005) rounded upwards) of the offered per annum rates which one or more
leading banks in The City of New York selected by the Trustee (after
consultation with the Servicer) are quoting as of 11:00 a.m., New York City
time, on such date to leading European banks for United States dollar deposits
for one month; provided, however, that if such banks are not quoting as
described above, One-Month LIBOR will be the One-Month LIBOR applicable to the
immediately preceding Distribution Date.
Transferor Collections
Collections allocable to the Transferor's Interest that are not distributed
to Certificateholders will be distributed to or at the direction of the owner of
the Transferor's Interest only to the extent that such distribution will not
reduce the amount of the Transferor's Interest as of the related Distribution
Date below the Minimum Transferor's Interest. Amounts not so distributed because
of such limitations will be retained in the Collection Account until the
Transferor's Interest exceeds the Minimum Transferor's Interest, at which time
such excess shall be released to or at the direction of the owner of the
Transferor's Interest. If any such amounts are still retained in such account at
the end of the Revolving Period, such amounts will be paid to the
Certificateholders as a reduction of the Certificate Principal Balance.
In addition, during the Revolving Period, if the Transferor is unable to
transfer Additional Balances or Subsequent Home Equity Loans to the Trust so
that the Transferor's Interest as of each Distribution Date is at least equal to
the Minimum Transferor's Interest and Principal Collections would otherwise be
retained by the Transferor as permitted by the Agreement, then an amount of
Principal Collections equal to the excess of the Minimum Transferor's Interest
over the Transferor's Interest will be deposited by the Servicer into the
Collection Account until such time, if any, as the Transferor's Interest is at
least equal to the Minimum Transferor's Interest. At the end of the Revolving
Period, if the Transferor's Interest is still less than the Minimum Transferor's
Interest, then any such Principal Collections remaining on deposit in the
Collection Account will be paid to Certificateholders as a reduction of the
Certificate Principal Balance.
Principal Payments from Principal Collections
During the Revolving Period, no Principal Collections will be paid to
Certificateholders other than Accelerated Principal Distribution Amounts.
Instead, during such period Principal Collections will be available to the
Transferor to acquire Additional Balances and Subsequent Home Equity Loans.
During the Managed Amortization Period, the amount of Principal Collections
payable to Certificateholders on each Distribution Date will be, to the extent
funds are available therefor from Principal Collections, the Scheduled Principal
Collections Payment for such Distribution Date. On any Distribution Date during
the Managed Amortization Period, the "SCHEDULED PRINCIPAL COLLECTIONS PAYMENT"
will be equal to the lesser of (i) the Maximum Principal Payment and (ii) the
Alternative Principal Payment.
During the Rapid Amortization Period, the amount of Principal Collections
payable to Certificateholders on each Distribution Date will be, to the extent
funds are available therefor from Principal Collections, the Maximum Principal
Payment.
With respect to any Distribution Date after the end of the Revolving
Period, the "MAXIMUM PRINCIPAL PAYMENT" will be the product of Principal
Collections for the related Collection Period and the Fixed Allocation
Percentage. With respect to any Distribution Date during the Managed
Amortization Period, the "ALTERNATIVE PRINCIPAL PAYMENT" will be the amount (but
not less than zero) of Principal Collections for the related Collection Period
less the aggregate of Additional Balances created during the related Collection
Period.
The "REVOLVING PERIOD" will begin on the Closing Date and end on the day
immediately preceding the day on which the Managed Amortization Period begins
(or, if earlier, upon the occurrence of a Rapid Amortization Event). The
"MANAGED AMORTIZATION PERIOD" will begin on the earlier of (i) September 1, 1999
and (ii) the first day of the calendar month during which a Deficiency Amount
exists, and end on August 31, 2004 (or, if earlier, upon the occurrence of a
Rapid Amortization Event). The "RAPID AMORTIZATION PERIOD" will begin on
September 1, 2004 (or, if earlier upon the occurrence of a Rapid Amortization
Event) and end upon the termination of the Trust.
With respect to any date of determination, the "FIXED ALLOCATION
PERCENTAGE" will be the greater of (i) 98.00% and (ii) the percentage equivalent
(but not in excess of 100%) of a fraction, the numerator of which is the
Invested Amount and the denominator of which is the Pool Balance as of the
beginning of the related Collection Period.
On the Distribution Date in June 2025 (the "SCHEDULED MATURITY DATE"), to
the extent funds are available therefor, Certificateholders will be entitled to
receive as payment of principal an amount equal to the Certificate Principal
Balance. To the extent funds are not otherwise available for such payment, the
Trustee will make a draw on the Policy for such insufficiency on the Scheduled
Maturity Date.
The aggregate distributions of principal to Certificateholders will not
exceed the Original Certificate Principal Balance.
The Transferor will be entitled to receive the portion of Principal
Collections on each Distribution Date that is not distributed on the
Certificates, to the extent that such distribution will not reduce the
Transferor's Interest below the Minimum Transferor's Interest as of such
Distribution Date.
RAPID AMORTIZATION EVENTS
The Rapid Amortization Period will commence upon the occurrence of a Rapid
Amortization Event. A "RAPID AMORTIZATION EVENT" will be any of the following
events:
(a) failure on the part of the Servicer (i) to make a payment or deposit
required to be made by the Servicer under the Agreement within five Business
Days after the date such payment or deposit is required to be made or (ii) to
observe or perform in any material respect any other covenants or agreements of
the Servicer set forth in the Agreement, which failure continues unremedied for
a period of 60 days after written notice and materially and adversely affects
the interests of the Certificateholders;
(b) any representation or warranty made by the Transferor in the Agreement
proves to have been incorrect in any material respect when made and continues to
be incorrect in any material respect for a period of 60 days after written
notice and as a result of which the interests of the Certificateholders are
materially and adversely affected; provided, however, that a Rapid Amortization
Event shall not be deemed to occur if the Transferor has purchased or made a
substitution for the related Home Equity Loan or Home Equity Loans if applicable
during such period (or within an additional 60 days with the consent of the
Trustee) in accordance with the provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor;
(d) the Trust becomes subject to regulation by the Securities and Exchange
Commission as an "investment company" within the meaning of the Investment
Company Act of 1940, as amended;
(e) the occurrence of a Servicer Default (as defined in the Agreement); or
(f) the occurrence of certain trigger events specified in the Insurance
Agreement.
In the case of any event described in clause (a), (b) or (e), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace or cure period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
Percentage Interests or the Certificate Insurer (so long as there is no default
by the Certificate Insurer in the performance of its obligations under the
Policy), by written notice to the Transferor and the Servicer (and to the
Trustee, if given by the Certificateholders or the Certificate Insurer) declare
that a Rapid Amortization Event has occurred as of the date of such notice. In
the case of any event described in clause (c) or (d), a Rapid Amortization Event
will be deemed to have occurred without any notice or other action on the part
of the Trustee, the Certificate Insurer or the Certificateholders immediately
upon the occurrence of such event. In the case of any event described in clause
(f), a Rapid Amortization Event will be deemed to have occurred only if, after
the applicable grace or cure period, if any, the Certificate Insurer gives
written notice to the Transferor, the Servicer and the Trustee that a Rapid
Amortization Event has occurred.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor files a bankruptcy petition or goes into liquidation or
any person is appointed a receiver or bankruptcy trustee of the Transferor, on
the day of any such filing or appointment, the Transferor will promptly give
notice to the Trustee of any such filing or appointment and no further
Additional Balances will be transferred to the Trust. If directed by the
Certificate Insurer or by Certificateholders representing Percentage Interests
aggregating more than 51% of the Certificate Principal Balance of the
Certificates, with the consent of the Certificate Insurer, the Trustee will
sell, dispose of or otherwise liquidate the Home Equity Loans in a commercially
reasonable manner and on commercially reasonable terms. The proceeds from the
sale, disposition or liquidation of the Home Equity Loans will first be paid to
the Certificate Insurer to the extent of unreimbursed draws under the Policy and
other amounts owing to the Certificate Insurer pursuant to the Insurance
Agreement. Any remaining amounts will be treated as collections and, the portion
thereof allocated to the Certificateholders will be distributed to the
Certificateholders on the date such proceeds are received. The Policy will be
available to cover any shortfalls in the event the portion of such proceeds
allocable to the Certificateholders are not sufficient to pay in full the
remaining amount due on the Certificates.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of the Home Equity Loans as described above.
THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. Accordingly, the Depositor, the
Transferor and the Servicer do not make any representation as to the accuracy
and completeness of such information.
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company (the "COMPANY"). The
Company is not obligated to pay the debts of or claims against MBIA. MBIA is
domiciled in the State of New York and licensed to do business in and subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of MBIA, a wholly owned subsidiary of
the Company, and its subsidiaries as of December 31, 1998 and December 31, 1997
and for each of the three years in the period ended December 31, 1998, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of the Company for the year ended December 31, 1998,
are hereby incorporated by reference into this Prospectus Supplement and shall
be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of MBIA and its subsidiaries included in documents
filed by the Company 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
Certificates 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 tables below present selected financial information of MBIA determined
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities ("SAP") and generally accepted accounting
principles ("GAAP"):
SAP
---
DECEMBER 31, DECEMBER 31,
1997 1998
(AUDITED) (AUDITED)
------------ ------------
(in millions)
ADMITTED ASSETS $5,256 $6,521
LIABILITIES 3,496 4,231
CAPITAL AND SURPLUS 1,760 2,290
GAAP
----
DECEMBER 31, DECEMBER 31,
1997 1998
(AUDITED) (AUDITED)
------------ ------------
(in millions)
ASSETS $5,988 $7,488
LIABILITIES 2,624 3,211
SHAREHOLDER'S EQUITY 3,364 4,277
Copies of the financial statements of MBIA incorporated by reference herein
and copies of MBIA's 1998 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
MBIA Inc. is actively managing a high-priority Year 2000 (Y2K) program. The
Company has established an independent Y2K testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
MBIA has a budget of $1.13 million for its 1998-2000 Y2K efforts. Expenditures
are proceeding as anticipated, and MBIA does not expect the project budget to
materially exceed this amount. MBIA has initiated a comprehensive Y2K plan that
includes assessment, remediation, testing and contingency planning. This plan
covers "mission-critical" internally developed systems, vendor software,
hardware and certain third-party entities through which MBIA conducts its
business. Testing to date indicates that functions critical to the financial
guarantee business, both domestic and international, were Y2K-ready as of
December 31, 1998. Additional testing will continue throughout 1999.
MBIA does not accept any responsibility for the accuracy or completeness of
this Prospectus Supplement or any information or disclosure contained herein, or
omitted herefrom, other than with respect to the accuracy of the information
regarding the Policy and the Certificate Insurer set forth herein under "-- The
Certificate Insurance Policy". Additionally, MBIA makes no representation
regarding the Certificates or the advisability of investing in the Certificates.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. MBIA does not guaranty the market price of the Certificates nor
does it guaranty that the ratings on the Certificates will not be revised or
withdrawn.
The Policy
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Reimbursement Agreement (the "INSURANCE AGREEMENT") to be dated as of the
Closing Date, among the Transferor, the Servicer, the Depositor, the Trustee and
the Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment to the
Trustee for the benefit of the Certificateholders (a) on each Distribution Date,
the full and complete payment of (i) the Guaranteed Principal Amount with
respect to the Certificates for such Distribution Date and (ii) accrued and
unpaid interest due on the Certificates at the Certificate Rate (together, the
"GUARANTEED DISTRIBUTIONS"), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates and the
Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent and (b) of any Preference Amount.
The effect of the Policy is to guarantee the timely payment of interest on, and
the ultimate payment of the principal amount of, all of the Certificates.
