<PAGE>
Pursuant to Rule 424(b)(5)
Registration Statement File No. 333-39127
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 13, 1999)
[LOGO] $153,852,000 (APPROXIMATE)
C-BASS
MORTGAGE LOAN ASSET-BACKED CERTIFICATES,
SERIES 1999-CB4
CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
SELLER
------------------------
LITTON LOAN SERVICING LP
SERVICER
------------------------
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
<TABLE>
<CAPTION>
INITIAL
CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
CLASS BALANCE(1) RATE PUBLIC DISCOUNT DEPOSITOR
<S> <C> <C> <C> <C> <C>
A-1 $ 87,260,000 (2) 100% 0.30% 99.70%
A-2 $ 42,300,000 (2) 100% 0.30% 99.70%
M-1 $ 9,717,000 8.20% 97.510688% 0.40% 97.110688%
M-2 $ 8,907,000 8.20% 93.048501% 0.45% 92.598501%
B $ 5,668,000 (2) (3) 0.50% (3)
Total $153,852,000 $147,322,943.54 $467,629.50 $146,855,314.00
</TABLE>
(1) Plus or minus 5%
(2) The Class A-1, Class A-2 and Class B certificates will bear interest at the
variable rate described in this Prospectus Supplement.
(3) The Class B Certificates will be offered by the Underwriters from time to
time to the public in negotiated transactions or otherwise at varying
pricing to be determined at the time of the related sale.
------------------------
Only the five classes of certificates identified above are being offered by this
prospectus supplement and the accompanying prospectus.
THE CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a
pool of first and second lien residential mortgage loans. The mortgage
loans will be segregated into two groups, one consisting of two
sub-groups of fixed-rate FHA insured mortgage loans and VA guaranteed
mortgage loans and conventional fixed-rate mortgage loans with
conforming balances and one consisting of two sub-groups of
conventional fixed-rate non-conforming mortgage loans and conventional
adjustable-rate mortgage loans.
o The Class A-1 and Class A-2 Certificates will be senior certificates.
o The Class M-1, Class M-2 and Class B Certificates are subordinate to
and provide credit enhancement for the Class A-1 and Class A-2
Certificates. The Class B Certificates are subordinate to and provide
credit enhancement for the Class M-1 and Class M-2 Certificates.
o The Class M-1 and Class M-2 Certificates will accrue interest at the
fixed rate set forth above, subject to certain limitations described
in this prospectus supplement.
o The Class A-1, Class A-2, and Class B Certificates will accrue
interest at a rate equal to one-month LIBOR plus a fixed margin,
subject to certain limitations described in this prospectus
supplement.
CREDIT ENHANCEMENT
o Subordination--The subordinate certificates are subordinate in right
of certain payments to the senior certificates.
o Overcollateralization--Certain excess interest received from the
mortgage loans will be applied as payments of principal on the
Certificates to establish and maintain a required level of
overcollateralization.
o Certain of the mortgage loans will be covered by either insurance from
the Federal Housing Administration or a guaranty from the United
States Department of Veterans Affairs.
------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Cedelbank and the Euroclear System
on or about August 27, 1999.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-15 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 3 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Merrill Lynch Mortgage Investors, Inc.,
Credit-Based Asset Servicing and Securitization LLC or any of their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
------------------
MERRILL LYNCH & CO. BANC OF AMERICA SECURITIES LLC
------------------
August 24, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Summary of Prospectus Supplement.............................................S-1
Risk Factors................................................................S-15
The Mortgage Pool...........................................................S-22
The Seller..................................................................S-55
The Servicer................................................................S-57
The Pooling and Servicing Agreement.........................................S-59
Description of the Certificates.............................................S-64
Yield, Prepayment and Maturity Considerations...............................S-77
Use of Proceeds.............................................................S-88
Certain Federal Income Tax Consequences.....................................S-88
State Taxes.................................................................S-90
ERISA Considerations........................................................S-90
Legal Investment Considerations.............................................S-92
Method of Distribution......................................................S-92
Legal Matters...............................................................S-93
Ratings.....................................................................S-93
Index of Principal Definitions..............................................S-95
Annex I......................................................................A-1
Important notice about information presented in this prospectus supplement
and the accompanying prospectus
We tell you about the certificates in two separate documents that
progressively provide more detail; (a) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your series; and (b) this prospectus supplement, which
describes the specific terms of your series of securities.
If the terms of your series of certificates vary between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions can be found.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-95 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 102 in the
accompanying prospectus.
---------------------
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire prospectus and prospectus
supplement carefully before you decide to purchase a certificate. If capitalized
terms are not defined in this summary, they are defined in the prospectus.
<TABLE>
<S> <C>
Title of Series............................................ C-BASS Mortgage Loan Asset Backed Certificates, Series 1999-CB4.
The Certificates........................................... The Class A-1, Class A-2, Class M-1, Class M-2, Class B, Class X
and Class R Certificates are the entire ownership interest in a
trust fund which is composed of first and second lien mortgage
loans. The trust will issue the certificates pursuant to a
pooling and servicing agreement among Credit-Based Asset
Servicing and Securitization LLC, as seller, Merrill Lynch
Mortgage Investors, Inc., as depositor, Litton Loan Servicing LP,
as servicer and The Chase Manhattan Bank, as trustee. The trust
is offering the Class A-1, Class A-2, Class M-1, Class M-2 and
Class B certificates as book-entry securities clearing through
The Depository Trust Company (in the United States) or Cedelbank
or Euroclear (in Europe). See "Description of the Certificates -
Book-Entry Registration and Definitive Certificates" in this
prospectus supplement.
The Offered Certificates................................... The Underwriters are offering to sell the Class A-1, Class A-2,
Class M-1, Class M-2 and Class B Certificates. The Class X and
Class R Certificates are not being offered.
Depositor of Mortgage Loans................................ Merrill Lynch Mortgage Investors, Inc. will deposit the mortgage
loans in the trust fund. The depositor is a Delaware corporation
and a wholly-owned, limited purpose subsidiary of Merrill Lynch
Mortgage Capital Inc., which is a wholly owned indirect
subsidiary of Merrill Lynch & Co., Inc. The depositor is an
affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
one of the underwriters.
Mortgage Loan Seller....................................... On the closing date, the mortgage loans will be sold to the
depositor by Credit-Based Asset Servicing and Securitization LLC.
The mortgage loans were originated or acquired generally in
accordance with the underwriting standards described in "The
Mortgage Pool - Underwriting Standards" herein.
Servicer................................................... Litton Loan Servicing LP will service the mortgage loans. The
servicer must advance delinquent payments of principal and
interest on the mortgage loans, subject to certain limitations.
See "Pooling and Servicing--Advances" in this prospectus
supplement and "Description of the Securities--Advances in
Respect of Delinquencies" in the prospectus. The servicer is an
affiliate of the seller of the mortgage loans.
Trustee.................................................... The Chase Manhattan Bank, a New York banking corporation.
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
Cut-off Date............................................... August 1, 1999.
Closing Date............................................... On or about August 27, 1999.
Final Scheduled Distribution Dates......................... The final scheduled distribution date for each class of offered
certificates is set forth below:
Final Scheduled
Class Distribution Date
----- -----------------
Class A-1 August 25, 2028
Class A-2 March 25, 2029
Class M-1 September 25, 2030
Class M-2 September 25, 2030
Class B September 25, 2030
Each such final scheduled distribution date has been calculated
as described under "Yield Prepayment and Maturity Considerations
--Final Scheduled Distribution Dates" in this prospectus
supplement.
The Mortgage Pool.......................................... On the closing date, the trust will acquire a pool of mortgage
loans that will be divided into two loan groups, loan group 1 and
loan group 2, and further divided into four sub-groups,
sub-groups 1A, 1B, 2A and 2B.
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
The total mortgage pool has the following aggregate
characteristics (percentages are based on the aggregate principal
balance as of August 1, 1999):
Aggregate Current Principal Balance $161,950,332.63
Average Outstanding Principal Balance $95,377
Range of Outstanding Principal Balances $1,570 to $577,663
Average Original Principal Balance $97,262
Range of Original Principal Balances $6,850 to $580,000
Loans with Prepayment Penalties 32.93%
Loans with Negative Amortization 3.45%
Index
Six-Month LIBOR 18.87%
1 YR CMT 3.50%
Other 0.31%
Fixed Rate 77.33%
Mortgage Interest Rates by Index
(ARM loans only)
Six-Month LIBOR 10.876%
1 YR CMT 7.603%
Other 8.496%
Gross margin Weighted Avg by Index
(ARM loans only)
Six-Month LIBOR 7.262%
1 YR CMT 2.928%
Other 2.911%
Weighted Average Loan Rate 9.476%
Range of Loan Rates 5.75% to 21.00%
Weighted Average CLTV 85.47%
Weighted Average Original Term
to Maturity 339 months
Weighted Average Remaining Term to
Stated Maturity 320 months
For the ARM loans only:
Weighted Average Maximum Loan Rate 16.493%
Range of Maximum Loan Rates 0.00% to 23.25%
Weighted Average Minimum Loan Rate 9.612%
Range of Minimum Loan Rates 0.00% to 16.75%
Weighted Average Initial Rate Adjustment Cap 2.611%
Range of Initial Rate Adjustment Cap 0.00% to 6.00%
Weighted Average Periodic Rate Adjustment Cap 1.430%
Range of Periodic Rate Adjustment Caps 0.00% to 3.00%
Weighted Average Months to Next Roll 14 months
Range of Months to Next Roll 1 to 75 months
Weighted Average Interest Roll Frequency 7 months
Max Zip Code Concentration (%) 0.77%
Max Zip Code Concentration (zip) 11372
Geographic Concentrations in Excess of 5%:
California 20.34%
New York 18.71%
Florida 7.31%
New Jersey 5.21%
Second Liens 1.79%
FHA Mortgage Loans 17.61%
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
VA Mortgage Loans 4.14%
Sub-Prime Loans 50.46%
Performing Loans 68.85%
Sub-Performing Loans: 23.56%
Sub-Performing Loans that are Forbearance Plan Loans 0.83%
Sub-Performing Loans that are Bankruptcy Plan Loans 0.76%
Re-Performing Loans: 7.59%
Re-Performing Loans that are Forbearance Plan Loans 1.71%
Re-Performing Loans that are Bankruptcy Plan Loans 3.95%
Loan group 1 will consist of two sub-groups with the following
aggregate characteristics (percentages are based on the aggregate
principal balance as of August 1, 1999).
Aggregate Current Principal Balance $109,075,280.38
Average Outstanding Principal Balance $83,969
Range of Outstanding Principal Balances $1,570 to $304,290
Average Original Principal Balance $85,994
Range of Original Principal Balances $6,850 to $304,290
Loans with Prepayment Penalties 23.75%
Loans with Negative Amortization 0%
Weighted Average Loan Rate 9.285%
Range of Loan Rates 5.75% to 21.00%
Weighted Average CLTV 87.78%
Weighted Average Original Term to Maturity 332 months
Weighted Average Remaining Term to Stated
Maturity 310 months
Balloon Loans 5.37%
Max Zip Code Concentration (%) 1.14%
Max Zip Code Concentration (zip) 11372
Geographic Concentrations in Excess of 5%:
New York 21.28%
California 17.05%
Florida 8.62%
Texas 5.66%
Second Liens 2.66%
FHA Mortgage Loans 22.57%
VA Mortgage Loans 6.06%
Sub-Prime Loans 38.05%
Performing Loans 71.55%
Sub-Performing Loans: 19.31%
Sub-Performing Loans that are
Forbearance Plan Loans 1.23%
Sub-Performing Loans that are
Bankruptcy Plan Loans 1.12%
Re-Performing Loans: 9.15%
Re-Performing Loans that are
Forbearance Plan Loans 2.36%
Re-Performing Loans that are
Bankruptcy Plan Loans 4.63%
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Sub-group 1A will consist of FHA insured and VA guaranteed
fixed-rate mortgage loans with the following characteristics
(percentages are based on the aggregate principal balance of the
applicable sub-group as of August 1, 1999):
Aggregate Current Principal Balance $31,233,788.53
Average Current Principal Balance $73,839
Range of Current Principal Balances $1,573 to $301,211
Average Original Principal Balance $77,630
Range of Original Principal Balances $6,850 to $303,748
Loans with Prepayment Penalties 0%
Loans with Negative Amortization 0%
Weighted Average Loan Rate 8.558%
Minimum Interest Rate 6.00%
Maximum Interest Rate 14.00%
Weighted Average Original Term to
Maturity 358 months
Weighted Average Remaining Term to
Stated Maturity 307 months
Weighted Average Seasoning 51 months
Weighted Average LTV 98.82%
Balloon Loans 0.00%
Max ZIP Code Concentration (%) 1.29%
Max ZIP Code Concentration (ZIP) 11434
Geographic concentration in excess of 5%:
California 20.47%
New York 11.35%
Texas 8.22%
Florida 7.79%
Maryland 6.29%
Second Liens 0.00%
FHA Mortgage Loans 78.84%
VA Mortgage Loans 21.16%
Sub-Prime Loans 0.00%
Performing Loans 26.55%
Sub-Performing Loans: 44.95%
Sub-Performing Loans that are
Forbearance Plan Loans 3.86%
Sub-Performing Loans that are
Bankruptcy Plan Loans 3.69%
Re-Performing Loans: 28.50%
Re-Performing Loans that are
Forbearance Plan Loans 7.91%
Re-Performing Loans that are
Bankruptcy Plan Loans 14.38%
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Sub-group 1B will consist of conventional fixed-rate mortgage
loans having conforming balances with the following
characteristics (percentages are based on the aggregate principal
balance of the applicable sub-group as of August 1, 1999):
Aggregate Current Principal Balance $77,841,491.85
Average Current Principal Balance $88,860
Range of Current Principal Balances $1,570 to $304,290
Average Original Principal Balance $90,033
Range of Original Principal Balances $10,000 to $304,290
Weighted Average Loan Rate 9.577%
Minimum Interest Rate 5.75%
Maximum Interest Rate 21.00%
Weighted Average Original Term to
Maturity 321 months
Weighted Average Remaining Term to
Stated Maturity 312 months
Weighted Average Seasoning 9 months
Weighted Average CLTV 83.54%
Balloon Loans 7.53%
Max ZIP Code Concentration (%) 1.60%
Max ZIP Code Concentration (ZIP) 11372
Geographic concentration in excess of 5%:
New York 25.27%
California 15.68%
Florida 8.96%
Second Liens 3.73%
Sub-Prime Loans 53.32%
Performing Loans 89.60%
Sub-Performing Loans: 9.02%
Sub-Performing Loans that are
Forbearance Plan Loans 0.17%
Sub-Performing Loans that are
Bankruptcy Plan Loans 0.09%
Re-Performing Loans: 1.38%
Re-Performing Loans that are
Forbearance Plan Loans 0.14%
Re-Performing Loans that are
Bankruptcy Plan Loans 0.72%
Owner-financed Mortgage Loans 3.49%
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Loan group 2 will consist of two sub-groups with the following
aggregate characteristics (percentages are based on the aggregate
principal balance as of August 1, 1999):
Aggregate Current Principal Balance $52,875,052.25
Average Outstanding Principal Balance $132,519
Range of Outstanding Principal Balances $18,570 to $577,663
Average Original Principal Balance $133,948
Range of Original Principal Balances $20,000 to $580,000
Loans with Prepayment Penalties 51.87%
Loans with Negative Amortization 0.24%
Index:
Six-Month LIBOR 57.79%
1 YR CMT 10.72%
Other 0.94%
Fixed Rate 30.55%
Mortgage Interest Rates by Index (ARM loans only):
Six-Month LIBOR 10.876%
1 YR CMT 7.603%
Other 8.496%
Gross margin by Index (ARM loans only):
Six-Month LIBOR 7.262%
1 YR CMT 2.928%
Other 2.911%
Weighted Average Loan Rate 9.869%
Range of Loan Rates 6.00% to 16.75%
Weighted Average LTV 80.78%
Weighted Average Original Term to
Maturity 354 months
Weighted Average Remaining Term to
Stated Maturity 340 months
For the ARM loans only:
Weighted Average Maximum Loan Rate 16.493%
Range of Maximum Loan Rates 0.00% to 23.25%
Weighted Average Minimum Loan Rate 9.612%
Range of Minimum Loan Rates 0.00% to 16.75%
Weighted Average Initial Rate Adjustment Cap 2.611%
Range of Initial Rate Adjustment Cap 0.00% to 6.00%
Weighted Average Periodic Rate Adjustment Cap 1.430%
Range of Periodic Rate Adjustment Caps 0.00% to 3.00%
Weighted Average Months to Next Roll 14 months
Range of Months to Next Roll 1 to 75 months
Weighted Average Interest Roll Frequency 7 months
Max Zip Code Concentration (%) 1.17%
Max Zip Code Concentration (zip) 11003
Geographic Concentrations in Excess of 5%:
California 27.13%
New York 13.40%
New Jersey 7.69%
FHA Mortgage Loans 7.37%
VA Mortgage Loans 0.17%
Second Liens 0.00%
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Sub-Prime Loans 76.06%
Performing Loans 63.29%
Sub-Performing Loans: 32.34%
Sub-Performing Loans that are
Forbearance Plan Loans 0.00%
Sub-Performing Loans that are
Bankruptcy Plan Loans 0.00%
Re-Performing Loans: 4.37%
Re-Performing Loans that are
Forbearance Plan Loans 0.36%
Re-Performing Loans that are
Bankruptcy Plan Loans 2.54%
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Sub-group 2A will consist of conventional fixed-rate mortgage loans
having non-conforming balances with the following characteristics
(percentages are based on the aggregate principal balance of the
applicable sub-group as of August 1, 1999):
Aggregate Current Principal Balance $16,154,447.87
Average Current Principal Balance $323,089
Range of Current Principal Balances $241,131 to $577,663
Average Original Principal Balance $324,317
Range of Original Principal Balances $241,530 to $580,000
Weighted Average Loan Rate 8.803%
Minimum Interest Rate 6.75%
Maximum Interest Rate 11.59%
Weighted Average Original Term to
Maturity 342 months
Weighted Average Remaining Term to
Stated Maturity 337 months
Weighted Average Seasoning 6 months
Weighted Average LTV 81.09%
Percentage of Balloon Loans 6.57%
Max ZIP Code Concentration (%) 3.82%
Max ZIP Code Concentration (ZIP) 11003
Geographic concentration in excess of 5%:
California 41.53%
New York 29.86%
Washington 5.68%
Second Liens 0.00%
Sub-Prime Loans 55.80%
Performing Loans 94.41%
Sub-Performing Loans: 5.59%
Sub-Performing Loans that are
Forbearance Plan Loans 0.00%
Sub-Performing Loans that are
Bankruptcy Plan Loans 0.00%
Re-Performing Loans: 0.00%
Re-Performing Loans that are
Forbearance Plan Loans 0.00%
Re-Performing Loans that are
Bankruptcy Plan Loans 0.00%
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Sub-group 2B will consist of adjustable-rate mortgage loans with
the following characteristics (percentages are based on the
aggregate principal balance of the applicable sub-group as of
August 1, 1999):
Aggregate Current Principal Balances $36,720,604.38
Average Current Principal Balances $105,217
Range of Current Principal Balances $18,570 to $348,134
Average Original Principal Balances $106,675
Range of Original Principal Balances $20,000 to $350,000
Loans with Prepayment Penalties 61.01%
Loans with Negative Amortization 0.35%
Index:
Six Month LIBOR 83.21%
1 Yr. CMT 15.43%
Other 1.36%
Mortgage Interest Rates by Index
Six Month LIBOR 10.876%
1 Yr. CMT 7.603%
Other 8.496%
Gross Margin by Index
Six Month LIBOR 7.262%
1 Yr. CMT 2.928%
Other 2.911%
Weighted Average Loan Rate 10.339%
Range of Current Loan Rates 6.00% to 16.75%
Weighted Average Gross Margin 6.534%
Range of Gross Margins 2.00 % to 11.00%
Weighted Average Maximum Lifetime
Mortgage Interest Rate 16.493%
Weighted Average Lifetime Minimum
Mortgage Interest Rate 9.612%
Weighted Average LTV 80.65%
Weighted Average Original Term to Maturity 359 months
Weighted Average Remaining Term to Stated Maturity 341 months
Weighted Average Seasoning 18 months
Weighted Average Initial Periodic Cap 2.611%
Weighted Average Periodic Cap 1.430%
Weighted Average Months to Interest Roll 14 months
Weighted Average Interest Roll Frequency 7 months
Max ZIP Code Concentration (%) 0.95%
Max ZIP Code Concentration (ZIP) 95638
Geographic concentration in excess of %:
California 20.79%
New Jersey 10.36%
New York 6.15%
Florida 5.44%
Second Liens 0.00%
FHA Mortgage Loans 10.62%
VA Mortgage Loans 0.25%
Sub-Prime Loans 84.98%
Performing Loans 49.60%
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Sub-Performing Loans 44.11%
Sub-Performing Loans that are
Forbearance Plan Loans 0.00%
Sub-Performance Loans that are
Bankruptcy Plan Loans 0.00%
Re-Performing Loans 6.30%
Re-Performing Loans that are
Forbearance Plan Loans 0.52%
Re-Performing Loans that are
Bankruptcy Plan Loans 3.66%
See "The Mortgage Pool" in this prospectus supplement for more
information about the mortgage loans.
Distributions--General..................................... The distribution date will be the 25th day of each month or, if such
day is not a business day, the next business day, beginning on
September 27, 1999. Distributions will generally include payments
made on the mortgage loans during the related collection period.
The collection period for any distribution date is the period
from the second day of the calendar month preceding the month in
which such distribution date occurs through the first day of the
calendar month in which such distribution date occurs.