For any Distribution Date (other than the Scheduled Maturity Date) after
the Transferor Subordinated Amount has been reduced to zero, the "GUARANTEED
PRINCIPAL AMOUNT" is the amount, if any, by which the Certificate Principal
Balance as of such Distribution Date exceeds the Invested Amount as of such
Distribution Date (in each case after giving effect to all other amounts
distributable as principal on the Certificates on such Distribution Date). In
addition, the Policy will guarantee the payment of the Certificate Principal
Balance on the Scheduled Maturity Date (after giving effect to all other amounts
distributable as principal on the Certificates on the Scheduled Maturity Date).
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii) 12:00
noon New York City time on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment (the "PREFERENCE AMOUNT") under
applicable bankruptcy, insolvency, receivership or similar law in the event of
an insolvency of the Transferor, the Servicer, the Depositor or the Trust, the
Certificate Insurer will pay such amount out of the funds of the Certificate
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 Certificate Insurer from the Trustee of (A) a certified
copy of the order (the "Order") of the court or other governmental body which
exercised jurisdiction to the effect that the Trustee is required to return the
amount of any Guaranteed Distributions distributed with respect to the
Certificates during the term of the Policy because such distributions were
avoidable preference payments under applicable bankruptcy or insolvency law, (B)
a certificate of the Trustee that the Order has been entered with respect to
which Order the appeal period has expired without an appeal having been filed
and is not subject to any stay and (C) an assignment duly executed and delivered
by the Certificateholders, in such form as is reasonably required by the
Certificate Insurer and provided to the Certificateholders by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and claims
of the Certificateholders relating to or arising under the Certificates against
the debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the 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 Certificate Insurer
shall have Received written notice from the 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 Trustee or any Certificateholder
directly.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the 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 Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the States of New York,
California or New Hampshire are authorized or obligated by law or executive
order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent any payment by
the Certificate Insurer under the Policy. To the extent the Certificate Insurer
makes Guaranteed Distributions, either directly or indirectly (as by paying
through the Trustee), to the Certificateholders, the Certificate Insurer will be
subrogated to the rights of the Certificateholders, as applicable, with respect
to such Guaranteed Distributions, shall be deemed to the extent of the payments
so made to be a registered Certificateholder for purposes of payment and shall
receive all future payments to Certificateholders in respect of such subrogated
rights until all such Guaranteed Distributions by the Certificate Insurer have
been fully reimbursed, provided that the Certificateholders have received the
full amount of the Guaranteed Distributions.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument. The Policy by its terms may not be cancelled or
revoked. The Policy is governed by the laws of the State of New York.
The Policy is not covered by the Property Casualty Insurance Security fund
specified in Article 76 of the New York Insurance Law.
Pursuant to the terms of the Agreement and except as specified in the
Agreement, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without consent of such Holders and the Holders of the Certificates
may exercise such rights only with the prior written consent of the Certificate
Insurer. In addition, the Certificate Insurer will have certain additional
rights as a third party beneficiary of the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust Fund.
LIMITED SUBORDINATION OF THE TRANSFEROR'S INTEREST
If Certificate Interest Collections on the related Distribution Date are
insufficient (such insufficiency, the "DEFICIENCY AMOUNT") to pay the sum of (i)
accrued and unpaid Servicing Fees, (ii) the premium for the Policy, (iii)
accrued interest due and any overdue interest on the Certificates, (iv) the
Investor Loss Amount on such Distribution Date and (v) the Investor Loss Amounts
for previous Distribution Dates not previously paid, then Interest Collections
and Principal Collections allocable to the Transferor's Interest (but not in
excess of the then-current Transferor Subordinated Amount, determined as
described below) will be applied to cover the Deficiency Amount. The portion of
the Deficiency Amount in respect of clauses (iv) and (v) above not covered by
such collections (up to the remaining Transferor Subordinated Amount and not in
excess of the Investor Loss Amount) will be reallocated to, and will reduce, the
Transferor's Interest and the Transferor Subordinated Amount in accordance with
clause (i)(b) of the definition thereof. If such Certificate Interest
Collections plus the amount of collections allocable to the Transferor's
Interest which have been so applied to cover the Deficiency Amount are together
insufficient to pay the amount set forth in item (iii) of the definition of
Deficiency Amount, then a draw will be made on the Policy to cover such
shortfall. After the Transferor Subordinated Amount has been reduced to zero,
the Deficiency Amount will no longer be covered by the Transferor's Interest as
described above.
With respect to any Distribution Date, the "TRANSFEROR SUBORDINATED AMOUNT"
will be the least of: (i) $10,000,000 (2.00% of the Original Invested Amount)
minus the sum of (a) the aggregate amount of Transferor Interest Collections and
Transferor Principal Collections otherwise allocable to the Transferor's
Interest that have previously been distributed to Certificateholders to cover a
Deficiency Amount as described above and (b) the aggregate amount of the
Investor Loss Amounts that previously have been reallocated in reduction of the
Transferor's Interest as described above; (ii) the Transferor Subordinated
Amount on the previous Distribution Date; and (iii) the Required Enhancement
Amount.
OVERCOLLATERALIZATION
The payment of Accelerated Principal Distribution Amounts to
Certificateholders will result in the Invested Amount being greater than the
Certificate Principal Balance, thereby creating overcollateralization. On any
Distribution Date, such overcollateralization will be available to absorb any
Investor Loss Amount not covered either by: (i) Certificate Interest Collections
remaining after the payment of Servicing Fees, the premium for the Policy and
the distribution of interest on the Certificates; or (ii) the limited
subordination of the Transferor's Interest as described above. Any Investor Loss
Amounts not covered by Certificate Interest Collections, the limited
subordination of the Transferor's Interest or such overcollateralization will be
covered by draws on the Policy to the extent provided therein.
Overcollateralization will arise or increase primarily as a result of the
payment of Accelerated Principal Distribution Amounts. As of the Closing Date,
the Invested Amount will be equal to the Original Certificate Principal Balance
and, accordingly, there will not be any initial overcollateralization.
Commencing with the first Distribution Date, the Trustee will pay the
Accelerated Principal Distribution Amount, to the extent Certificate Interest
Collections are available therefor on each Distribution Date, up to an amount
equal to the excess, if any, of the Required Overcollateralization Amount over
the Overcollateralization Amount.
REPORTS TO HOLDERS OF THE CERTIFICATES
Not later than the second Business Day prior to each Distribution Date, the
Servicer will deliver to the Trustee for mailing to each holder of a Certificate
(which will be Cede as nominee of DTC, unless and until Definitive Certificates
are issued) a statement setting forth, among other items:
(i) the amount being distributed to Certificateholders;
(ii) the amount of interest included in such distribution and the
related Certificate Rate or, if applicable, the Alternate
Certificate Rate;
(iii) the amount, if any, of overdue accrued interest included in such
distribution;
(iv) the amount, if any, of the remaining overdue accrued interest after
giving effect to such distribution;
(v) the amount, if any, of principal included in such distribution;
(vi) the amount, if any, of the reimbursement of previous Investor Loss
Amounts included in such distribution;
(vii) the amount, if any, of the aggregate unreimbursed Investor Loss
Amounts after giving effect to such distribution;
(viii) the Floating Allocation Percentage for the preceding Collection
Period;
(ix) the Invested Amount, the Certificate Principal Balance and the
"Factor" (the Certificate Principal Balance divided by the Original
Certificate Principal Balance), each after giving effect to such
distribution;
(x) the Required Enhancement Amount for such Distribution Date;
(xi) the Transferor Subordinated Amount after giving effect to such
distribution;
(xii) the Pool Balance as of the end of the preceding Collection Period;
(xiii) during the Revolving Period, the amount of Principal Collections to
be retained by the Transferor in respect of such Payment Date;
(xiv) the Servicing Fee for such Distribution Date;
(xv) the number and aggregate Principal Balance of any Home Equity Loans
delinquent (a) 30 to 59 days, (b) 60 to 89 days and (c) 90 days or
more, respectively, as of the end of the related Collection Period;
(xvi) the number and aggregate Principal Balance of any Home Equity Loans
in foreclosure as of the end of the related Collection Period;
(xvii) the aggregate book value of any Mortgaged Property that was
acquired by the Trust through foreclosure or grant of deed in lieu
of foreclosure during the related Collection Period;
(xviii) the amount of any draws on the Policy; and
(xix) the number and aggregate Principal Balance of any Home Equity Loans
that will be retransferred from the Trust to the Transferor on the
related Removal Date and the cumulative number and aggregate
Principal Balance of all Home Equity Loans that have been
retransferred on all prior Removal Dates.
In the case of information furnished pursuant to clauses (ii), (iii), (iv),
(v), (vi) and (vii) above, the amounts will be expressed as a dollar amount per
Certificate with a $1,000 denomination.
Within 90 days after the end of each calendar year, the Servicer will be
required to deliver to the Trustee for mailing to each Person who at any time
during the calendar year was a holder of a Certificate (which will be Cede as
nominee of DTC, unless and until Definitive Certificates are issued) a statement
containing the information set forth in clauses (ii) and (v) above aggregated
for such calendar year or, at the request of a Person who was a
Certificateholder for a portion of such calendar year, setting forth such
information for each month thereof.
TRANSFER OF HOME EQUITY LOANS
At the time of issuance of the Certificates, the Transferor will transfer
to the Depositor, and the Depositor will transfer to the Trust, all of its
right, title and interest in and to the Initial Home Equity Loans (including any
Additional Balances related thereto), the related Account Agreements, Mortgages
and other related documents (collectively, the "RELATED DOCUMENTS"), including
all collections received on or with respect to the Initial Home Equity Loans
after the Initial Cut-off Date (but not including any interest or principal
received by the Transferor with respect to the Initial Home Equity Loans prior
to the Initial Cut-off Date), together with all its right, title and interest in
and to Insurance Proceeds received after the Initial Cut-off Date. The
Transferor will transfer its rights to receive payments under the Account
Agreements but will retain its obligations to fund future draws by borrowers
under the Account Agreements. The Trustee will, concurrently with such transfer,
deliver the Certificates to the Depositor and the Transferor's Interest to the
Transferor in exchange for the Initial Home Equity Loans. Each Initial Home
Equity Loan will be identified in a schedule (the "HOME EQUITY LOAN SCHEDULE")
appearing as an exhibit to the Agreement or delivered to the Trustee in the form
of a magnetic tape or computer file. Such schedule will include information as
to the Statistical Calculation Date Principal Balance of each Initial Home
Equity Loan, as well as information respecting the Margin and the maturity of
each Initial Home Equity Loan.
The Trustee will review each Mortgage File (or copies thereof) after
transfer of the related Initial Home Equity Loan or Subsequent Home Equity Loan
to the Trust, and if any document required to be included in any Mortgage File
is found to be defective in any material respect and such defect is not cured
within 60 days following notification thereof to the Transferor by the Trustee,
the Transferor will repurchase such Home Equity Loan in the manner set forth
below.
The Transferor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Home Equity Loan in the Trust Fund (e.g., original
Combined Loan-to-Value Ratio, Principal Balance as of the Statistical
Calculation Date or Subsequent Selection Date, as the case may be, Margin and
maturity). In addition, the Servicer will make certain other representations and
warranties customary to sales of home equity loans. The Transferor will also
represent and warrant that, as of the Statistical Calculation Date or Subsequent
Selection Date, as the case may be, no Home Equity Loan was more than 90 days
delinquent.
If any loss is suffered by the Trust Fund, on behalf of the
Certificateholders, in respect of any Home Equity Loan as a result of (a) a
defective document in the related Mortgage File or (b) a breach of any
representation or warranty made by the Transferor as to a Home Equity Loan,
which breach materially and adversely affects the interest of the
Certificateholders in such Home Equity Loan, the Transferor will be obligated to
accept the retransfer of such Home Equity Loan from the Trust. Upon such
retransfer, the Principal Balance of such Home Equity Loan will be deducted from
the Pool Balance, thus reducing the amount of the Transferor's Interest. If the
deduction would cause the Transferor's Interest to become less than the Minimum
Transferor's Interest at such time, the Transferor will be obligated to either
substitute an Eligible Substitute Home Equity Loan or make a deposit into the
Collection Account in the amount (the "TRANSFER DEPOSIT AMOUNT") equal to the
amount by which the Transferor's Interest would be reduced to less than the
Minimum Transferor's Interest at such time. Any such deduction, substitution or
deposit will be considered a payment in full of such Home Equity Loan. Any
Transfer Deposit Amount will be treated as a part of Principal Collections.
Notwithstanding the foregoing, however, prior to all required deposits to the
Collection Account being made, no such transfer will be considered to have
occurred unless such deposit is actually made. The obligation of the Transferor
to accept a retransfer of a Defective Home Equity Loan is the sole remedy
regarding any defects in the Home Equity Loans and Related Documents available
to the Trustee or the Certificateholders.
An "ELIGIBLE SUBSTITUTE HOME EQUITY LOAN" is a Home Equity loan substituted
by the Transferor for a Defective Home Equity Loan, which must, on the date of
such substitution, (i) have a Principal Balance (or in the case of a
substitution of more than one Home Equity Loan for a Defective Home Equity Loan,
an aggregate Principal Balance), not substantially greater or less than the
Defective Home Equity Loan it replaces; (ii) have a Loan Rate not less than the
Loan Rate of the Defective Home Equity Loan it replaces; (iii) have a Loan Rate
based on the same Index as that of the Defective Home Equity Loan it replaces;
(iv) have a Margin that is not less than the Margin of the Defective Home Equity
Loan it replaces; (v) have a Mortgage of the same or higher level of priority as
the Mortgage relating to the Defective Home Equity Loan it replaces; (vi) have a
remaining term to maturity not more than six months earlier and not more than
six months later than the remaining term to maturity of the Defective Home
Equity Loan it replaces and in no case later than June 2025; (vii) comply with
each representation and warranty as to the Home Equity Loans set forth (or
incorporated by reference) in the Agreement (deemed to be made as of the date of
substitution); (viii) have an original Combined Loan-to-Value Ratio not greater
than that of the Defective Home Equity Loan; and (ix) satisfy certain other
conditions specified in the Agreement. To the extent the aggregate Principal
Balance of Eligible Substitute Home Equity Loans is less than the Principal
Balance of the Defective Home Equity Loans they replace and to the extent that
the Transferor's Interest would be reduced below the Minimum Transferor's
Interest, the Transferor will be required to make a deposit to the Collection
Account equal to such difference.
Home Equity Loans required to be transferred to the Transferor as described
in the preceding paragraphs are referred to as "DEFECTIVE HOME EQUITY LOANS."
AMENDMENTS TO ACCOUNT AGREEMENTS
In connection with the servicing of the Home Equity Loans and subject to
applicable law, the Agreement will provide that the Servicer may at the request
of a borrower or at its own initiative agree to amend, modify or waive
compliance by the borrower with any provision of the Account Agreement relating
to a Home Equity Loan; provided, that any such amendment, modification or waiver
(a) is required by law or (b)(i) is consistent with the Servicer's then-current
practice respecting comparable home equity loans held in its own portfolio, (ii)
does not materially and adversely affect the interests of the
Certificateholders, (iii) is consistent with prudent lending practices, and (iv)
satisfies certain other criteria specified in the Agreement. In addition, the
Agreement will permit the Servicer, subject to the foregoing restrictions and to
certain limitations specified in the Insurance Agreement, to increase the Credit
Limit or reduce the Margin of a Home Equity Loan. There can be no assurance that
changes in applicable law or the marketplace for home equity loans or present
business practice will not result in changes in the terms of the Account
Agreements.
CONSENT TO SENIOR LIENS
The Servicer, acting as agent for the Trust and to the extent consistent
with its then-current practice respecting comparable home equity loans held in
its own portfolio, may permit the placement of a subsequent senior mortgage on
any Mortgaged Property so long as either (i) the Combined Loan-to-Value Ratio of
the related Home Equity Loan immediately following such placement, based upon a
current evaluation of the Mortgaged Property, does not exceed the Combined
Loan-to-Value Ratio at origination of such Home Equity Loan or (ii) the
placement of such new senior mortgage is in connection with the refinancing of a
prior senior mortgage and generally does not result in an increase in the then
outstanding principal balance of such senior mortgage other than an increase due
to closing costs, points and other funds for the related borrower's use,
provided that certain other conditions specified in the Insurance Agreement are
satisfied.
OPTIONAL RETRANSFERS OF HOME EQUITY LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any Distribution
Date prior to the commencement of the Rapid Amortization Period, the Transferor
may, but will not be obligated to, remove from the Trust Fund on such
Distribution Date (the "REMOVAL DATE"), certain Home Equity Loans without notice
to the Certificateholders. The Transferor is permitted to designate the Home
Equity Loans to be so removed. Home Equity Loans so designated will only be
removed upon satisfaction of certain conditions specified in the Agreement,
including: (i) the Transferor's Interest as of such Removal Date (after giving
effect to such removal) exceeds the Minimum Transferor's Interest; (ii) the
Transferor shall have delivered to the Trustee a Home Equity Loan Schedule
containing a list of all Home Equity Loans remaining in the Trust Fund after
such removal; (iii) the Transferor shall represent and warrant that no selection
procedures that the Transferor reasonably believes are adverse to the interests
of the Certificateholders or the Certificate Insurer were used in selecting such
Home Equity Loans; (iv) in connection with the first such retransfer of Home
Equity Loans, each Rating Agency shall have been notified of the proposed
retransfer and prior to the Removal Date shall have notified the Transferor in
writing that such retransfer would not result in a qualification, reduction or
withdrawal of the ratings assigned to the Certificates without regard to the
Policy; and (v) the Transferor shall have delivered to the Trustee and the
Certificate Insurer an officer's certificate confirming that the above
conditions have been satisfied.
As of any date of determination, the "MINIMUM TRANSFEROR'S INTEREST" will
be an amount equal to the greater of (i) 2.00% of the Invested Amount on such
date and (ii) the Transferor Subordinated Amount on such date.
SERVICING AND HAZARD INSURANCE
The Home Equity Loans will be serviced in accordance with procedures as
described generally in "The Transferor and Servicer" herein and as set forth in
the Agreement.
In any case in which the Servicer becomes aware that a Mortgaged Property
has been conveyed by the related borrower, the Servicer, to the extent it deems
appropriate, will take reasonable steps to freeze such borrower's Credit Limit
at the level of the current outstanding Principal Balance of the related Home
Equity Loan. The Servicer is not obligated to enforce any due-on-sale clause in
an Account Agreement. If the Servicer elects not to enforce any such due-on-sale
clause or is prevented from enforcing such due-on-sale clause under applicable
law, the Servicer is authorized to enter into an assumption and modification
agreement with the person to whom such Mortgaged Property has been or is about
to be conveyed, pursuant to which such person becomes liable under the related
Account Agreement. The original borrower may request to be released from
liability under the related Account Agreement. If deemed appropriate by the
Servicer after the person to whom such Mortgaged Property has been conveyed
enters into an assumption and modification agreement, the original borrower may
be released from liability. If the Servicer elects not to enforce any such
due-on-sale clause and not to enter into an assumption and modification
agreement with the person to whom such Mortgaged Property has been conveyed,
then the original borrower remains liable under the related Account Agreement.
If the Servicer elects to enforce any such due-on-sale clauses in connection
with transfers of the related Mortgaged Properties, the acceleration of the
related Home Equity Loans as a result of such enforcement will affect the level
of prepayments on the Home Equity Loans, thereby affecting the weighted average
life of the Certificates. See "Yield Considerations" in the Prospectus and
"Prepayment and Yield Considerations" herein.
In connection with the origination of Home Equity Loans before June 1998,
each borrower with a Credit Limit of $50,000 or more was required to obtain for
the corresponding Mortgaged Property a hazard insurance policy containing a
mortgage clause naming the Transferor as loss payee. Since June 1998, hazard
insurance has been required only for borrowers with Home Equity Loans where the
Transferor is in first lien position. The majority of Account Agreements
obligate the borrower to notify the Transferor of any change in insurance
status. Under the remaining Account Agreements, the Transferor maintains
procedures designed to ensure that the policy status is reviewed periodically.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
In the event that title to any Mortgaged Property is acquired by
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Servicer, or to the Trustee or its nominee on behalf of
the Certificateholders. Notwithstanding any such acquisition of title and
cancellation of the related Home Equity Loan, such Home Equity Loan will be
considered to be an outstanding Home Equity Loan held in the Trust Fund until
such time as the related Mortgaged Property is sold and such Home Equity Loan is
liquidated.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The primary servicing compensation to be paid to the Servicer in respect of
its servicing activities relating to the Home Equity Loans (the "SERVICING FEE")
will be computed monthly at a specified annual rate (the "SERVICING FEE RATE")
on the Invested Amount as of the first day of the immediately preceding
Collection Period. The Servicing Fee Rate will be 0.65% per annum. The portion
of the Servicing Fee allocable to the Certificates will be paid from Certificate
Interest Collections and certain reallocated amounts as described under
"--Distributions on the Certificates" herein. On each Distribution Date, the
Servicing Fee will be paid to the Servicer prior to amounts payable to
Certificateholders.
The Servicer will pay certain ongoing expenses associated with the Trust
Fund and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Certificate
Registrar and any paying agent. In addition, as indicated in the preceding
section, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with defaulted Home Equity Loans and in connection
with the restoration of Mortgaged Properties, such right of reimbursement being
prior to the rights of Certificateholders to receive any related Insurance
Proceeds or Net Liquidation Proceeds.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust Fund will terminate on the Distribution Date following the later
of (a) payment in full of all amounts owing to the Certificate Insurer and (b)
the earliest of (i) the Distribution Date on which the Certificate Principal
Balance has been reduced to zero, (ii) the final payment or other liquidation of
the last Home Equity Loan in the Trust Fund, (iii) the optional purchase by the
Servicer or the Certificate Insurer of the Home Equity Loans, as described below
and (iv) the Scheduled Maturity Date.
The Home Equity Loans and all property acquired in respect of any Home
Equity Loan held in the Trust Fund will be subject to optional purchase by the
Servicer, or in the absence of the exercise thereof by the Servicer, the
Certificate Insurer, on any Distribution Date after the Certificate Principal
Balance is less than or equal to 5% of the Original Certificate Principal
Balance and all amounts due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with interest thereon, as provided
under the Insurance Agreement, have been paid. The purchase price thereof will
be equal to the sum of the Certificate Principal Balance and accrued and unpaid
interest thereon at the Certificate Rate through the day preceding the
Distribution Date on which such purchase is made. In no event, however, will the
Trust created by the Agreement continue in perpetuity. Written notice of
termination of the Agreement will be given to each Certificateholder.
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the Transferor. See "-- Rapid
Amortization Events" herein.