Record Date................................................ The.record.date.for each distribution date will be as follows:
for the Class A-1, Class A-2 and Class B Certificates, the
business day before such distribution date (unless definitive
certificates are issued); and for the other certificates, the
last business day of the month preceding such distribution date.
Interest Distributions..................................... On each distribution date, you will be entitled to receive interest
accrued on your certificate at the pass-through rate during the
related accrual period and any interest which you earned
previously but which you did not receive. The accrual period for
all certificates, except for the Class A-1, Class A-2 and Class B
Certificates, is the month immediately preceding the month in
which such distribution date occurs. Except for the first accrual
period, the accrual period for the Class A-1, Class A-2 and Class
B Certificates is the period from the distribution date in the
prior month to the day prior to the current distribution date.
The first accrual period for the Class A-1, Class A-2 and Class B
Certificates will begin on the closing date and end on September
26, 1999. Interest will be calculated for all certificates,
except for the Class A-1, Class A-2 and Class B Certificates, on
the basis of a 360-day year consisting of twelve 30-day months.
Interest will be calculated for the Class A-1, Class A-2 and
Class B Certificates on the basis of the actual number of days in
the accrual period, based on a 360-day year. There are certain
circumstances which could reduce the amount of interest paid to
you. See "Description of the Certificates - Interest
Distributions on the Certificates" in this prospectus supplement.
Pass-Through Rates......................................... The pass-through rate with respect to the offered certificates,
other than the Class A-1, Class A-2 and Class B Certificates,
will be calculated at the per annum rates set forth on the cover
page, subject to the limitations described under "Description of
the Certificates - Pass-Through Rates" in this prospectus
supplement. The pass-through rate with respect to the Class A-1
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
Certificates will be equal to the least of (i) the sum of
one-month LIBOR plus a margin of 0.85%, (ii) the weighted average
of the mortgage interest rates of the mortgage loans minus the
sum of the rates at which the servicing fee and the trustee fee
are calculated, and (iii) the weighted average mortgage interest
rates in loan group 1 minus the sum of the rates at which the
servicing fee and the trustee fee are calculated. The
pass-through rate with respect to the Class A-2 Certificates will
be equal to the lesser of (i) the sum of one-month LIBOR plus a
margin of 0.55%, and (ii) the weighted average of the mortgage
interest rates of the mortgage loans in loan group 2 minus the
sum of the rates at which the servicing fee and the trustee fee
are calculated. The pass-through rate with respect to the Class B
Certificates will be equal to the lesser of (i) the sum of
one-month LIBOR plus a margin of 2.75%, and (ii) the weighted
average of the mortgage interest rates of the mortgage loans
minus the sum of the rates at which the servicing fee and the
trustee fee are calculated.
In addition, if the seller fails to exercise its option to
purchase the mortgage loans as described below under the heading
"Optional Termination", the margin of basis points used in
calculating the pass-through rate on the Class A-1, Class A-2,
and Class B Certificates will increase by 0.50%, and the
pass-through rates on the Class M-1 and Class M-2 Certificates
will increase by 0.50%.
Principal Distributions.................................... On each distribution date, you will receive a distribution of
principal if there is cash available on that date for your class of
certificates. You should review the priority of payments described
under "Description of the Certificates - Principal Distributions"
in this prospectus supplement.
Credit Enhancement......................................... Credit enhancements reduce the harm caused to holders of
certificates by shortfalls in payments received on the mortgage
loans. They can reduce the effect of shortfalls on all classes,
or they can allocate shortfalls so they affect some classes
before others. This transaction employs the following four forms
of credit enhancement. See "Description of the Certificates" in
this prospectus supplement.
Subordination. On each distribution date, classes that are lower
in order of payment priority will not receive payments until the
classes that are higher in order of payment priority have been
paid. If there is not enough money on a distribution date to pay
all classes, the subordinate classes are the first to forego
payment.
Overcollateralization. Although the total principal balance of
the mortgage loans is approximately $161,950,333, the trust is
issuing only $153,852,000 total principal amount of Certificates.
The remaining 5.00% of the total principal balance of the
mortgage loans will absorb losses on the mortgage loans before
such losses affect the Certificates. If the level of
overcollateralization falls below what is required, the excess
interest described in the next section will be paid to the
Certificates as principal. This will have the effect of reducing
the principal balance of the Certificates faster than the
principal
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balance of the mortgage loans so that the required
level of overcollateralization is reached.
Monthly Excess Cashflow. Because more interest is expected to be
paid by the borrowers than is necessary to pay the interest
earned on the certificates, we expect there to be excess interest
each month. The excess interest will be used to create
overcollateralization, to pay interest that was previously earned
but not paid to the certificates, and to reimburse the
certificates for losses that they experienced previously.
Application of Realized Losses. If, on any distribution date
after the balances of the certificates have been reduced by the
amount of cash paid on that date, the total principal balance of
the certificates is greater than the total principal balance of
the mortgage loans, the principal balance of the certificates
that are lower in order of payment priority will be reduced by
the amount of such excess.
Optional Termination....................................... The seller has the option to purchase all the mortgage loans and any
properties that the trustee acquired in satisfaction of any of
the mortgage loans. This option can be exercised when the
total principal balance of the mortgage loans, including the
mortgage loans related to the properties which the trustee has
acquired, is 10% or less than the total principal balance of
the mortgage loans on the cut-off date. If the option is
exercised, your certificate will be retired early and you will
be entitled to the following amounts to the extent available
therefor:
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the pass-through rate;
o any interest previously earned but not paid; and
o in the case of the Class A-2 and Class B Certificates only,
any "LIBOR Carryover Amount", as described in this prospectus
supplement, from all previous distribution dates.
You will receive the last two items only to the extent that there
is enough cash to make such payments. See "Pooling and Servicing
Agreement - Termination" in this prospectus supplement.
Certain Federal Income Tax
Consequences............................................. The trustee will elect to treat the assets of the trust, exclusive
of a reserve fund intended to protect against basis risk for the
Class A certificates, as comprising several real estate mortgage
investment conduits, or REMICs, for federal income tax purposes.
For further information regarding the federal income tax
consequences of investing in the offered certificates, see
"Certain Federal Income Tax Consequences" in this prospectus
supplement and "Material Federal Income Tax Consequences" in the
prospectus.
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Ratings.................................................... The trust will not issue the certificates unless they receive the
respective ratings set forth below from Moody's Investors Service,
Inc., Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co.:
Class Moody's Fitch Duff
----- ------- ----- ----
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
M-1 Aa2 AA AA
M-2 A2 A A
B Baa2 BBB BBB
The rating on the certificates indicates the likelihood that you
will receive all funds to which you are entitled by the terms of
your certificate. The rating agency that issues the rating
reviews the nature and credit quality of the mortgage loans and
the soundness of the structure which the depositor has created to
allow the payments on the mortgage loans to flow to the holders
of the certificates. A rating is not a recommendation to buy,
sell or hold securities and the rating agency can revise or
withdraw it at any time. A rating does not address the likelihood
of the payment of any LIBOR Carryover Amount, the frequency of
prepayments on the mortgage loans or the effect of such
prepayments on your yield. See "Yield" and "Ratings" in this
prospectus supplement and "Yield Considerations" in the
prospectus.
Legal Investment........................................... You should consult with counsel to see if you are permitted to buy
the offered certificates, since legal investment rules will vary
depending on the type of entity purchasing the offered
certificates, whether that entity is subject to regulatory
authority, and if so, by whom. The offered certificates will not
be "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended, because loan
group 1 contains second lien mortgage loans and owner-financed
mortgage loans that were originated by individuals and not by
financial institutions or mortgagees approved by the Secretary of
Housing and Urban Development. See "Legal Investment" in this
prospectus supplement and in the prospectus.
ERISA Considerations....................................... If you are a fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended, or Section 4975 of the Internal
Revenue Code of 1986, you should consult with counsel as to
whether you can buy or hold an offered certificate. See "ERISA
Considerations" in this prospectus supplement and in the
prospectus.
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RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the certificates. You should also carefully consider the information set forth
under "Risk Factors" in the prospectus.
There are risks inherent in the nature of the mortgage loans.
Approximately 38.05% of the mortgage loans in loan group 1 (by
aggregate principal balance as of the Cut-Off Date) and approximately 76.06% of
the mortgage loans in loan group 2 (by aggregate principal balance as of the
Cut-Off Date) are of sub-prime credit quality. In addition, the trust contains
some mortgage loans that have been severely delinquent or are subject to
bankruptcy or forbearance plans. Delinquencies and liquidation proceedings are
more likely with these mortgage loans than with mortgage loans that do not have
such histories. In the event these mortgage loans do become delinquent or
subject to liquidation, you may face delays in receiving payment and losses if
the credit enhancements are insufficient to cover the delays and losses.
The trust also contains some mortgage loans with respect to which the
total amount of scheduled monthly payments due thereon on or before the Cut-off
Date were not received. These past due payments are called "arrearage" and are
not a part of the trust. In the case of any mortgage loan that has an
outstanding arrearage, all payments of principal received with respect to such
mortgage loan will be applied by the servicer to reduce such arrearage to zero
before being applied to reduce the outstanding principal balance of such
mortgage loan. The servicer will be required to make advances of delinquent
payments of principal and interest on delinquent mortgage loans, each to the
extent such advances are deemed recoverable, until such mortgage loans become
current. In the event that a mortgage loan is liquidated before the related
arrearage is reduced to zero, the arrearage, together with reimbursements for
advances of principal and interest and servicing advances with respect to such
mortgage loan, will reduce the liquidation proceeds available for distribution
to certificateholders.
There are risks involving unpredictability of prepayments and the effect of
prepayments on yields.
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
more slowly than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the fixed-rate
mortgage loans, those mortgage loans are more likely to prepay than if
prevailing rates remain above the interest rates on such mortgage
loans. In addition, if interest rates decline, adjustable-rate mortgage
loan prepayments may increase due to the availability of fixed-rate
mortgage loans at lower interest rates. Conversely, if prevailing
interest rates rise significantly, the prepayments on fixed-rate and
adjustable-rate mortgage loans are likely to decrease.
o Approximately 23.75% of the mortgage loans in loan group 1 (by
aggregate principal balance as of the cut-off date of the mortgage
loans in loan group 1) and approximately 51.87% of the mortgage loans
in loan group 2 (by aggregate principal balance as of the cut-off date
of the mortgage loans in loan group 2) require the mortgagor to pay a
penalty if the mortgagor prepays the mortgage loan during periods
ranging from one year to five years after the mortgage loan was
originated. A prepayment penalty may discourage a mortgagor from
prepaying the mortgage loan during the applicable period. The holder of
the Class X Certificates will be entitled to all prepayment penalties
received on the Mortgage Loans, and such amounts will not be available
for distribution on the offered certificates. Under certain
circumstances, as described in the pooling and servicing agreement, the
servicer may waive the payment of any otherwise applicable prepayment
penalty. You should conduct your own analysis of the effect, if any,
that the
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prepayment penalties, and decisions by the servicer with respect to the
waiver of such penalties, may have on the prepayment performance of the
mortgage loans. The depositor makes no representation as to the effect
that the prepayment penalties, and decisions by the servicer with
respect to the waiver of such penalties, may have on the prepayment
performance of the mortgage loans.
o The seller may be required to purchase mortgage loans from the trust in
the event certain breaches of representations and warranties have not
been cured. In addition, the seller has the option to purchase mortgage
loans sixty days or more delinquent. These purchases will have the same
effect on the holders of the offered certificates as a prepayment of
the mortgage loans.
o If the rate of default and the amount of losses on the mortgage loans
is higher than you expect, then your yield may be lower than you
expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the
certificates.