MISCELLANEOUS
In determining the percentage of the Trust Fund evidenced by a Certificate
for purposes of determining the consent of Certificateholders or other action by
Certificateholders as discussed under "Description of the Agreements --
Amendment" in the Prospectus, such percentage shall be based upon the relative
outstanding principal balances of the Certificates. Amendments to the Agreement
requiring the consent of Certificateholders shall require only the consent of
the holders of Certificates affected thereby, evidencing Percentage Interests
aggregating at least 51%. Amendments to the Agreement may be made only with the
prior written consent of the Certificate Insurer. Certain other actions under
the Agreement also require the prior written consent of the Certificate Insurer.
The Certificate Insurer may direct the Trustee to waive any default by the
Servicer under the Agreement, except that a default in making any required
distribution on any Certificate may only be waived by the affected
Certificateholder. Upon the occurrence of certain events of default specified in
the Agreement, the Trustee may terminate the rights of the Servicer only with
the consent of the Certificate Insurer, and shall terminate the Servicer at the
direction of the Certificate Insurer.
REGISTRATION OF THE CERTIFICATES
The Certificates will initially be registered in the name of Cede, the
nominee of DTC. Certificateholders may hold their Certificates through DTC in
the United States or Cedelbank or Euroclear (each as defined below) in Europe if
they are participants of such systems, or indirectly through organizations that
are participants in such systems.
Cede, as nominee for DTC, will hold the global Certificates. Cedelbank and
Euroclear will hold omnibus positions on behalf of the Cedelbank Participants
and the Euroclear Participants (each as defined below), respectively, through
customers' securities accounts in Cedelbank'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.
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 New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("PARTICIPANTS") and facilitates the
clearance and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of securities. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also 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.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 counterparties holding directly or indirectly
through Cedelbank Participants or Euroclear Participants, on the other, will be
effected within 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.
Cedelbank Participants and Euroclear Participants may not deliver instructions
directly to the Depositaries.
Because of time-zone differences, credits of securities in Cedelbank 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
Cedelbank Participant or Euroclear Participant on such business day. Cash
received by Cedelbank or Euroclear as a result of sales of securities by or
through a Cedelbank 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 Cedelbank or Euroclear cash account only as of the business day
following settlement in DTC.
Certificate Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of their Certificates may do so only through
Participants (unless and until Definitive Certificates, as defined below, are
issued). In addition, Certificate Owners will receive all distributions of
principal of and interest on their Certificates from the Trustee through DTC and
Participants. Certificate Owners will not receive or be entitled to receive
Definitive Certificates representing their respective interests in the
Certificates, except under the limited circumstances described below.
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" will be Cede, as nominee of DTC. Certificate Owners
will not be Certificateholders as such term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While the Certificates are outstanding (except under the circumstances
described below), 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. Unless and until Definitive Certificates are issued,
Certificate Owners who are not Participants may transfer ownership of their
interests in the Certificates only through Participants by instructing such
Participants to transfer such ownership interests in the Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
ownership interests, which account is maintained with their respective
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership interests in the Certificates will be executed through
DTC and the accounts of the respective Participants at DTC will be debited and
credited.
The Certificates will be issued in registered form to Certificate Owners or
their nominees, rather than to DTC (such Certificates being referred to herein
as "DEFINITIVE CERTIFICATES"), only if (i) DTC or the Servicer advises the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Servicer or the Trustee is unable to locate a qualified successor, (ii)
the Servicer, at its sole option and with the consent of the Trustee, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of one
or more events of default specified in the Agreement, DTC, at the direction of
Certificate Owners having a majority in Percentage Interests of the Certificates
advises the Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interest of
Certificate Owners. Upon issuance of Definitive Certificates to Certificate
Owners, such Certificates will be transferable directly (and not exclusively on
a book-entry basis), and registered holders will deal directly with the Trustee
with respect to transfers, notices and distributions.
DTC has advised the Servicer and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a holder of Certificates under the Agreement only at the direction of
one or more Participants to whose DTC account the Certificates are credited. DTC
has advised the Servicer that DTC will take such action with respect to any
Percentage Interest of Certificates only at the direction of and on behalf of
such Participants with respect to such Percentage Interest of Certificates. DTC
may take actions, at the direction of the related Participants, with respect to
certain ownership interests in the Certificates that conflict with actions taken
with respect to other ownership interests in the Certificates.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participating organizations
("CEDELBANK PARTICIPANTS") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedelbank interfaces with
domestic markets in several countries. As a professional depository, Cedelbank
is subject to regulation by the Luxembourg Monetary Institute. Cedelbank
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 Cedelbank is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Cedelbank 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 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 described above. 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
"EUROCLEAR 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, net the Euroclear
Cooperative. The Euroclear 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. 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 that 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 receipt 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 the Certificates held through Cedelbank or
Euroclear will be credited to the cash accounts of Cedelbank 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 Considerations." Cedelbank or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificate Owner under the Agreement on behalf of a Cedelbank
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, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Cedelbank 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 Servicer would seek an alternative depositary (if available) or
cause the issuance of Definitive Certificates to Certificate Owners or their
nominees in the manner described above.
Issuance of the Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee to
DTC and DTC will credit such distributions to the accounts of its Participants,
which will further credit them to the accounts of indirect participants of
Certificate Owners, Certificate Owners may experience delays in the receipt of
such distributions.
DTC AND YEAR 2000 COMPLIANCE
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty or contract modification of any kind.
THE TRUSTEE
Bankers Trust Company will act as Trustee of the Trust Fund. The mailing
address of the Trustee's corporate trust office is Four Albany Street, 10th
Floor, New York, New York 10006 and its telephone number is (212) 250-2500.
The Trustee may resign at any time, in which event the Servicer will be
obligated to appoint a successor Trustee. The Servicer may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Upon becoming aware of such
circumstances, the Servicer will be obligated to appoint a successor Trustee. If
a downgrading in the credit rating of the Trustee occurs that would materially
and adversely affect the rating of the Certificates, the Servicer, under certain
circumstances and with the prior written consent of the Certificate Insurer, may
remove the Trustee and appoint a successor Trustee. Any resignation or removal
of the Trustee and appointment of a successor Trustee will not become effective
until acceptance of such appointment by the successor Trustee.
CERTAIN ACTIVITIES
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Agreement, engage in the purchase and sale (or turnover) of
investments; (vii) offer securities in exchange for property (except the
Certificates for an interest in the Home Equity Loans and Additional Balances);
or (viii) repurchase or otherwise reacquire its securities. The Agreement does
not provide for meetings of Certificateholders, and the Servicer does not
contemplate holding such meetings.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Certificates, is based
on the provisions of the Internal Revenue Code of 1986, as amended (the "CODE"),
the Treasury Regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to Certificate Owners in light of their
personal investment circumstances or to certain types of Certificate Owners
subject to special treatment under the U.S. federal income tax laws (for
example, banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign and any
other tax consequences to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates, Brown &
Wood LLP, special tax counsel to the Depositor and counsel to the Underwriters
("TAX COUNSEL"), is of the opinion that the Certificates will be treated as debt
instruments for federal income tax purposes as of such date. See "Material
Federal Income Tax Consequences" in the Prospectus.
The Depositor expresses in the Agreement its intent that, and the
Certificateholders, by their acceptance of the Certificates, are deemed to
express their intent that, for applicable tax purposes, the Certificates will be
indebtedness secured by the Home Equity Loans. 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 Transferor intends to treat this
transaction as a sale of an interest in the Home Equity Loans 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 Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Home Equity Loans has been retained by
the Transferor and has not been 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 has advised 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.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income 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 minimis discount, under Treasury regulations (the
"OID REGULATIONS"), it is possible that the Certificates could nevertheless be
deemed to have been issued with original issue discount ("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. See "Material Federal Income Tax Consequences--Single Class of Grantor
Trust Certificates--Original Issue Discount" in the Prospectus for a discussion
of the application of the OID rules if the Certificates are in fact issued at a
greater than de minimis discount or are treated as having been issued with OID
under the OID Regulations. For purposes of calculating OID, it is likely that
the Certificates will be treated as pay-through securities.
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
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement, Tax Counsel is of the opinion that the Trust contemplated by this
Prospectus Supplement will not be treated as a publicly traded 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 Home Equity Loans (or
an interest therein) to the Certificate Owners and that the proper
classification of the legal relationship between the Transferor and the
Certificate Owners resulting from this transaction is that of a partnership
(including a publicly traded partnership treated as a corporation), or an
association taxable as a corporation. Since Tax Counsel has advised that the
Certificates will be treated as indebtedness in the hands of the
Certificateholders for U.S. federal income tax purposes, and that the Trust will
not be a publicly traded partnership or an association taxable as a corporation,
the Transferor 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 would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Home Equity 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 Transferor
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.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a 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 a 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.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Tax Counsel is of the 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 Home Equity Loans is being 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 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 Home Equity 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.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See "Material Federal Income Tax
Consequences -- Tax Treatment of Certificates as Debt for Tax Purposes --
Foreign Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, 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.
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 or 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 its name, address,
correct federal taxpayer identification number and a statement that it is not
subject to backup withholding. Should a non-exempt Certificate Owner fail to
provide the required certification, the Participants or Indirect Participants
(or the Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount to the
IRS as a credit against the holder's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On January 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.
STATE TAXES
No representation is made regarding the tax consequences of purchase,
ownership or disposition of the Certificates under the tax laws of any state.
Investors considering an investment in the Certificates should consult their own
tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
GENERAL
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit or other plan, such as an individual
retirement account or a Keogh plan, that is subject to ERISA or to Section 4975
of the Code (collectively referred to as "PLANS") from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under Section 4975 of the Code (together,
"PARTIES IN INTEREST") with respect to the Plan. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such person. For example, the Trustee, the
Transferor and the Underwriters are likely to be Parties in Interest with
respect to many Plans; a purchase of a Certificate by such a Plan would
constitute a prohibited transaction unless a statutory, regulatory or
administrative exemption were available. There are five class exemptions issued
by the Department of Labor (the "DOL") that may apply in such event: DOL
Prohibited Transaction Exemption 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers),
91-38 (Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds), 90-1 (Class Exemption for Transactions Involving Insurance
Company Pooled Separate Accounts ), 95-60 (Class Exemption for Transactions
Involving Insurance Company General Accounts), and 96-23 (Class Exemption for
Plan Asset Transactions Determined by In-House Asset Managers). There is no
assurance that these exemptions, even if all of the conditions specified therein
are satisfied, will apply to all transactions involving the Trust's assets. See
"ERISA Considerations" in the Prospectus.
Moreover, additional prohibited transactions could arise if the assets of
the Trust were deemed to constitute assets of any plan that owned Certificates.
The DOL has issued a final regulation (the "PLAN ASSETS REGULATION") concerning
the definition of what constitutes the "plan assets" of a Plan. Under the Plan
Assets Regulation the assets and properties of certain corporations,
partnerships, trusts and certain other entities in which a Plan acquires an
"equity interest" could be deemed to be assets of the Plan in certain
circumstances. Accordingly, if Plans or persons investing plan assets of Plans
purchase Certificates, the Trust could be deemed to hold plan assets of such
Plan unless one of the exceptions under the Plan Assets Regulation is applicable
to the Trust.
AVAILABILITY OF EXEMPTIONS FOR CERTIFICATES
The Plan Assets Regulation contains an exception (the "PUBLICLY-OFFERED
SECURITIES EXCEPTION") that provides that if a Plan acquires a "publicly-offered
security", the issuer of the security is not deemed to hold plan assets. A
publicly-offered security is a security that is (i) freely transferable, (ii)
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another and (iii) either is (A) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act or (B)
sold to the Plan as part of an offering of securities to the public pursuant to
an effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the Exchange Act
within 120 days (or such later time as may be allowed by the Commission) after
the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred.