See "Yield, Prepayment and Maturity Considerations" for a description of
factors that may influence the rate and timing of prepayments on the mortgage
loans.
There are risks associated with the repurchase of mortgage loans by the seller.
With respect to mortgage loans in sub-group 2B with an aggregate
principal balance of approximately $20,000,000, the seller will conduct a
re-appraisal of the related mortgaged properties. Within 60 days of the closing
date, the seller will repurchase any mortgage loan the loan-to-value ratio of
which, as indicated by the re-appraisal obtained by the seller, exceeds by 40%
or more the loan-to-value ratio of such mortgage loan as represented by the
seller in the pooling and servicing agreement. Any such repurchase by the seller
will have the same effect on the Class A-2 Certificates as a prepayment of such
mortgage loans.
In addition, the seller will purchase each mortgage loan in loan group
1 (x) which has a loan-to-value ratio in excess of 80% but does not have private
mortgage insurance, (y) for which foreclosure proceedings have been completed
within the first six months following the closing date, and (z) for which
disposition of the related mortgaged property within such six-month period would
result in a loss which senior certificateholders would not be protected against,
in whole or in part, by available credit enhancement. Any such purchase by the
seller will have the same effect on the Class A-1 Certificates as a prepayment
of such mortgage loans.
There are risks related to owner-financed mortgage loans.
Reduced Underwriting Standards
Approximately 3.49% of the mortgage loans in sub-group 1B (by
aggregate principal balance of the sub-group 1B mortgage loans as of the cut-off
date) are owner-financed mortgage loans. These mortgage loans were originated by
the individual sellers of the related mortgaged property who generally are
inexperienced in matters pertaining to mortgage banking. These mortgage loans
were originated with less stringent standards than the other mortgage loans. The
borrower under an owner-financed mortgage loan generally does not complete a
mortgage loan application and the seller of the related property generally does
not verify the income or employment of the related borrower, nor obtain other
information customarily obtained during the mortgage loan origination process.
The seller obtained and reviewed in connection with an acquisition of an
owner-financed loan the credit history and payment history of the borrower, as
well as conduct an assessment of the value of the property. As a result, certain
information concerning the owner-financed mortgage loans that may be of interest
to you is not available.
Appraisals May Be Inaccurate
In acquiring owner-financed mortgage loans, the seller
assesses the value of a property, generally using either a prior appraisal,
which must be re-certified if older than six months, or a drive-by appraisal. A
drive-by appraisal is not as accurate as a full real estate appraisal because
the appraiser does not have access to the interior of the mortgaged property and
may not have access to the rear of the mortgaged property. As a result, the
appraisal may reflect assumptions made by the appraiser regarding the interior
or the rear of the mortgaged property which
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may not be accurate. To the extent the seller has over-appraised the value of a
property, such amount may not be recovered during a liquidation proceeding.
There are risks relating to alternatives to foreclosure.
Many of the mortgage loans are delinquent as of the closing date. Other
mortgage loans may become delinquent after the closing date. The servicer may
either foreclose on any such mortgage loan or work out an agreement with the
mortgagor, which may involve waiving or modifying any term of the mortgage loan.
If the servicer extends the payment period or accepts a lesser amount than
stated in the mortgage note in satisfaction of the mortgage note, your yield may
be reduced.
The recovery of defaulted amounts under FHA and VA programs is uncertain.
All of the mortgage loans in sub-group 1A and some of the mortgage
loans in sub-group 2B (in an amount equal to 10.62% with respect to FHA mortgage
loans and 0.25% with respect to VA mortgage loans) are covered by either
insurance from the Federal Housing Administration or a guaranty from the United
States Department of Veterans Affairs. Recovery of the entire insured amounts
from these agencies is dependent upon material compliance by the originator and
the servicer to applicable regulations. These regulations are subject to
interpretative uncertainties. If upon filing a claim for recovery of a defaulted
amount, it is discovered that the mortgage loan did not comply with a
regulation, the servicer may not be able to fully recover the insured amounts.
See "The Mortgage Pool - FHA Mortgage Loans and VA Mortgage Loans" herein.
There is a risk relating to the potential inadequacy of credit enhancement for
the offered certificates.
The credit enhancement features described in the summary are intended
to enhance the likelihood that holders of the offered certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if such
advances are not likely to be recovered. We cannot assure you that the
applicable credit enhancement will adequately cover any shortfalls in cash
available to pay your certificates as a result of such delinquencies or
defaults.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
There is a risk since the certificates are not obligations of any entity.
The offered certificates represent an interest in the trust fund only.
No other person will insure or guaranty the offered certificates or will have
any obligation with respect to the certificates except for the obligations of
the Depositor and of the Seller pursuant to certain limited representations and
warranties made with respect to the mortgage loans and of the Servicer with
respect to its servicing obligations under the pooling and servicing agreement.
Neither the certificates nor the underlying mortgage loans (other than the FHA
inured and VA guaranteed mortgage loans) will be guaranteed or insured by any
governmental agency or instrumentality. Proceeds of the assets included in the
trust fund (including the mortgage loans) will be the sole source of payments on
the offered certificates. You will not be able to receive money from any entity
in the event that such proceeds are not enough to make all payments provided for
under the offered certificates.
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There is a risk that interest payments may be insufficient to create
overcollateralization.
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the certificates as well as certain fees
and expenses of the trust. Any remaining interest will then be used to
compensate for losses that occur on the mortgage loans. After these financial
obligations of the trust are covered, the available excess interest will be used
to create and maintain overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to maintain the
overcollateralization level required by the rating agencies. The factors
described below will affect the amount of excess interest that the mortgage
loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest will be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated, excess interest will be
reduced because such mortgage loans will no longer be outstanding and
generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans
are higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on such
date to pay certificateholders.
o The mortgage loans have rates that are fixed or that adjust based on an
index that is different from the index used to determine rates on the
Class A-1, Class A-2 and Class B Certificates. As a result, interest
rates on the Class A-1, Class A-2 and Class B Certificates may increase
relative to interest rates on the mortgage loans in the related loan
group, requiring that more of the interest generated by the mortgage
loans be applied to cover interest on the Class A-1, Class A-2 and
Class B Certificates.
There are risks in holding subordinate certificates.
The protections afforded the senior certificates in this transaction
create risks for the subordinate certificates. Prior to any purchase of any
subordinate certificates, consider the following factors that may adversely
impact your yield:
o Because the subordinate certificates receive interest and principal
distributions after the related senior certificates receive such
distributions, there is a greater likelihood that the subordinate
certificates will not receive the distributions to which they are
entitled on any distribution date.
o If the servicer determines not to advance a delinquent payment because
such amount is not recoverable from a mortgagor, there may be a
shortfall in distributions on the certificates which will impact the
subordinate certificates.
o The subordinate certificates are not expected to receive principal
distributions until, at the earliest, September 2002.
o Losses resulting from the liquidation of defaulted mortgage loans will
first reduce the level of overcollateralization, if any, for the
certificates. If there is no overcollateralization, losses will be
allocated to the subordinate certificates. A loss allocation results in
a reduction in a certificate balance without a corresponding
distribution of cash to the holder. A lower certificate balance will
result in less interest accruing on the certificate.
o The earlier in the transaction that a loss on a mortgage loan occurs,
the greater the impact on yield.
Please review "Description of the Certificates" and "Yield, Prepayment
and Maturity Considerations" in this prospectus supplement for more detail.
There is a risk that mortgage loan rates will affect the Class A-1, Class A-2
and Class B Certificates.
The Class A-1, Class A-2 and Class B Certificates will accrue interest
at a pass-through rate based on the one-month LIBOR index plus a specified
margin, but are subject to a cap. The cap on interest paid on the Class A-1
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Certificates will, in most cases, be based on the weighted average of the
interest rates on the mortgage loans in loan group 1, net of certain expenses of
the trust. The cap on interest paid on the Class A-2 Certificates will generally
be based on the weighted average of the interest rates on the mortgage loans in
loan group 2, net of certain expenses of the trust. The cap on interest paid on
the Class B Certificates will, in most cases, be based on the weighted average
of the interest rates on the mortgage loans in both loan groups, net of certain
expenses of the trust. Distributions on the Class A-1 Certificates will be based
on collections from loan group 1, distributions on the Class A-2 Certificates
will be based on collections from loan group 2 and distributions on the Class B
Certificates will be based on collections from both loan groups. The mortgage
loans in loan group 1 have fixed interest rates, and the mortgage loans in loan
group 2 have fixed interest rates or interest rates that are based on various
indices. Substantially all of the mortgage loans in sub-group 2B have periodic
and maximum limitations on adjustments to the mortgage loan rate and a majority
of those loans do not adjust for one to five years after the date of
origination. As a result, the Class A-1, Class A-2 and Class B Certificates may
accrue less interest than they would accrue if their rates were based solely on
the one-month LIBOR index plus the specified margin.
A variety of factors could limit the pass-through rate on the Class
A-1, Class A-2 and Class B Certificates. Some of these factors are described
below:
o Each pass-through rate adjusts monthly while the loan rates on the
fixed-rate mortgage loans are fixed and on the adjustable-rate mortgage
loans adjust less frequently. Consequently, the cap on the certificates
may limit increases in the pass-through rates for extended periods in a
rising interest rate environment.
o The loan rate on certain mortgage loans may respond to different
economic and market factors than one-month LIBOR. It is possible that
interest rates on certain of the adjustable-rate mortgage loans may
decline while interest rates on the Class A-2 and Class B Certificates
are stable or rising. It is also possible that interest rates on both
the adjustable-rate mortgage loans in sub-group 2B and the Class A-2
and Class B Certificates may decline or increase during the same
period, but that the interest rates on the Class A-2 and Class B
Certificates may decline more slowly or increase more rapidly.
o These factors may adversely affect the yields to maturity on the Class
A-1, Class A-2 and Class B Certificates.
Although holders of the Class A-2 and Class B Certificates will be
entitled to receive any LIBOR carry-over amount from and to the limited extent
of funds available for such payments, we cannot assure you that those funds will
be available or sufficient . Holders of the Class A-1 Certificates are not
entitled to any such payments.
There is a risk that interest payments on the mortgage loans may be insufficient
to pay interest on your certificates.
When a mortgage loan is prepaid in full, the borrower is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next distribution date. The servicer is required to cover a
portion of the shortfall in interest collections that are attributable to
prepayments in full, but only up to one-half of the servicer's servicing fee for
the related accrual period. If the credit enhancement is insufficient to cover
this shortfall in excess of one-half of the servicing fee, you may incur a loss.