The Depositor expects that the Certificates will meet the criteria of the
Publicly-Offered Securities Exception as set forth above. The Underwriters
expect (although no assurance can be given) that the Certificates will be held
by at least 100 persons independent of the Trust and of each other at the
conclusion of the offering; there are no restrictions imposed on the transfer of
the Certificates; and the Certificates will be sold as part of an offering
pursuant to an effective registration statement under the Securities Act, and
then will be timely registered under the Exchange Act under Section 12(b) or
12(g) of the Exchange Act. The Underwriters will notify the Trustee as to
whether the Certificates will be held by 100 independent persons at the
conclusion of the offering. The Depositor will not, however, determine whether
the 100-investor requirement of the Publicly-Offered Securities Exception is
satisfied with respect to the Certificates.
If the Certificates fail to meet the criteria of the Publicly-Offered
Securities Exception and the Trust's assets are deemed to include plan assets of
Plans that are holders of the Certificates, transactions involving the Trust and
Parties in Interest with respect to such Plans might be prohibited under Section
406 of ERISA and Section 4975 of the Code unless another ERISA prohibited
transaction exemption is applicable. Thus, for example, if a participant in any
Plan is an obligor or guarantor of one of the Home Equity Loans, under DOL
interpretations the purchase of the Certificates by such Plan could constitute a
prohibited transaction. The five class exemptions mentioned above are not likely
to apply to many of the prohibited transactions that may arise in connection
with the operations of the Trust.
REVIEW BY PLAN FIDUCIARIES
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is especially important that any Plan
fiduciary or other investor who proposes to use plan assets of any Plan to
purchase Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition and
ownership of Certificates. Assets of a Plan should not be invested in the
Certificates unless it is clear that the assets of the Trust will not be plan
assets or that the Publicly-Offered Securities Exception will apply.
In addition, prospective Plan investors should consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
Publicly-Offered Securities Exception, and the potential consequences in their
specific circumstances, prior to making an investment in the Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment in
the Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Certificates will be applied by the Depositor to the purchase price of the
Initial Home Equity Loans and expenses connected with pooling the Initial Home
Equity Loans and issuing the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage-related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), because, among other things, most of the Mortgages securing the Home
Equity Loans are not first Mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgages
(i.e. "mortgage-related securities" under SMMEA) may not be legally authorized
to invest in the Certificates. No representation is made as to whether the
Certificates constitute legal investments for any entity under any applicable
statute, law, rule, regulation or order. Prospective purchasers are urged to
consult with their counsel concerning the status of the Certificates as legal
investments for such purchasers prior to investing in the Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "UNDERWRITING AGREEMENT") relating to the Certificates, the Depositor has
agreed to sell to the underwriters named below (the "UNDERWRITERS"), and the
Underwriters have agreed to purchase, severally but not jointly, the following
principal amounts of Certificates set forth opposite their names below.
UNDERWRITERS PRINCIPAL AMOUNT OF CERTIFICATES
------------ --------------------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................... $
NationsBanc Montgomery Securities LLC.......... $
------------
Total.......................... $500,000,000
In the Underwriting Agreement, each of the Underwriters has agreed, subject
to the terms and conditions set forth therein, to purchase all of its respective
allocation of the Certificates if any of the Certificates are purchased.
The Underwriters have advised the Depositor that they propose initially to
offer the Certificates to the public at the price set forth on the cover page
hereof, and to certain dealers at such price less a concession not in excess of
% of the Certificate denomination. The Underwriters may allow and such dealers
may reallow a concession not in excess of % of the Certificate denomination to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed.
Until the distribution of the Certificates is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Certificates. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Certificates. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Certificates.
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Depositor, the Transferor or any of their respective affiliates
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Certificates. In addition, neither the Depositor, the
Transferor or any of their respective affiliates nor any of the Underwriters
makes any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
The Depositor has agreed to indemnify each Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the Underwriters may be required to make in respect
thereof. The Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, one of the Underwriters.
The Underwriters intend to make a secondary market in the Certificates, but
have no obligation to do so. There can be no assurance that a secondary market
for the Certificates will develop, or if it does develop, that it will provide
holders of the Certificates with liquidity of investment at any particular time
or for the life of the Certificates. The Certificates will not be listed on any
securities exchange.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriters or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriters will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
Until 90 days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus.
This 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.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and the
Underwriters by Brown & Wood LLP, New York, New York and for the Transferor by
Orrick, Herrington & Sutcliffe LLP, San Francisco, California. The material
federal income tax consequences of the Certificates will be passed upon for the
Depositor by Brown & Wood LLP, New York, New York.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated
"AAA" by S&P and "Aaa" by 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 Agency. The ratings assigned to the Certificates
address the likelihood of the receipt of distributions due on the Certificates
according to their terms. The ratings take into consideration, among other
things, the credit quality of the Home Equity Loans, the structural and legal
aspects associated with the Certificates, and the claims-paying ability of the
Certificate Insurer. An adverse change in any of such factors or in other
factors may be a basis for the downward revision or withdrawal of the rating of
the Certificates affected by such change. The ratings assigned to the
Certificates do not represent any assessment of the likelihood that principal
prepayments might differ from those originally anticipated. The rating does not
address the possibility that the holders of the Certificates might suffer a
lower than anticipated yield. There can be no assurance as to whether any other
rating agency will rate the Certificates, or if it does, what rating it will
assign to the Certificates.
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
----
Accelerated Principal Distribution Amount.............................S-14, S-47
Account Agreement............................................................S-6
Accrual Period........................................................S-14, S-48
Additional Balance...........................................................S-6
Aggregate Investor Loss Amount.........................................S-5, S-44
Agreement....................................................................S-4
Alternate Certificate Rate..................................................S-48
Alternative Principal Payment.........................................S-15, S-50
Brokerage firm..............................................................S-47
Business Day................................................................S-47
Cede........................................................................S-20
Cedelbank Participants......................................................S-61
Certificate Interest Collections......................................S-13, S-46
Certificate Owners..........................................................S-20
Certificate Principal Balance..........................................S-4, S-44
Certificate Rate.......................................................S-4, S-48
Certificates.................................................................S-4
Charged Off Amount.....................................................S-7, S-45
CLTV........................................................................S-34
Code........................................................................S-63
Collection Period.....................................................S-12, S-45
Combined Loan-to-Value Ratio.................................................S-9
Conversion Date..............................................................S-9
CPR.........................................................................S-40
Credit Limit.................................................................S-9
Cut-off Date.................................................................S-6
Defective Home Equity Loan..................................................S-18
Defective Home Equity Loans.................................................S-57
Deficiency Amount.....................................................S-16, S-54
Definitive Certificates.....................................................S-61
Depositaries................................................................S-60
Depositor Subordinated Amount...............................................S-55
Distribution Date............................................................S-4
DOL.........................................................................S-67
DTC.........................................................................S-20
Eligible Substitute Home Equity Loan..................................S-18, S-57
ERISA.................................................................S-19, S-66
Euroclear.............................................................S-20, S-62
Euroclear Cooperative.......................................................S-62
Euroclear Operator..........................................................S-62
Euroclear Participants......................................................S-62
European Depositaries.......................................................S-20
Excess Overcollateralization Amount....................................S-5, S-44
Fixed Allocation Percentage...........................................S-15, S-50
Floating Allocation Percentage........................................S-13, S-46
Fully Charged Off Home Equity Loan.....................................S-8, S-46
Global Securities............................................................S-1
Guaranteed Distributions....................................................S-53
Guaranteed Principal Amount.................................................S-53
Home Equity Loan Schedule...................................................S-56
Indirect participating firm.................................................S-47
Initial Cut-off Date Pool Balance............................................S-7
Initial Cut-off Date Principal Balance.......................................S-7
Initial Home Equity Loans....................................................S-6
Insurance Agreement...................................................S-16, S-53
Insurance Proceeds....................................................S-12, S-46
Interest Collections..................................................S-12, S-45
Invested Amount........................................................S-5, S-44
Investor Loss Amount..................................................S-13, S-47
Junior Lien Ratio...........................................................S-10
LIBOR Business Day,.........................................................S-49
Liquidated Home Equity Loan............................................S-7, S-45
Liquidation Expenses........................................................S-46
Liquidation Loss Amount................................................S-8, S-46
Liquidation Proceeds........................................................S-46
Loan Rate....................................................................S-9
Managed Amortization Period...........................................S-15, S-50
Margin.......................................................................S-9
Maximum Principal Payment.............................................S-15, S-50
MBIA........................................................................S-51
Minimum Transferor's Interest.........................................S-12, S-58
Moody's.....................................................................S-20
Mortgage File................................................................S-6
Mortgaged Property..........................................................S-12
Net Liquidation Proceeds..............................................S-12, S-45
New Regulations.............................................................S-66
OID.........................................................................S-64
OID Regulations.............................................................S-64
One-Month LIBOR.............................................................S-48
Original Certificate Principal Balance.................................S-4, S-44
Original Invested Amount...............................................S-5, S-44
Overcollateralization Amount...........................................S-5, S-44
Partially Charged Off Home Equity Loan.................................S-7, S-46
Participants................................................................S-60
Parties in Interest.........................................................S-66
Percentage Interest....................................................S-5, S-47
Plan........................................................................S-19
Plan Assets Regulation......................................................S-67
Plans.......................................................................S-66
Policy......................................................................S-16
Pool Balance...........................................................S-6, S-46
Preference Amount...........................................................S-53
Principal Balance......................................................S-7, S-46
Principal Collections.................................................S-12, S-45
Providian...................................................................S-34
Publicly-Offered Securities Exception.......................................S-67
Rapid Amortization Event....................................................S-50
Rapid Amortization Period.............................................S-15, S-50
Rating Agencies.............................................................S-20
Record Date.................................................................S-47
Reference Banks.............................................................S-49
Related Documents...........................................................S-56
Removal Date..........................................................S-11, S-58
Required Enhancement Amount...........................................S-14, S-48
Required Enhancement Percentage.......................................S-14, S-48
Required Overcollateralization Amount.................................S-14, S-48
Revolving Period......................................................S-15, S-50
S&P.........................................................................S-20
Scheduled Maturity Date...............................................S-15, S-50
Scheduled Principal Collections Payment...............................S-15, S-49
Servicing Fee.........................................................S-18, S-59
Servicing Fee Rate....................................................S-18, S-59
SMMEA.......................................................................S-68
Statistical Calculation Date Pool Balance....................................S-8
Subsequent Cut-off Date................................................S-6, S-33
Subsequent Cut-off Date Principal Balance..............................S-7, S-33
Subsequent Home Equity Loans.................................................S-6
Subsequent Selection Date..............................................S-6, S-33
Subsequent Transfer Agreements..............................................S-33
Subsequent Transfer Dates...................................................S-33
Tax Counsel.................................................................S-64
Telerate Page 3750..........................................................S-49
Terms and Conditions........................................................S-62
Transfer Deposit Amount.........................................S-13, S-46, S-57
Transferor Subordinated Amount................................................17
Transferor's Interest..................................................S-5, S-44
Trust........................................................................S-4
Trust Fund...................................................................S-6
U.S. Person..................................................................S-3
Underwriters................................................................S-68
Underwriting Agreement......................................................S-68
Weighted Average Loan Rate..................................................S-48
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Providian
Home Equity Loan Asset Backed Certificates, Series 1999-PNB1 (the "GLOBAL
SECURITIES"), will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Cedelbank or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds. Capitalized terms used but not
defined in this Annex I have the meanings assigned to them in the Prospectus
Supplement and the Prospectus.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payments in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to similar issues
of pass-through certificates in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date. Payment will then be made by
the respective Depositary to the DTC Participant's account against delivery of
the Global Securities. After settlement has been completed, the Global
Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedelbank
Participant's or Euroclear Participant's account. The Global Securities credit
will appear the next day (European time) and the cash debit will be back-valued
to, and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedelbank or Euroclear cash debit will be valued instead as of the actual
settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
pre-position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedelbank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedelbank Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedelbank or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases, Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the bonds to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date. The
payment will then be reflected in the account of the Cedelbank Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedelbank Participant's or Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedelbank Participant or Euroclear Participant have a line
of credit with its respective clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade fails),
receipt of the cash proceeds in the Cedelbank Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedelbank Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedelbank Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners
of Certificates that are non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed
Form W-8 (Certificate of Foreign Status). If the information
shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected
income (Form 4224). A non-U.S. Person, including a non-U.S.
corporation or bank with a U.S. branch, for which the interest
income is effectively connected with its conduct of a trade or
business in the United States, can obtain an exemption from
the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in
treaty countries (Form 1001). Non-U.S. Persons that are
Certificate Owners residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax
rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will
be imposed at that rate unless the filer alternatively files
Form W-8. Form 1001 may be filed by the Certificate Owner or
its agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain
a complete exemption from the withholding tax by filing Form
W-9 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate
Owner of a Global Security or, in the case of a Form 1001 or a
Form 4224 filer, its agent, files by submitting the
appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. PERSON" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any state, including the District of Columbia (unless, in the
case of a partnership, Treasury Regulations provide otherwise), thereof or (iii)
an estate the income of which is includible in gross income for United States
tax purposes, 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 fiduciaries have the authority to control
all substantial decisions of the trust. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes (the
"Notes" and, together with the Certificates, the "Securities") offered hereby
and by Supplements to this Prospectus (the "Offered Securities") will be offered
from time to time in one or more series. Each series of Certificates will
represent in the aggregate the entire beneficial ownership interest in a trust
fund (with respect to any series, the "Trust Fund") consisting of one or more
segregated pools of various types of one- to five-family mortgage loans (or
certain balances thereof) (collectively, the "Mortgage Loans"), mortgage
pass-through certificates or mortgage-backed securities evidencing interests in
Mortgage Loans or secured thereby ("MBS") or certain direct obligations of the
United States, agencies thereof or agencies created thereby (the "Government
Securities") (with respect to any series, collectively, "Assets"). The Mortgage
Loans and MBS are collectively referred to herein as the "Mortgage Assets." If a
series of Securities includes Notes, such Notes will be issued and secured
pursuant to an indenture and will represent indebtedness of the Trust Fund. If
so specified in the related Prospectus Supplement, the Trust Fund for a series
of Securities may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof (with
respect to any series, collectively, "Credit Support"), and currency or interest
rate exchange agreements and other financial assets or derivative instruments,
or any combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Securities" and "Description of Credit Support."
Each series of Securities will consist of one or more classes of Securities that
may (i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior or subordinate to one or more other classes of
Securities in respect of certain distributions on the Securities; (iii) be
entitled to principal distributions, with disproportionately low, nominal or no
interest distributions; (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions; (v) provide for
distributions of accrued interest thereon commencing only following the
occurrence of certain events, such as the retirement of one or more other
classes of Securities of such series; (vi) provide for distributions of
principal as described in the related Prospectus Supplement; and/or (vii)
provide for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this paragraph, to
the extent of available funds, in each case as described in the related
Prospectus Supplement. Any such classes may include classes of Offered
Securities. See "Description of the Securities."
Principal and interest with respect to Securities will be distributable monthly,
quarterly, semi-annually or at such other intervals and on the dates specified
in the related Prospectus Supplement. Distributions on the Securities of any
series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or interest in
the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, any Master
Servicer, any Sub-Servicer or any of their respective affiliates, except to the
limited extent described herein and in the related Prospectus Supplement.
Neither the Securities nor any assets in the related Trust Fund will be
guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by, among
other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE CAPTION
"RISK FACTORS" HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION
"RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE PURCHASING ANY
OFFERED SECURITY.
If so provided in the related Prospectus Supplement, one or more elections may
be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" for federal income tax purposes. See
also "Material Federal Income Tax Consequences" herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of any
series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement.
MERRILL LYNCH & CO.
The date of this Prospectus is March 23, 1999.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the assets included therein, including the Assets
and any Credit Support and Cash Flow Agreements (with respect to the Securities
of any series, the "Trust Assets"); (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) additional information
with respect to the method of distribution of such Certificates; (vi) whether
one or more REMIC elections will be made and designation of the regular
interests and residual interests; (vii) the aggregate original percentage
ownership interest in the Trust Fund to be evidenced by each class of
Securities; (viii) information as to any Master Servicer, any Sub-Servicer and
the Trustee, as applicable; (ix) information as to the nature and extent of
subordination with respect to any class of Securities that is subordinate in
right of payment to any other class; and (x) whether such Securities will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Offered Securities. This Prospectus and the Prospectus Supplement
relating to each series of Securities contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Chicago Regional Office, Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as nominee of
The Depository Trust Company ("DTC") and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the "Securityholders") upon request
to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the
Agreements--Evidence as to Compliance." The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust Fund
as are required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the rules and regulations of the Commission thereunder, as
interpreted by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, or by telephone at (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT..........................................................3
AVAILABLE INFORMATION..........................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..............................4
SUMMARY OF PROSPECTUS..........................................................6
RISK FACTORS..................................................................14
DESCRIPTION OF THE TRUST FUNDS................................................18
USE OF PROCEEDS...............................................................23
YIELD CONSIDERATIONS..........................................................23
THE DEPOSITOR.................................................................27
DESCRIPTION OF THE SECURITIES.................................................27
DESCRIPTION OF THE AGREEMENTS.................................................36
DESCRIPTION OF CREDIT SUPPORT.................................................53
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................65
STATE TAX CONSIDERATIONS......................................................99
ERISA CONSIDERATIONS..........................................................99
LEGAL INVESTMENT.............................................................101
PLAN OF DISTRIBUTION.........................................................103
LEGAL MATTERS................................................................104
FINANCIAL INFORMATION........................................................104
RATING.......................................................................104
INDEX OF PRINCIPAL DEFINITIONS...............................................105
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Securities........................ Asset-Backed Certificates (the
"Certificates") and Asset Backed
Notes (the "Notes" and, together
with the Certificates, the
"Securities"), issuable in series.
Issuer..................................... With respect to each series, the
trust fund (the "Trust Fund") formed
to issue the Securities of that
series.
Depositor.................................. Merrill Lynch Mortgage Investors,
Inc. (the "Depositor"), a wholly
owned subsidiary of Merrill Lynch
Mortgage Capital, Inc., which is a
wholly-owned indirect subsidiary of
Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch
& Co., Inc. nor any of its
affiliates, including the Depositor
and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, will insure or
guarantee the Securities or the
Mortgage Loans or be otherwise
obligated in respect thereof.
Master Servicer............................ The master servicer or master
servicers (each, a "Master
Servicer"), if any, or a servicer
for substantially all the Mortgage
Loans for each series of Securities,
which servicer or master servicer(s)
may be affiliates of the Depositor,
will be named in the related
Prospectus Supplement. See
"Description of the
Agreements--General" and
"--Collection and Other Servicing
Procedures."
Trustee.................................... The trustee (the "Trustee") for each
series of Certificates will be named
in the related Prospectus
Supplement. See "Description of the
Agreements--The Trustee."
The Trust Assets........................... Each series of Certificates will
represent in the aggregate the
entire beneficial ownership interest
in a Trust Fund. If a series of
Securities includes Notes, such
Notes will represent indebtedness of
the Trust Fund and will be secured
by a security interest in the Assets
of the Trust Fund. A Trust Fund will
consist of any of the following
assets (the Mortgage Assets and
Government Securities may be
referred to collectively or
individually as "Assets"):
(a) Mortgage Assets....................The Mortgage Assets with respect to
a series of Certificates will
consist of a pool of single family
loans (or certain balances thereof)
(collectively, the "Mortgage
Loans"), mortgage pass-through
certificates or other
mortgage-backed securities (such as
debt obligations and participation
interests or certificates)
evidencing interests in or secured
by Mortgage Loans (collectively, the
"MBS") or a combination of Mortgage
Loans and/or MBS. The Mortgage Loans
will not be guaranteed or insured by
the Depositor or any of its
affiliates or, unless otherwise
provided in the Prospectus
Supplement, by any governmental
agency or instrumentality or other
person. The Mortgage Loans will be
secured by first and/or junior liens
on one- to five-family residential
properties or security interests in
shares issued by cooperative housing
corporations ("Single Family
Properties"), including mixed
residential and commercial
structures. The Mortgage Loans may
include (i) closed-end and/or
revolving home equity loans or
certain balances thereof ("Home
Equity Loans") and/or (ii) home
improvement installment sales
contracts and installment loan
agreements ("Home Improvement
Contracts"). The Mortgaged
Properties may be located in any one
of the fifty states, the District of
Columbia, the Commonwealth of Puerto
Rico or any other U.S. jurisdiction
specified in the Prospectus
Supplement. The Prospectus
Supplement will indicate additional
jurisdictions, if any, in which the
Mortgaged Properties may be located.
Unless otherwise provided in the
related Prospectus Supplement, all
Mortgage Loans will have individual
principal balances at origination of
not less than $25,000 and original
terms to maturity of not more than
40 years. All Mortgage Loans will
have been originated by persons
other than the Depositor, and all
Mortgage Assets will have been
purchased, either directly or
indirectly, by the Depositor on or
before the date of initial issuance
of the related series of
Certificates. The related Prospectus
Supplement will indicate if any such
persons are affiliates of the
Depositor.
Each Mortgage Loan may provide for
accrual of interest thereon at an
interest rate (a "Mortgage Rate")
that is fixed over its term or that
adjusts from time to time, or that
may be converted from an adjustable
to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage
Rate, from time to time at the
mortgagor's election, in each case
as described in the related
Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans
in a Trust Fund may be based on one
or more indices. Each Mortgage Loan
may provide for scheduled payments
to maturity, payments that adjust
from time to time to accommodate
changes in the Mortgage Rate or to
reflect the occurrence of certain
events, and may provide for negative
amortization or accelerated
amortization, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may
be fully amortizing or require a
balloon payment due on its stated
maturity date, in each case as
described in the related Prospectus
Supplement. Each Mortgage Loan may
contain prohibitions on prepayment
or require payment of a premium or a
yield maintenance penalty in
connection with a prepayment, in
each case as described in the
related Prospectus Supplement. The
Mortgage Loans may provide for
payments of principal, interest or
both, on due dates that occur
monthly, quarterly, semi-annually or
at such other interval as is
specified in the related Prospectus
Supplement. See "Description of the
Trust Funds--Assets."
(b) Government Securities.............. If so provided in the related
Prospectus Supplement, the Trust
Fund may include, in addition to
Mortgage Assets, certain direct
obligations of the United States,
agencies thereof or agencies created
thereby which provide for payment of
interest and/or principal
(collectively, "Government
Securities").
(c) Collection Accounts................ Each Trust Fund will include one or
more accounts established and
maintained on behalf of the
Securityholders into which the
person or persons designated in the
related Prospectus Supplement will,
to the extent described herein and
in such Prospectus Supplement,
deposit all payments and collections
received or advanced with respect to
the Assets and other assets in the
Trust Fund. Such an account may be
maintained as an interest bearing or
a non-interest bearing account, and
funds held therein may be held as
cash or invested in certain
short-term, investment grade
obligations, in each case as
described in the related Prospectus
Supplement. See "Description of the
Agreements --Collection Account and
Related Accounts."