In addition, certain shortfalls in interest collections arising from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, will not be covered by the servicer.
There is a risk that there may be a delay in receipt of liquidation proceeds,
and that liquidation proceeds may be less than the outstanding balance of the
mortgage loan.
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the credit enhancements are insufficient to
cover the loss.
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There is an increased risk of loss relating to high loan-to-value ratios.
Mortgage loans with higher loan-to-value ratios may present a greater
risk of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 72.82% of the mortgage loans in loan group 1 and approximately
48.05% of the mortgage loans in loan group 2 (in each case, based on aggregate
principal balance as of the cut-off date), had a loan-to-value ratio in excess
of 80% at origination. Because all of the mortgage loans in sub-group 1A and
some in sub-group 2B are either guaranteed by the FHA or insured by the VA,
defaults on these mortgage loans should have the same effect on the related
certificates as a prepayment of such mortgage loans. However, in the event that
such guaranty or insurance is no longer available to provide protection, any
losses on such mortgage loans will be borne by the related certificateholders.
There are risks relating to geographic concentration of the mortgage loans.
The following chart lists the states with the highest concentrations of
mortgage loans for each loan group, based on the aggregate principal balance of
the mortgage loans in each loan group as of the cut-off date.
Loan Group 1 Loan Group 2
New York 21.28% California 27.13%
California 17.05% New York 13.40%
Florida 8.62% New Jersey 7.69%
Texas 5.66%
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in states listed above which may or may
not affect real property values may affect the ability of
borrowers to repay their loans on time.
o Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in
those states, which would result in an increase in the
loan-to-value ratios.
o Any increase in the market value of properties located in the
states listed above would reduce the loan-to-value ratios and
could, therefore, make alternative sources of financing
available to the borrowers at lower interest rates, which
could result in an increased rate of prepayment of the
mortgage loans.
There are risks relating to balloon loans.
Balloon loans pose a risk because a borrower must make a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss. Approximately
7.53% of the mortgage loans in sub-group 1B are balloon loans (by aggregate
principal balance as of the cut-off date) and approximately 6.57% of the
mortgage loans in sub-group 2A are balloon loans (by aggregate principal balance
as of the cut-off date).
There are risks relating to subordinate loans.
Approximately 3.73% of the mortgage loans in sub-group 1B (by aggregate
principal balance as of the cut-off date) evidence a lien that is subordinate to
the rights of the mortgagee under a senior mortgage or mortgages. The proceeds
from any liquidation, insurance or condemnation proceedings will be available to
satisfy the outstanding principal balance of such junior mortgage loans only to
the extent that the claims of such senior mortgage loans have been satisfied in
full, including any foreclosure costs. In circumstances where the servicer
determines that it would be uneconomical to foreclose on the related mortgaged
property, the servicer may write off the entire outstanding principal balance of
the related loan as bad debt. The foregoing considerations will be particularly
applicable to junior mortgage loans that have high combined loan-to-value ratios
because in such cases, the servicer is more likely to determine that foreclosure
would be uneconomical. You should consider the risk that to the extent losses on
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mortgage loans are not covered by available credit enhancement, such losses will
be borne by the holders of the certificates.
There are risks associated with Year 2000 compliance.
The servicer is faced with the task of completing its goals for
compliance in connection with the year 2000 issue. The year 2000 issue is the
result of prior computer programs being written using two digits to define the
applicable year. Any computer program that has time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Any such
occurrence could result in miscalculations or in a major computer system
failure. Although the servicer believes its computer systems are year 2000
compliant, it is presently engaged in various procedures to determine if the
computer systems and software of its suppliers, customers, brokers and agents
will be year 2000 compliant. In the event that the servicer, any subservicer or
any of their suppliers, customers, brokers or agents do not successfully and
timely achieve year 2000 compliance, the servicer's performance of its
obligations could be adversely affected.
The year 2000 is also an issue for almost all entities which use
computers. To the extent any entity related to this transaction (including the
servicer, any depository and the trustee) is unable to achieve year 2000
compliance, there could be delays in processing payments on the mortgage loans
and consequently delays in distributions to you.
There is a risk of lack of liquidity of the offered certificates.
The underwriters intend to make a secondary market in the classes of
certificates actually purchased by them, but they have no obligation to do so.
There is no assurance that such a secondary market will develop or, if it
develops, that it will continue. Consequently, you may not be able to sell your
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
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THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by Credit-Based Asset Servicing and Securitization LLC (the "Seller"). None of
the Depositor, either Underwriter, the Servicer, the Trustee or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
Certain information with respect to the Mortgage Loans to be included
in each Loan Group is set forth herein. Prior to the Closing Date, Mortgage
Loans may be removed from a Loan Group and other Mortgage Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to each Loan Group as presently constituted is representative of
the characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group may
vary.
General
C-BASS Trust 1999-CB4 (the "Trust Fund") will consist of a pool of
1,698 closed-end, fixed-rate and adjustable-rate mortgage loans (the "Mortgage
Pool") having original terms to maturity ranging from 35 to 375 months (the
"Mortgage Loans") and an aggregate principal balance as of August 1, 1999 (the
"Cut-off Date") of $161,950,332.63. All Mortgage Loan statistics set forth
herein are based on principal balances, interest rates, terms to maturity,
mortgage loan counts and similar statistics as of the Cut-off Date. All weighted
averages specified herein are based on the principal balances of the Mortgage
Loans in the related Loan Group or sub-group, as applicable, as of the Cut-off
Date, as adjusted for the principal payments received or advanced on or before
such date, plus Deferred Interest (each, a "Cut-off Date Principal Balance").
The "Principal Balance" of a Mortgage Loan, as of any date, is equal to the
principal balance of such Mortgage Loan at its origination, less the sum of
scheduled and unscheduled payments in respect of principal made on such Mortgage
Loan. References to percentages of the Mortgage Loans mean percentages based on
the aggregate of the Cut-off Date Principal Balances of the Mortgage Loans in
the related Loan Group, unless otherwise specified. The "Pool Balance" is equal
to the aggregate Principal Balances of the Mortgage Loans in both Loan Groups.
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement")
dated as of the Cut-off Date between the Seller and the Depositor. Pursuant to
the Pooling and Servicing Agreement, the Depositor will cause the Mortgage Loans
to be assigned to the Trustee for the benefit of the Certificateholders. See
"The Pooling and Servicing Agreement" herein.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were acquired by the
Seller in the secondary market in the ordinary course of its business including
from affiliates of the underwriters, and re-underwritten by the Seller in
accordance with its underwriting standards as described in "The Seller -
Underwriting Standards". See "Method of Distribution." The Mortgage Loans in the
Mortgage Pool were originated by various mortgage loan originators.
Approximately 26.43% and 19.42% of the Mortgage Loans in Loan Group 1 were
originated by Golden National Mortgage Corp. and New Century Mortgage
Corporation, respectively. Approximately 45.05% and 12.03% of the Mortgage Loans
in Loan Group 2 were originated by Pacific Thrift and Loan and Golden National
Mortgage Corp., respectively.
Under the Pooling and Servicing Agreement, the Seller will make certain
representations and covenants to the Trustee relating to, among other things,
the due execution and enforceability of the Pooling and Servicing Agreement and
certain characteristics of the Mortgage Loans and, subject to certain
limitations, will be obligated to repurchase or substitute a similar mortgage
loan for any Mortgage Loan as to which there exists deficient documentation or
an uncured breach of any such representation, warranty or covenant, if such
breach of any such representation, warranty or covenant materially and adversely
affects the Certificateholders' interests in such Mortgage Loan. The Depositor
will make no representations or warranties with respect to the Mortgage Loans
and will have no obligation to repurchase or substitute Mortgage Loans with
deficient documentation or that are otherwise defective. The Seller is selling
the Mortgage Loans without recourse and will have no obligation with respect to
the Certificates in its capacity as Seller other than the repurchase or
substitution obligations described above.
S-22
<PAGE>
The Mortgage Pool will consist of two loan groups ("Loan Group 1" and
"Loan Group 2," respectively, and each, a "Loan Group"). Each Loan Group is
further divided into two sub-groups ("Sub-group 1A," "Sub-group 1B," "Sub-group
2A" and "Sub-group 2B"). The Mortgage Loans in Sub-group 1A (the "Sub-group 1A
Mortgage Loans") consist of 423 Mortgage Loans with an aggregate principal
balance (the "Sub-group 1A Loan Balance") of $31,233,788.53 as of the Cut-off
Date. The Mortgage Loans in Sub-group 1B (the "Sub-group 1B Mortgage Loans")
consist of 876 Mortgage Loans with an aggregate principal balance (the
"Sub-group 1B Loan Balance") of $77,841,491.85 as of the Cut-off Date. The
Mortgage Loans in Sub-group 2A (the "Sub-group 2A Mortgage Loans") consist of 50
fixed-rate Mortgage Loans with an aggregate principal balance (the "Sub-group 2A
Loan Balance") of $16,154,447.87 as of the Cut-off Date. The Mortgage Loans in
Sub-group 2B (the "Sub-group 2B Mortgage Loans") consist of 349 adjustable-rate
Mortgage Loans with an aggregate principal balance (the "Sub-group 2B Loan
Balance", and each of the Sub-group 1A Loan Balance, the Sub-group 1B Loan
Balance, the Sub-group 2A Loan Balance and the Sub-group 2B Loan Balance, a
"Loan Group Balance") of $36,720,604.38 as of the Cut-off Date.
Each Loan Group consists of Performing Mortgage Loans, Sub-Performing
Mortgage Loans and Re-Performing Mortgage Loans, each as defined below:
o A "Performing Mortgage Loan" is a Mortgage Loan pursuant to which no
payment due under the related mortgage note (or any modification
thereto) prior to the Cut-off Date, is 30 days Delinquent.
o A "Sub-Performing Mortgage Loan" is a Mortgage Loan pursuant to which a
payment due prior to the Cut-off Date under the terms of the related
mortgage note (or any modification thereto), is at least 30 but not
more than 89 days Delinquent. Certain Sub-Performing Mortgage Loans
have been modified in writing and are also characterized as follows:
(a) If a Sub-Performing Mortgage Loan is a "Forbearance
Plan Mortgage Loan", the related mortgagor must make
monthly payments ("Modified Scheduled Payments") in
an amount at least equal to the sum of (i) the amount
of the monthly scheduled payment of principal and
interest determined in accordance with such mortgage
loan's original amortization schedule ("Regular
Scheduled Payments") plus (ii) an additional amount
to be applied to pay down the total amount of
scheduled monthly payments due thereon on or before
the Cut-off Date but not received prior to the
Cut-off Date plus the aggregate amount of tax and
insurance advances made with respect to such Mortgage
Loan to the extent remaining outstanding as of the
Cut-off Date.