(d) Credit Support.....................If so provided in the related
Prospectus Supplement, partial or
full protection against certain
defaults and losses on the Assets in
the related Trust Fund may be
provided to one or more classes of
Securities of the related series in
the form of subordination of one or
more other classes of Securities of
such series, which other classes may
include one or more classes of
Offered Securities, and/or by one or
more of the following types of
credit support that has the effect
of covering losses on Assets: a
letter of credit, insurance policy,
guarantee, reserve fund or other
type of credit support consistent
with the foregoing (any such
coverage with respect to the
Securities of any series, "Credit
Support"). The amount and types of
coverage, the identification of the
entity providing the coverage (if
applicable) and related information
with respect to each type of Credit
Support, if any, will be described
in the Prospectus Supplement for a
series of Securities. The Prospectus
Supplement for any series of
Securities evidencing an interest in
a Trust Fund that includes MBS will
describe any similar forms of credit
support that are provided by or with
respect to, or are included as part
of the trust fund evidenced by or
providing security for, such MBS.
See "Risk Factors--Credit Support
Limitations" and "Description of
Credit Support."
(e) Cash Flow Agreements...............If so provided in the related
Prospectus Supplement, the Trust
Fund may include guaranteed
investment contracts pursuant to
which moneys held in the funds and
accounts established for the related
series will be invested at a
specified rate. The Trust Fund may
also include one or more of the
following agreements: interest rate
exchange agreements, interest rate
cap or floor agreements, currency
exchange agreements, other swaps and
derivative instruments or other
agreements consistent with the
foregoing. The principal terms of
any such agreement (any such
agreement, a "Cash Flow Agreement"),
including, without limitation,
provisions relating to the timing,
manner and amount of payments
thereunder and provisions relating
to the termination thereof, will be
described in the Prospectus
Supplement for the related series.
In addition, the related Prospectus
Supplement will provide certain
information with respect to the
obligor under any such Cash Flow
Agreement. The Prospectus Supplement
for any series of Securities
evidencing an interest in a Trust
Fund that includes MBS will describe
any cash flow agreements that are
included as part of the trust fund
evidenced by or providing security
for such MBS. See "Description of
the Trust Funds--Cash Flow
Agreements."
(f) Pre-Funding Account................ To the extent provided in a
Prospectus Supplement, the Depositor
will be obligated (subject only to
the availability thereof) to sell at
a predetermined price, and the Trust
Fund for the related series of
Securities will be obligated to
purchase (subject to the
satisfaction of certain conditions
described in the applicable
Agreement), additional Assets (the
"Subsequent Assets") from time to
time (as frequently as daily) within
the number of months specified in
the Prospectus Supplement after the
issuance of such series of
Securities having an aggregate
principal balance approximately
equal to the amount on deposit in
the Pre-Funding Account (the
"Pre-Funded Amount") for such series
on date of such issuance.
Description of Securities.................. Each series of Certificates will
evidence an interest in the related
Trust Fund and will be issued
pursuant to a pooling and servicing
agreement or a trust agreement.
Pooling and servicing agreements and
trust agreements are referred to
herein as the "Agreements." If a
series of Securities includes Notes,
such Notes will represent
indebtedness of the related Trust
Fund and will be secured by a
security interest in the Assets of
the Trust Fund (or a specified group
thereof) pursuant to an indenture.
Each series of Securities will
include one or more classes. Each
class of Securities (other than
certain Stripped Interest
Securities, as defined below) will
have a stated principal amount (a
"Security Balance") and except for
certain Stripped Principal
Securities, as defined below, will
accrue interest thereon based on a
fixed, variable or adjustable
interest rate (in the case of
Certificates, a "Pass-Through
Rate"). The related Prospectus
Supplement will specify the Security
Balance, if any, and the
Pass-Through Rate or interest rate
for each class of Securities or, in
the case of a variable or adjustable
Pass-Through Rate or interest rate,
the method for determining the
Pass-Through Rate or interest rate.
Distributions on Securities................ Each series of Securities will
consist of one or more classes of
Securities that may (i) provide for
the accrual of interest thereon
based on fixed, variable or
adjustable rates; (ii) be senior
(collectively, "Senior Securities")
or subordinate (collectively,
"Subordinate Securities") to one or
more other classes of Securities in
respect of certain distributions on
the Securities; (iii) be entitled to
principal distributions, with
disproportionately low, nominal or
no interest distributions
(collectively, "Stripped Principal
Securities"); (iv) be entitled to
interest distributions, with
disproportionately low, nominal or
no principal distributions
(collectively, "Stripped Interest
Securities"); (v) provide for
distributions of accrued interest
thereon commencing only following
the occurrence of certain events,
such as the retirement of one or
more other classes of Securities of
such series (collectively, "Accrual
Securities"); (vi) provide for
distributions of principal as
described in the related Prospectus
Supplement; and/or (vii) provide for
distributions based on a combination
of two or more components thereof
with one or more of the
characteristics described in this
paragraph, including a Stripped
Principal Security component and a
Stripped Interest Security
component, to the extent of
available funds, in each case as
described in the related Prospectus
Supplement. If so specified in the
related Prospectus Supplement,
distributions on one or more classes
of a series of Securities may be
limited to collections from a
designated portion of the Mortgage
Loans in the related Mortgage Pool
(each such portion of Mortgage
Loans, a "Mortgage Loan Group.") See
"Description of the
Securities--General." Any such
classes may include classes of
Offered Securities. With respect to
Securities with two or more
components, references herein to
Security Balance, notional amount
and Pass-Through Rate or interest
rate refer to the principal balance,
if any, notional amount, if any, and
the Pass-Through Rate or interest
rate, if any, for any such
component.
The Securities will not be
guaranteed or insured by the
Depositor or any of its affiliates,
by any governmental agency or
instrumentality or by any other
person, unless otherwise provided in
the related Prospectus Supplement.
See "Risk Factors--Limited Assets"
and "Description of the Securities."
(a) Interest........................... Interest on each class of Offered
Securities (other than Stripped
Principal Securities and certain
classes of Stripped Interest
Securities) of each series will
accrue at the applicable
Pass-Through Rate or interest rate
on the outstanding Security Balance
thereof and will be distributed to
Securityholders as provided in the
related Prospectus Supplement. The
specified date on which
distributions are to be made is a
"Distribution Date." Distributions
with respect to interest on Stripped
Interest Securities may be made on
each Distribution Date on the basis
of a notional amount as described in
the related Prospectus Supplement.
Distributions of interest with
respect to one or more classes of
Securities may be reduced to the
extent of certain delinquencies,
losses, prepayment interest
shortfalls, and other contingencies
described herein and in the related
Prospectus Supplement. See "Risk
Factors--Average Life of Securities;
Prepayments; Yields," "Yield
Considerations" and "Description of
the Securities--Distributions of
Interest on the Securities."
(b) Principal.......................... The Securities of each series
initially will have an aggregate
Security Balance no greater than the
outstanding principal balance of the
Assets as of, unless the related
Prospectus Supplement provides
otherwise, the close of business on
the first day of the month of
formation of the related Trust Fund
(the "Cut-off Date"), after
application of scheduled payments
due on or before such date, whether
or not received. The Security
Balance of a Security outstanding
from time to time represents the
maximum amount that the holder
thereof is then entitled to receive
in respect of principal from future
cash flow on the assets in the
related Trust Fund. Unless otherwise
provided in the related Prospectus
Supplement, distributions of
principal will be made on each
Distribution Date to the class or
classes of Securities entitled
thereto until the Security Balances
of such Securities have been reduced
to zero. Unless otherwise specified
in the related Prospectus
Supplement, distributions of
principal of any class of Securities
will be made on a pro rata basis
among all of the Securities of such
class or by random selection, as
described in the related Prospectus
Supplement or otherwise established
by the related Trustee. Stripped
Interest Securities with no Security
Balance will not receive
distributions in respect of
principal. See "Description of the
Securities--Distributions of
Principal of the Securities."
Risk Factors............................... There are material risks to be
considered in investing in the
Securities. See "Risk Factors"
herein and, if applicable, in the
related Prospectus Supplement.
Advances................................... Unless otherwise provided in the
related Prospectus Supplement, the
Master Servicer will be obligated as
part of its servicing
responsibilities to make certain
advances that in its good faith
judgment it deems recoverable with
respect to delinquent scheduled
payments on the Whole Loans in such
Trust Fund. Neither the Depositor
nor any of its affiliates will have
any responsibility to make such
advances. Advances made by a Master
Servicer are reimbursable generally
from subsequent recoveries in
respect of such Whole Loans and
otherwise to the extent described
herein and in the related Prospectus
Supplement. If and to the extent
provided in the Prospectus
Supplement for any series, the
Master Servicer will be entitled to
receive interest on its outstanding
advances, payable from amounts in
the related Trust Fund. The
Prospectus Supplement for any series
of Securities evidencing an interest
in a Trust Fund that includes MBS
will describe any corresponding
advancing obligation of any person
in connection with such MBS. See
"Description of the
Securities--Advances in Respect of
Delinquencies."
Termination................................ If so specified in the related
Prospectus Supplement, a series of
Securities may be subject to
optional early termination through
the repurchase of the Assets in the
related Trust Fund by the party
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon
the reduction of the Security
Balance of a specified class or
classes of Securities to a specified
percentage or amount or on and after
a date specified in such Prospectus
Supplement, the party specified
therein will solicit bids for the
purchase of all of the Assets of the
Trust Fund, or of a sufficient
portion of such Assets to retire
such class or classes, or purchase
such Assets at a price set forth in
the related Prospectus Supplement.
In addition, if so provided in the
related Prospectus Supplement,
certain classes of Securities may be
purchased subject to similar
conditions. See "Description of the
Securities--Termination."
Registration of Securities................. If so provided in the related
Prospectus Supplement, one or more
classes of the Offered Securities
will initially be represented by one
or more certificates or notes, as
applicable, registered in the name
of Cede & Co., as the nominee of
DTC. No person acquiring an interest
in Offered Securities so registered
will be entitled to receive a
definitive certificate or note, as
applicable, representing such
person's interest except in the
event that definitive certificates
or notes, as applicable, are issued
under the limited circumstances
described herein. See "Risk
Factors--Book-Entry Registration"
and "Description of the Securities
--Book-Entry Registration and
Definitive Securities."
Tax Status of the Certificates............. The Certificates of each series will
constitute, as specified in the
related Prospectus Supplement,
either (i) "regular interests"
("REMIC Regular Certificates") or
"residual interests" ("REMIC
Residual Certificates") in a Trust
Fund treated as a real estate
mortgage investment conduit
("REMIC") under Sections 860A
through 860G of the Internal Revenue
Code of 1986, as amended (the
"Code"), (ii) interests ("Grantor
Trust Certificates") in a Trust Fund
treated as a grantor trust under
applicable provisions of the Code,
(iii) interests in a Trust Fund
treated as a partnership for
purposes of federal and state income
tax or (iv) indebtedness of the
Trust Fund for federal income tax
purposes.
(a) REMIC.............................. REMIC Regular Certificates generally
will be treated as debt obligations
of the applicable REMIC for federal
income tax purposes. Certain REMIC
Regular Certificates may be issued
with original issue discount for
federal income tax purposes. See
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
The Offered Certificates evidencing
an interest in a Trust Fund
containing Mortgage Loans will be
treated as (i) assets described in
section 7701(a)(19)(C) of the Code
and (ii) "real estate assets" within
the meaning of section 856(c)(5)(A)
of the Code, in each case to the
extent described herein and in the
Prospectus. See "Material Federal
Income Tax Consequences" herein and
in the related Prospectus
Supplement.