(b) If a Sub-Performing Mortgage Loan is a "Bankruptcy
Plan Mortgage Loan," the related mortgagor defaulted
and, after default, became the subject of a case
under Title 11 of the United States Code (the
"Bankruptcy Code") and, as of the Cut-off Date, had a
confirmed bankruptcy plan. Each such bankruptcy plan
generally requires the related mortgagor to make
Modified Scheduled Payments in an amount at least
equal to (i) the Regular Scheduled Payment plus (ii)
an additional amount sufficient to pay down overdue
amounts resulting from the period of default,
generally over a period of three to five years from
the commencement of such bankruptcy plan.
o A "Re-Performing Mortgage Loan" is a mortgage loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan)
which had defaulted in the past and which is currently at least 90 days
Delinquent with respect to certain Regular Scheduled Payments but which
satisfies one of the following criteria (the "Re-Performance Test"):
(a) the mortgagor has made at least three aggregate
Regular Scheduled Payments in the three calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to May 1, 1999),
or
(b) the mortgagor has made at least four aggregate
Regular Scheduled Payments in the four calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to April 1,
1999), or
S-23
<PAGE>
(c) the mortgagor has made at least five aggregate
Regular Scheduled Payments in the five calendar
months preceding the Cut-off Date (regardless of
either the timing of receipt of such payments or the
payment history of such loans prior to March 1,
1999).
A Mortgage Loan is "Delinquent," if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the related
Mortgagor under the related Mortgage Note (the "Monthly Payment") due on a due
date is not paid by the close of business on the next scheduled due date for
such Mortgage Loan. Thus, a Mortgage Loan for which the borrower failed to make
the Monthly Payment due on July 1, 1999 will be reported as current in the
calculation of delinquency status on August 1, 1999 and Delinquent as of August
1, 1999 if the payment is not made by the close of business on such date.
With respect to certain Delinquent Mortgage Loans, the total amount of
scheduled Monthly Payments due thereon on or before the Cut-off Date but not
received prior to the Cut-off Date, together with any outstanding servicing
advances on such Mortgage Loans, is referred to as the "Arrearage." The Servicer
has previously made advances in respect of the Arrearages. Any Arrearage shall
not be included as part of the Trust Fund and, accordingly, payments with
respect to Arrearage will not be payable to the Certificateholders as and when
received. However, the Servicer shall be required to make servicing advances on
Delinquent Mortgage Loans and make advances of delinquent payments of principal
and interest on Delinquent Mortgage Loans, each to the extent such advances are
deemed recoverable, until such Mortgage Loans become current.
Sub-group 1A Mortgage Loans Statistics
Sub-group 1A consists of 423 Mortgage Loans. The Sub-group 1A Loan
Balance as of the Cut-off Date is equal to $31,233,788.53 and the Arrearage is
equal to approximately $859,284. The Sub-group 1A Mortgage Loans have original
terms to maturity ranging from 180 to 375 months. The following statistical
information, unless otherwise specified, is based upon the Sub-group 1A Loan
Balance as of the Cut-off Date.
The Sub-group 1A Mortgage Loans are secured by mortgages or deeds of
trust or other similar security instruments (each, a "Mortgage") creating first
liens on one- to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units and individual condominium
units (each, a "Mortgaged Property"). Approximately 93.25% of the Sub-group 1A
Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 80%. There
can be no assurance that the Loan-to-Value Ratio of any Sub-group 1A Mortgage
Loan determined at any time after origination is less than or equal to its
original Loan-to-Value Ratio. All of the Sub-group 1A Mortgage Loans have
scheduled Monthly Payments due on the first day of the month (with respect to
each Mortgage Loan, a "Due Date").
Approximately 78.84% of the Sub-group 1A Mortgage Loans are FHA
Mortgage Loans. Approximately 21.16% of the Sub-group 1A Mortgage Loans are VA
Mortgage Loans. See "--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 26.55% of the Sub-group 1A Mortgage Loans are Performing
Mortgage Loans. Approximately 44.95% of the Group 1A Mortgage Loans are
Sub-Performing Mortgage Loans, including 3.86% (of the Sub-group 1A Loan
Balance) that are Forbearance Plan Mortgage Loans and 3.69% (of the Sub-group 1A
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in
Sub-group 1A, approximately 25.19% are 30-59 days past due and approximately
19.77% are 60 or more days past due. Approximately 28.50% of the Sub-group 1A
Mortgage Loans are Re-Performing Mortgage Loans including 7.91% (of the
Sub-group 1A Loan Balance) that are Forbearance Plan Mortgage Loans and 14.38%
(of the Sub-group 1A Loan Balance) that are Bankruptcy Plan Mortgage Loans.
None of the Sub-group 1A Mortgage Loans are Balloon Loans or
Owner-Financed Mortgage Loans.
Each Sub-group 1A Mortgage Loan accrues interest at a rate (each, a
"Loan Rate") of not less than 6.00% per annum and not more than 14.00% per annum
and as of the Cut-off Date the weighted average Loan Rate of the Sub-group 1A
Mortgage Loans was approximately 8.558% per annum.
S-24
<PAGE>
The weighted average remaining term to maturity of the Sub-group 1A
Mortgage Loans will be approximately 307 months as of the Cut-off Date. None of
the Sub-group 1A Mortgage Loans had a first Due Date prior to February 1, 1971
or after April 1, 1999 or will have a remaining term to maturity of less than 17
months or greater than 356 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1A Mortgage Loan is April 2029.
The average Principal Balance of the Sub-group 1A Mortgage Loans at
origination was approximately $77,630. The average Cut-off Date Principal
Balance of the Sub-group 1A Mortgage Loans was approximately $73,839.
No Sub-group 1A Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $301,211 or less than approximately $1,573. The
Sub-group 1A Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ --------------- ------------------------ ------------------------------------
<S> <C> <C> <C>
1,573 - 50,000 125 $4,383,732.57 14.04%
50,001 - 100,000 206 14,848,072.38 47.54
100,001 - 150,000 75 8,913,262.02 28.54
150,001 - 200,000 15 2,542,058.43 8.14
200,001 - 250,000 1 245,452.59 0.79
300,001 - 301,211 1 301,210.54 0.96
=============== ======================== ====================================
Total 423 $31,233,788.53 100.00%
=============== ======================== ====================================
- --------------------
(1) The average Cut-off Date Principal Balance of the Sub-group 1A Mortgage Loans was approximately $73,839
</TABLE>
Original Terms to Maturity of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Original Term (months) Loans the Cut-off Date the Cut-off Date
-------------------------------- ---------------- ----------------------- ------------------------------------
<S> <C> <C> <C>
121 - 180 4 $159,477.80 0.51%
181 - 240 2 32,545.18 0.10
241 - 300 5 273,481.43 0.88
301 - 360 410 30,536,500.43 97.77
361 - 375 2 231,783.69 0.74
---------------- ----------------------- ------------------------------------
Total 423 $31,233,788.53 100.00%
================ ======================= ====================================
</TABLE>
- --------------------
(1) The weighted average original term of the Sub-group 1A Mortgage Loans was
approximately 358 months.
S-25
<PAGE>
Property Types of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ----------------------------- ----------------------- ------------------------ --------------------------------------
<S> <C> <C> <C>
Single Family Detached 390 $28,396,778.07 90.92%
Condominium 14 953,732.06 3.05
Four Family 3 625,664.84 2.00
Three Family 2 326,209.42 1.04
Townhouse 3 247,165.58 0.79
PUD (1) 4 230,223.02 0.74
Two Family 3 181,733.12 0.58
Manufactured Home 2 162,927.51 0.52
2-4 Family Property 2 109,354.91 0.35
----------------------- ------------------------ -------------------------------------
Total 423 $31,233,788.53 100.00%
======================= ======================== =====================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Occupancy Status Loans the Cut-off Date the Cut-off Date
- ---------------------------- ----------------- ----------------------- ------------------------------------------
<S> <C> <C> <C>
Primary 413 $30,433,651.89 97.44%
Investment 10 800,136.64 2.56
================= ======================= ==========================================
Total 423 $31,233,788.53 100.00%
================= ======================= ==========================================
</TABLE>
- ----------------------
(1) Based on a representation made by the borrower at the time of origination.
Purpose of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ---------------------------- ----------------- ----------------------- ------------------------------------------
<S> <C> <C> <C>
Purchase 360 $25,866,431.08 82.82%
Rate/Term Refinance 55 4,681,095.23 14.99
Cashout 8 686,262.22 2.20
================= ======================= ==========================================
Total 423 $31,233,788.53 100.00%
================= ======================= ==========================================
</TABLE>
S-26
<PAGE>
Loan Rates of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
5.51 - 6.00 1 $42,096.36 0.13%
6.01 - 6.50 1 141,848.77 0.45
6.51 - 7.00 8 761,901.88 2.44
7.01 - 7.50 43 3,916,900.16 12.54
7.51 - 8.00 78 6,434,990.88 20.60
8.01 - 8.50 122 9,377,591.60 30.02
8.51 - 9.00 57 3,912,662.78 12.53
9.01 - 9.50 58 3,966,969.42 12.70
9.51 - 10.00 23 1,298,628.93 4.16
10.01 - 10.50 10 470,008.33 1.50
10.51 - 11.00 8 326,920.48 1.05
11.01 - 11.50 8 366,890.57 1.17
11.51 - 12.00 2 92,621.22 0.30
12.01 - 12.50 1 32,071.31 0.10
12.51 - 13.00 1 25,497.35 0.08
13.01 - 14.00 2 66,188.49 0.21
------------------- -------------------------- ------------------------------
Total 423 $31,233,788.53 100.00%
=================== ========================== ==============================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Sub-group 1A Mortgage Loans as of the
Cut-off Date was approximately 8.558% per annum.
Original Loan-to-Value Ratios of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Original Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- --------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0.00 - 10.00 22 $1,393,115.63 4.46%
10.01 - 20.00 1 21,557.31 0.07
40.01 - 50.00 1 2,661.79 0.01
60.01 - 70.00 3 244,694.92 0.78
70.01 - 80.00 7 446,200.08 1.43
80.01 - 90.00 21 1,713,209.15 5.49
90.01 - 100.00 199 15,959,984.78 51.10
100.01 - 110.00 151 10,111,335.83 32.37
110.01 - 120.00 11 917,139.68 2.94
120.01 - 130.00 5 335,608.97 1.07
130.01 - 142.50 2 88,280.39 0.28
--------------- ------------------------ --------------------------------
Total 423 $31,233,788.53 100.00%
=============== ======================== ================================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Sub-group 1A
Mortgage Loans as of the Cut-off Date was approximately 98.82%.