(b) Grantor Trust...................... If the related Prospectus
Supplement specifies that the
related Trust Fund will be a grantor
trust, the Trust Fund will be
classified as a grantor trust and
not as an association taxable as a
corporation for federal income tax
purposes, and therefore holders of
Certificates will be treated as the
owners of undivided pro rata
interests in the Assets held by the
Trust Fund.
(c) Partnership........................ If so specified in a Prospectus
Supplement, the related Trust Fund
will be treated as a partnership for
purposes of federal and state income
tax, and each Certificateholder, by
the acceptance of a Certificate of
such Trust Fund, will agree to treat
the Trust Fund as a partnership in
which such Certificateholder is a
partner for federal income and state
tax purposes. Alternative
characterizations of such Trust Fund
and such Certificates are possible,
but would not result in materially
adverse tax consequences to
Certificateholders.
(d) Indebtedness....................... If so specified in the related
Prospectus Supplement, the
Certificates of a series will be
treated as indebtedness for federal
income tax purposes and the
Certificateholder, in accepting the
Certificate, will agree to treat
such Certificate as indebtedness.
Investors are advised to consult
their tax advisors and to review
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
Tax Status of Notes........................ Unless otherwise specified in the
related Prospectus Supplement, Notes
of a series will be treated as
indebtedness for federal and state
income tax purposes and the
Noteholder, in accepting the Note,
will agree to treat such Note as
indebtedness. See "Material Federal
Income Tax Consequences" herein and
in such Prospectus Supplement.
Investors are advised to consult
their tax advisors and to review
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
ERISA Considerations....................... A fiduciary of an employee benefit
plan and certain other retirement
plans and arrangements, including
individual retirement accounts,
annuities, Keogh plans, and
collective investment funds and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that is
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or Section 4975
of the Code should carefully review
with its legal advisors whether the
purchase or holding of Offered
Securities could give rise to a
transaction that is prohibited or is
not otherwise permissible either
under ERISA or Section 4975 of the
Code. See "ERISA Considerations"
herein and in the related Prospectus
Supplement. Certain classes of
Securities may not be transferred
unless the Trustee and the Depositor
are furnished with a letter of
representations or an opinion of
counsel to the effect that such
transfer will not result in a
violation of the prohibited
transaction provisions of ERISA and
the Code and will not subject the
Trustee, the Depositor or the Master
Servicer to additional obligations.
See "Description of the
Securities--General" and "ERISA
Considerations".
Legal Investment........................... Each Prospectus Supplement will
specify which class or classes of
Offered Securities, if any, will
constitute "mortgage-related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Institutions whose investment
activities are subject to legal
investment laws and regulations or
review by certain regulatory
authorities may be subject to
restrictions on investment in
certain classes of the Offered
Securities. See "Legal Investment"
herein and in the related Prospectus
Supplement.
Rating..................................... At the date of issuance, as to each
series, each class of Offered
Securities will be rated not lower
than investment grade by one or more
nationally recognized statistical
rating agencies (each, a "Rating
Agency"). See "Rating" herein and in
the related Prospectus Supplement.
<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS AND RISK THAT SUCH ASSETS WILL NOT BE SUFFICIENT TO PAY
SECURITIES IN FULL
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Master Servicer's and any Sub-Servicer's servicing obligations under the related
Agreement (including the limited obligation to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable) and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Master Servicer in
connection with an agreement to purchase or act as remarketing agent with
respect to a convertible ARM Loan (as defined herein) upon conversion to a fixed
rate or a different index. Since certain representations and warranties with
respect to the Mortgage Assets may have been made and/or assigned in connection
with transfers of such Mortgage Assets prior to the Closing Date, the rights of
the Trustee and the Securityholders with respect to such representations or
warranties will be limited to their rights as an assignee thereof. Unless
otherwise specified in the related Prospectus Supplement, none of the Depositor,
the Master Servicer or any affiliate thereof will have any obligation with
respect to representations or warranties made by any other entity. Unless
otherwise specified in the related Prospectus Supplement, neither the Securities
nor the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each series of Securities (including the Assets and any
form of credit enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Depositor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See "Description of the Trust Funds."
RISK THAT PREPAYMENTS WILL ADVERSELY AFFECT AVERAGE LIFE AND YIELDS OF
SECURITIES
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Assets in
any Trust Fund or that the rate of payments will conform to any model described
herein or in any Prospectus Supplement. If prevailing interest rates fall
significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rates borne by the Mortgage Loans underlying or comprising the Mortgage
Assets in any Trust Fund. As a result, the actual maturity of any class of
Securities evidencing an interest in a Trust Fund containing Mortgage Assets
could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL--RISK THAT DEFAULTS BY
OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED PROPERTIES WILL RESULT IN LOSSES
TO INVESTORS
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the relevant residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the related Mortgage Loans, and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry in
that market. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest, the principal balances of such Mortgage Loans could be increased to an
amount equal to or in excess of the value of the underlying Mortgaged
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Support, if any, holders of
Securities of the series evidencing interests in the related Mortgage Loans will
bear all risk of loss resulting from default by mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of Mortgage Loans may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis of
the initial payment amount. In some instances the Mortgagor's income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase. In addition
to the foregoing, certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of loss
particularly with respect to any related junior Mortgage Loans. See "--Junior
Mortgage Loans."
In addition, a Prospectus Supplement may specify that the Loan-to-Value
Ratios for the Mortgage Loans in the related Trust will be in excess of 100%.
The related Mortgaged Properties, therefore, will be highly unlikely to provide
adequate security for such Mortgage Loans. To the extent specified in such
Prospectus Supplement, the assessment of the credit history of a borrower and
such borrower's capacity to make payments on the related Mortgage Loan will have
been the primary considerations in underwriting the Mortgage Loans included in
such Trust. The evaluation of the adequacy of the Loan-to-Value Ratio, if so
specified in the related Prospectus Supplement, will have been given less
consideration, and in certain cases no consideration, in underwriting such
Mortgage Loans.
JUNIOR MORTGAGE LOANS--RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE
TO HOLDERS OF JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior lien"),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien and the Mortgage Loan. In the event that a
holder of the senior lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage. See "Certain Legal Aspects of the Mortgage
Loans--Junior Mortgages."
CREDIT SUPPORT LIMITATIONS--RISK THAT CREDIT SUPPORT WILL NOT COVER ALL LOSSES
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a "Covered
Trust"), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
SUBORDINATION OF THE SUBORDINATE SECURITIES; EFFECT OF LOSSES ON THE SUBORDINATE
SECURITIES
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See "Description of the Securities--General" and
"--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
BALLOON PAYMENTS--RISK THAT OBLIGOR WILL NOT BE ABLE TO MAKE BALLOON PAYMENT
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
OPTIONAL TERMINATION OF A TRUST FUND--POSSIBILITY, IF PROSPECTUS SUPPLEMENT SO
PROVIDES, THAT AMOUNT RECEIVED MAY BE LESS THAN OUTSTANDING PRINCIPAL AMOUNT
PLUS ACCRUED INTEREST
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities to a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
In either such case, if the related Prospectus Supplement so provides, the
proceeds available for distribution to Securityholders may be less than the
outstanding principal balance of their Securities plus accrued interest thereon,
in which event such Securityholders could incur a loss on their investment.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences--REMICs."
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating. See "Rating."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as "Securityholders" (as that term is to be used in the related
Agreement). Hence, until such time, Securityholders will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Securities--Book-Entry Registration and
Definitive Securities.
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 (i) closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the "Home
Improvement Contracts") originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by borrowers
under the revolving Home Equity Loans will, during a specified period of time,
automatically become part of the Trust Fund for a series. As a result, the
aggregate balance of the revolving Home Equity Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal
collections are applied to purchase such balances. Such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions may
be made to the extent that such additions could be made in connection with a
Trust Fund with respect to which a REMIC election has been made. The related
Prospectus Supplement will set forth the characteristics that such additional
Mortgage Loans will be required to meet. Such characteristics will be specified
in terms of the categories described in the second preceding paragraph.
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 (i)
additional Mortgage Loans (or certain balances thereof) that will be transferred
to the Trust from time to time and/or (ii) in the case of revolving Home Equity
loans or certain balances thereof, any additional balances advanced to the
borrowers under the revolving Home Equity loans during certain periods. If so
specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus Supplement. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a like aggregate Security Balance,
notional amount or percentage interest but of different authorized
denominations. See "Risk Factors--Limited Liquidity" and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs,
or the day after the Cut-off Date in the case of the first Due Period,
and will end on the first day of the month of the related Distribution
Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest
thereon and related Prepayment Premiums, Liquidation Proceeds,
Insurance Proceeds and other unscheduled recoveries received
subsequent to the related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
"Accrued Security Interest" will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans comprising or underlying the Assets in the Trust Fund for such
series. The particular manner in which such shortfalls are to be allocated among
some or all of the classes of Securities of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Securities may
be reduced as a result of any other contingencies, including delinquencies,
losses and deferred interest on or in respect of the Mortgage Loans comprising
or underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a class of Securities by reason of
the allocation to such class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the Security Balance of such class.
See "Risk Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interests on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Mortgage Loan,
"Related Proceeds") and, if so provided in the Prospectus Supplement, out of any
amounts otherwise distributable on one or more classes of Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Collection Account prior to any distributions being made
on the Securities to the extent that the Master Servicer (or such other entity)
shall determine in good faith that such advance (a "Nonrecoverable Advance") is
not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess funds
in the Collection Account, the Master Servicer is required to replace such funds
in the Collection Account on any future Distribution Date to the extent that
funds in the Collection Account on such Distribution Date are less than payments
required to be made to Securityholders on such date. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
loan number of the related Mortgage Loan and (b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, (a) the
book value, (b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as if such
Mortgage Loan were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement), (c) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (d) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan and (c) the amount of any
loss to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the
Securities--Registration and Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ("Security Owners") will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
("Cede"), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only "Securityholder" (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement, Trust
Agreement or Indenture, as applicable, only indirectly through the Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
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 (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See "Events of Default" and "Rights Upon Event of
Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and, if so
specified in the related Prospectus Supplement, the uninsured deposits in which
are otherwise secured such that the Trustee have a claim with respect to the
funds in the Collection Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Collection Account is maintained or (ii) otherwise maintained with a bank or
trust company, and in a manner, satisfactory to the Rating Agency or Agencies
rating any class of Securities of such series. The collateral eligible to secure
amounts in the Collection Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
("Permitted Investments"). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
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 (i) affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or (ii) in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and (ii)
in its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such Master
Servicer will remain obligated under the related Agreement. Each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must be consistent with the terms of the related Agreement and must
provide that, if for any reason the Master Servicer for the related series of
Securities is no longer acting in such capacity, the Trustee or any successor
Master Servicer may assume the Master Servicer's rights and obligations under
such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under an
Agreement. See "Retained Interest; Servicing Compensation and Payment of
Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Master Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation through foreclosure, repossession or
similar proceedings. The related Agreement will provide that any such offering
be made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
"Representations and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within three years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to three
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Master Servicer will
be entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Whole Loan, prior to the
distribution of such Liquidation Proceeds to Securityholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with 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 (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
-----------------------------------------
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments, and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
------------------------------------------
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election 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.
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
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
<PAGE>
$500,000,000
[PROVIDIAN NATIONAL BANK LOGO]
PROVIDIAN HOME EQUITY LOAN TRUST 1999-1,
PROVIDIAN HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-PNB1
PROVIDIAN NATIONAL BANK
TRANSFEROR AND SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
-------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
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
certificates offered hereby, nor an offer of the certificates 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 the expiration of 90 days from the date of this prospectus
supplement, all dealers selling the 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.
APRIL __, 1999