S-27
<PAGE>
Geographic Distribution of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal
Number of Outstanding as of the Balance of Sub-group Out-
Location Mortgage Loans Cut-off Date standing as of the Cut-off Date
- --------------------------- -------------------- -------------------------- -------------------------------------
<S> <C> <C> <C>
Alaska 2 $149,064.56 0.48%
Arizona 10 673,833.72 2.16
Arkansas 1 32,465.35 0.10
California 59 6,392,162.72 20.47
Colorado 2 133,449.92 0.43
Connecticut 4 388,457.13 1.24
District Of Columbia 1 138,305.09 0.44
Florida 40 2,432,586.34 7.79
Georgia 10 541,723.74 1.73
Hawaii 1 49,910.54 0.16
Idaho 2 145,687.26 0.47
Illinois 7 555,414.56 1.78
Indiana 7 469,466.80 1.50
Iowa 1 46,932.53 0.15
Kansas 1 56,775.90 0.18
Louisiana 6 378,219.28 1.21
Maine 1 46,253.72 0.15
Maryland 24 1,964,807.25 6.29
Massachusetts 10 913,351.52 2.92
Michigan 12 947,497.78 3.03
Minnesota 5 277,623.14 0.89
Mississippi 3 117,859.69 0.38
Missouri 6 219,871.25 0.70
Montana 1 67,145.55 0.21
Nevada 10 936,232.31 3.00
New Jersey 10 959,264.90 3.07
New Mexico 1 113,253.46 0.36
New York 41 3,545,088.43 11.35
North Carolina 13 881,611.86 2.82
Ohio 12 852,880.54 2.73
Oklahoma 4 219,169.70 0.70
Oregon 1 101,970.45 0.33
Pennsylvania 14 650,458.19 2.08
South Carolina 1 81,632.46 0.26
Tennessee 21 1,161,261.72 3.72
Texas 53 2,566,670.33 8.22
Utah 1 98,188.46 0.31
Virginia 14 1,217,025.75 3.90
Washington 4 359,536.02 1.15
West Virginia 1 20,079.16 0.06
Wisconsin 5 273,691.52 0.88
Wyoming 1 56,907.93 0.18
-------------------- -------------------------- --------------------------------------
Total 423 $31,233,788.53 100.00%
==================== ========================== ======================================
</TABLE>
- --------------------
(1) The greatest ZIP Code geographic concentration of the Sub-group 1A Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 1.29% in the 11434
ZIP Code.
S-28
<PAGE>
Documentation Level of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding as of
Documentation Level Loans the Cut-off Date the Cut-off Date
- ------------------------------------- ----------------- ------------------------------ ----------------------------------
<S> <C> <C> <C>
Alternate Documentation 11 $1,003,626.64 3.21%
Full Documentation 380 27,469,453.61 87.95
Limited Documentation 29 2,579,969.36 8.26
Stated Documentation 3 180,738.92 0.58
================= ============================== ==================================
Total 423 $31,233,788.53 100.00%
================= ============================== ==================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Status of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Sub-group Outstanding
Status Loans the Cut-off Date as of the Cut-off Date
- ------------------------------- --------------------- ----------------------- ------------------------------------------
<S> <C> <C> <C>
30 Days past due 103 $7,866,729.69 25.19%
60 Days past due 89 6,173,931.22 19.77
Current 97 8,291,933.06 26.55
Reperforming 134 8,901,194.56 28.50
===================== ======================= ==========================================
Total 423 $31,233,788.53 100.00%
===================== ======================= ==========================================
</TABLE>
Sub-group 1B Mortgage Loans Statistics
Sub-group 1B consists of 876 Mortgage Loans. The Sub-group 1B Loan
Balance as of the Cut-off Date is equal to $77,841,491.85 and the Arrearage is
equal to approximately $541,164. The Sub-group 1B Mortgage Loans have original
terms to maturity ranging from 35 to 361 months. The following statistical
information, unless otherwise specified, is based upon the Sub-group 1B Loan
Balance as of the Cut-off Date.
The Sub-group 1B Mortgage Loans are secured by Mortgages creating first
liens on Mortgaged Properties. Approximately 64.63% of the Sub-group 1B Mortgage
Loans had a Loan-to-Value Ratio at origination in excess of 80%. There can be no
assurance that the Loan-to-Value Ratio of any Sub-group 1B Mortgage Loan
determined at any time after origination is less than or equal to its original
Loan-to-Value Ratio. All of the Sub-group 1B Mortgage Loans have scheduled
Monthly Payments due on the first day of the month (with respect to each
Mortgage Loan, a "Due Date").
Approximately 89.60% of the Sub-group 1B Mortgage Loans are Performing
Mortgage Loans. Approximately 9.02% of the Sub-group 1B Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.17% (of the Sub-group 1B Loan
Balance) that are Forbearance Plan Mortgage Loans and 0.09% (of the Sub-group 1B
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in
Sub-group 1B, approximately 6.28% are 30-59 days past due and approximately
2.74% are 60 or more days past due. Approximately 1.38% of the Sub-group 1B
Mortgage Loans are Re-Performing Mortgage Loans including 0.14% (of the
Sub-group 1B Loan Balance) that are Forbearance Plan Mortgage Loans and 0.72%
(of the Sub-group 1B Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 33.27% of the Sub-group 1B Mortgage Loans provide for
payment by the Mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-group 1B Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made
S-29
<PAGE>
within six months, one year, two years, three years, four years or five years
from the date of origination of such Sub-group 1B Mortgage Loan. The amount of
the prepayment charge is provided in the related Mortgage Note and is generally
equal to 5% of the amount prepaid.
Approximately 7.53% of the Sub-group 1B Mortgage Loans will not fully
amortize by their respective maturity dates (each, a "Balloon Loan"). The
Monthly Payment for each Balloon Loan is based on an amortization schedule
ranging from 1 month to 360 months, except for the final payment (the "Balloon
Payment") which is due and payable between the 24th month and the 360th month
following origination of such Mortgage Loan, depending on the terms of the
related Mortgage Note. With respect to the majority of the Balloon Loans, the
Monthly Payments for such Balloon Loans amortize over 360 months, but the
Balloon Payment is due on the 180th month. The amount of the Balloon Payment on
each Balloon Loan is substantially in excess of the amount of the scheduled
Monthly Payment for such Mortgage Loan.
Approximately 3.49% of the Sub-group 1B Mortgage Loans are
Owner-Financed Mortgage Loans.
Each Sub-group 1B Mortgage Loan accrues interest at a rate (each, a
"Loan Rate") of not less than 5.75% per annum and not more than 21.00% per annum
and as of the Cut-off Date the weighted average Loan Rate of the Sub-group 1B
Mortgage Loans was approximately 9.577% per annum.
The weighted average remaining term to maturity of the Sub-group 1B
Mortgage Loans will be approximately 312 months as of the Cut-off Date. None of
the Sub-group 1B Mortgage Loans had a first Due Date prior to March 15, 1983 or
after September 1, 1999 or will have a remaining term to maturity of less than 1
months or greater than 360 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1B Mortgage Loan is August 2029.
The average Principal Balance of the Sub-group 1B Mortgage Loans at
origination was approximately $90,033. The average Cut-off Date Principal
Balance of the Sub-group 1B Mortgage Loans was approximately $88,860.
No Sub-group 1B Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $304,290 or less than approximately $1,570. The
Sub-group 1B Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
1,570 - 50,000 306 $9,862,774.47 12.67%
50,001 - 100,000 269 19,584,528.25 25.16
100,001 - 150,000 157 19,582,792.05 25.16
150,001 - 200,000 78 13,427,971.59 17.25
200,001 - 250,000 52 11,528,086.08 14.81
250,001 - 300,000 12 3,249,780.41 4.17
300,001 - 304,290 2 605,559.00 0.78
=================== ========================== ================================
Total 876 $77,841,491.85 100.00%
=================== ========================== ================================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Sub-group 1B Mortgage
Loans was approximately $88,860.
S-30
<PAGE>
Original Terms to Maturity of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Original Term (months) Loans the Cut-off Date the Cut-off Date
---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
35 - 60 11 $598,284.87 0.77%
61 - 120 29 908,300.56 1.17
121 - 180 190 11,036,850.81 14.18
181 - 240 64 3,554,951.54 4.57
241 - 300 56 3,200,474.41 4.11
301 - 360 525 58,470,878.37 75.12
361 - 362 1 71,751.29 0.09
------------------- -------------------------- --------------------------------
Total 876 $77,841,491.85 100.00%
=================== ========================== ================================
</TABLE>
- --------------------
(1) The weighted average original term of the Sub-group 1B Mortgage Loans was
approximately 321 months.
Property Types of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Single Family Detached 685 $58,608,048.23 75.29%
2-4 Family Property 55 10,437,133.98 13.41
PUD (1) 20 1,874,367.68 2.41
Condominium 21 1,727,356.98 2.22
Townhouse 49 1,670,750.91 2.15
Two Family 15 1,231,397.94 1.58
Manufactured Home 19 945,668.85 1.21
Four Family 6 892,400.83 1.15
Three Family 5 402,638.11 0.52
High Rise Condo 1 51,728.34 0.07
------------------- -------------------------- -----------------------------------
Total 876 $77,841,491.85 100.00%
=================== ========================== ===================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Occupancy Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Primary 800 $72,818,741.71 93.55%
Investment 70 4,482,303.88 5.76
Second Home 6 540,446.26 0.69
------------------- -------------------------- ---------------------------------
Total 876 $77,841,491.85 100.00%
=================== ========================== =================================
</TABLE>
- -----------------------
(1) Based on a representation made by the borrower at the time of origination.
S-31
<PAGE>
Purpose of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Purchase 366 $37,547,342.04 48.24%
Equity Refinance 389 29,328,763.05 37.68
Rate/Term Refinance 117 10,580,914.31 13.59
Debt Consolidation 3 262,639.88 0.34
Construction 1 121,832.57 0.16
=================== ========================== =================================
Total 876 $77,841,491.85 100.00%
=================== ========================== =================================
</TABLE>
Current Loan Rates of the Sub-group 1B Mortgage Loans (1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Current Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ------------------------------------ ------------------- -------------------------- ---------------------------------
<S> <C> <C> <C>
5.75 - 6.00 2 $321,448.32 0.41%
6.01 - 6.50 3 297,302.46 0.38
6.51 - 7.00 16 1,993,933.96 2.56
7.01 - 7.50 14 1,482,579.93 1.90
7.51 - 8.00 39 3,322,918.84 4.27
8.01 - 8.50 84 8,917,098.46 11.46
8.51 - 9.00 139 17,575,203.51 22.58
9.01 - 9.50 104 13,221,167.29 16.98
9.51 - 10.00 145 11,055,918.03 14.20
10.01 - 10.50 52 3,839,379.43 4.93
10.51 - 11.00 69 5,002,042.41 6.43
11.01 - 11.50 45 3,041,776.62 3.91
11.51 - 12.00 39 2,315,463.91 2.97
12.01 - 12.50 32 1,522,577.62 1.96
12.51 - 13.00 21 1,353,810.00 1.74
13.01 - 13.50 12 485,537.45 0.62
13.51 - 14.00 23 867,352.17 1.11
14.01 - 14.50 11 494,434.98 0.64
14.51 - 15.00 17 483,610.05 0.62
15.01 - 15.50 4 150,766.55 0.19
15.51 - 16.00 3 59,854.95 0.08
20.51 - 21.00 2 37,314.91 0.05
================= ========================= ====================================
Total 876 $77,841,491.85 100.00%
- --------------------------------------- ================= ========================= ====================================
</TABLE>
(1) The weighted average Loan Rate of the Sub-group 1B Mortgage Loans as of the
Cut-off Date was approximately 9.577% per annum.
S-32
<PAGE>
Geographic Distribution of the Sub-group 1B Mortgaged Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Sub-group Outstanding as of the
Location Mortgage Loans the Cut-off Date Cut-off Date
- ---------------------------- ------------------------- --------------------------- -----------------------------------
<S> <C> <C> <C>
Alabama 4 $104,666.37 0.13%
Alaska 1 38,260.27 0.05
Arizona 18 1,040,926.53 1.34
Arkansas 16 678,678.59 0.87
California 108 12,206,983.37 15.68
Colorado 15 1,233,019.25 1.58
Connecticut 7 710,404.77 0.91
Delaware 4 414,482.50 0.53
Florida 99 6,974,998.79 8.96
Georgia 19 1,368,895.66 1.76
Hawaii 4 372,727.80 0.48
Idaho 2 167,156.15 0.21
Illinois 30 2,331,363.25 3.00
Indiana 12 832,591.91 1.07
Iowa 6 467,901.06 0.60
Kansas 2 64,241.37 0.08
Kentucky 5 206,118.12 0.26
Louisiana 8 429,032.87 0.55
Maine 1 97,548.97 0.13
Maryland 13 1,082,414.88 1.39
Massachusetts 10 1,012,820.15 1.30
Michigan 20 1,472,202.06 1.89
Minnesota 11 1,044,693.94 1.34
Mississippi 5 202,106.97 0.26
Missouri 14 637,068.32 0.82
Montana 1 61,090.32 0.08
Nebraska 2 79,877.15 0.10
Nevada 10 883,382.73 1.13
New Hampshire 1 90,703.45 0.12
New Jersey 29 3,419,267.87 4.39
New Mexico 5 236,522.78 0.30
New York 114 19,667,518.07 25.27
North Carolina 44 2,906,165.80 3.73
Ohio 34 2,353,782.19 3.02
Oklahoma 14 573,920.87 0.74
Oregon 8 467,796.20 0.60
Pennsylvania 20 1,113,445.49 1.43
Rhode Island 2 133,495.78 0.17
South Carolina 11 719,298.07 0.92
South Dakota 3 158,880.09 0.20
Tennessee 18 1,022,753.13 1.31
Texas 67 3,604,565.88 4.63
Utah 12 1,177,808.74 1.51
Virginia 19 1,450,536.16 1.86
Washington 20 2,009,762.51 2.58
Wisconsin 8 519,614.65 0.67
------------------------- --------------------------- ----------------------------------
Total 876 $77,841,491.85 100.00%
========================= =========================== ==================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of the Sub-group 1B Mortgage
Loans, by Sub-group 1B Mortgage Loan Balance as of the Cut-off Date, was
approximately 1.60% in the 11372 ZIP Code.
S-33
<PAGE>
Documentation Levels of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Documentation Level Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Alternate Documentation 109 $6,276,816.00 8.06%
Full Documentation 448 40,213,834.32 51.66
Limited Documentation 162 21,282,983.28 27.34
No Documentation 130 8,190,835.40 10.52
Stated Documentation 27 1,877,022.85 2.41
=================== ========================== ================================
Total 876 $77,841,491.85 100.00%
=================== ========================== ================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Combined Loan-to-Value of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Combined Loan-to Value (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0.98 - 10.00 4 $227,198.41 0.29%
10.01 - 20.00 6 123,031.12 0.16
20.01 - 30.00 16 469,744.47 0.60
30.01 - 40.00 20 677,818.08 0.87
40.01 - 50.00 27 1,467,682.17 1.89
50.01 - 60.00 51 3,229,035.06 4.15
60.01 - 70.00 84 5,456,123.23 7.01
70.01 - 80.00 192 15,884,723.40 20.41
80.01 - 90.00 242 22,031,673.22 28.30
90.01 - 100.00 224 27,823,128.09 35.74
100.01 - 110.00 9 439,602.39 0.56
110.01 - 111.11 1 11,732.21 0.02
------------------- ------------------------ ----------------------------------
Total 876 $77,841,491.85 100.00%
=================== ======================== ==================================
</TABLE>
Status of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
30 days past due 54 $4,887,067.28 6.28%
60 days past due 30 2,131,654.71 2.74
Current 779 69,746,912.05 89.60
Reperforming 13 1,075,857.81 1.38
=================== ========================== =================================
Total 876 $77,841,491.85 100.00%
=================== ========================== =================================
</TABLE>
S-34
<PAGE>
Sub-group 2A Mortgage Loans Statistics
Sub-group 2A consists of 50 fixed-rate Mortgage Loans. The Sub-group 2A
Loan Balance as of the Cut-off Date is equal to $ 16,154,447.87 and the
Arrearage is equal to approximately $94,485. The Sub-group 2A Mortgage Loans
have original terms to maturity ranging from 180 month to 360 months. The
following statistical information, unless otherwise specified, is based upon the
Sub-group 2A Loan Balance as of the Cut-off Date.
The Sub-group 2A Mortgage Loans are secured by Mortgages creating first
or second liens on the related Mortgaged Properties. Approximately 51.03% of the
Sub-group 2A Mortgage Loans had a Combined Loan-to-Value Ratio at origination in
excess of 80%. There can be no assurance that the Combined Loan-to-Value Ratio
of any Sub-group 2A Mortgage Loan determined at any time after origination is
less than or equal to its original Combined Loan-to-Value Ratio. Except for
3.35% of the Sub-group 2A Mortgage Loans, all of the Sub-group 2A Mortgage Loans
have scheduled Monthly Payments due on the first day of the month. None of the
Sub-group 2A Mortgage Loans are secured by second liens on the related Mortgaged
Properties.
Approximately 94.41% of the Sub-group 2A Mortgage Loans are Performing
Mortgage Loans. Approximately 5.59% of the Sub-group 2A Mortgage Loans are
Sub-Performing Mortgage Loans. Of the Mortgage Loans in Sub-group 2A,
approximately 2.45% are 30-59 days past due and approximately 3.14% are 60 or
more days past due.
Approximately 31.09% of the Sub-group 2A Mortgage Loans provide for
payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-group 2A Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made within six months, one year, two years, three years,
four years or five years from the date of origination of such Sub-group 2A
Mortgage Loan. The amount of the prepayment charge is provided in the related
Mortgage Note and is generally equal to 5% of the amount prepaid.
6.57% of the Sub-group 2A are Mortgage Loans that are Balloon Loans.
Each Sub-group 2A Mortgage Loan accrues interest at a Loan Rate of not
less than 6.75% per annum and not more than 11.59% per annum and as of the
Cut-off Date the weighted average Loan Rate of the Sub-group 2A Mortgage Loans
was approximately 8.803% per annum.
The weighted average remaining term to maturity of the Sub-group 2A
Mortgage Loans will be approximately 337 months as of the Cut-off Date. None of
the Sub-group 2A Mortgage Loans had a first Due Date prior to November 1, 1993
or after September 1, 1999 or will have a remaining term to maturity of less
than 164 months or greater than 360 months as of the Cut-off Date. The month of
the latest maturity date of any Sub-group 2A Mortgage Loan is August 2029.
The average Principal Balance of the Sub-group 2A Mortgage Loans at
origination was approximately $324,317. The average Cut-off Date Principal
Balance of the Sub-group 2A Mortgage Loans was approximately $323,089.
No Sub-group 2A Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $577,663 or less than approximately $241,131. The
Sub-group 2A Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
S-35
<PAGE>
Cut-off Date Principal Balances of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
241,131 - 250,000 4 $984,892.86 6.10%
250,001 - 300,000 21 5,783,012.33 35.80
300,001 - 350,000 12 3,826,586.72 23.69
350,001 - 400,000 6 2,285,487.92 14.15
400,001 450,000 4 1,726,682.01 10.69
450,001 - 500,000 2 970,123.41 6.01
550,001 - 577,663 1 577,662.62 3.58
=================== ========================== ================================
Total 50 $16,154,447.87 100.00%
=================== ========================== ================================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Sub-group 2A Mortgage
Loans was approximately $323,089.
Original Terms to Maturity of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Original Term (months) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
121 - 180 4 $1,090,290.64 6.75%
181 - 240 1 431,035.27 2.67
241 - 300 1 491,030.18 3.04
301 - 360 44 14,142,091.78 87.54
----------------- -------------------------- ---------------------------------
Total 50 $16,154,447.87 100.00%
================= ========================== =================================
</TABLE>
- --------------------
(1) The weighted average original term of the Sub-group 2A Mortgage Loans was
approximately 342 months.
Property Types of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Single Family Detached 42 $13,471,280.63 83.39%
PUD (1) 5 1,678,805.24 10.39
2-4 Family Property 3 1,004,362.00 6.22
------------------- -------------------------- ---------------------------------
Total 50 $16,154,447.87 100.00%
=================== ========================== =================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
S-36
<PAGE>
Occupancy Status of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Occupancy Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Primary 50 $16,154,447.87 100.00%
------------------- -------------------------- --------------------------------
Total 50 $16,154,447.87 100.00%
=================== ========================== ================================
</TABLE>
- ----------------------------------------
(1) Based on a representation made by the borrower at the time of origination.
Purpose of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Purchase 26 $7,681,152.55 47.55%
Equity Refinance 21 7,433,302.75 46.01
Rate/Term Refinance 3 1,039,992.57 6.44
=================== ========================== =================================
Total 50 $16,154,447.87 100.00%
=================== ========================== =================================
</TABLE>
Current Loan Rates of the Sub-group 2A Mortgage Loans (1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Combined Loan-to Value (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
6.75 - 7.00 3 $849,369.64 5.26%
7.01 - 7.50 2 553,366.92 3.43
7.51 - 8.00 7 2,415,764.99 14.95
8.01 - 8.50 9 3,012,450.19 18.65
8.51 - 9.00 11 3,371,448.86 20.87
9.01 - 9.50 7 2,255,237.89 13.96
9.51 - 10.00 8 2,794,810.20 17.30
10.01 - 10.50 1 323,024.20 2.00
10.51 - 11.00 1 331,019.60 2.05
11.51 - 11.59 1 247,955.38 1.53
================== ======================== =================================
Total 50 $16,154,447.87 100.00%
- ---------------------------------------- ================== ======================== =================================
</TABLE>
(1) The weighted average Loan Rate of the Sub-group 2A Mortgage Loans as of the
Cut-off Date was approximately 8.803% per annum.
S-37
<PAGE>
Combined Loan-to-Value of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Combined Loan-to Value (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
56.13 - 60.00 2 $817,668.36 5.06%
60.01 - 70.00 5 2,220,591.47 13.75
70.01 - 80.00 15 4,872,174.20 30.16
80.01 - 90.00 14 4,300,456.69 26.62
90.01 - 97.00 14 3,943,557.15 24.41
------------------- ------------------------ ---------------------------------
Total 50 $16,154,447.87 100.00%
=================== ======================== =================================
</TABLE>
Geographic Distribution of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Sub-group Outstanding as of the
Location Mortgage Loans the Cut-off Date Cut-off Date
- ---------------------------- ------------------------- --------------------------- -----------------------------------
<S> <C> <C> <C>
California 19 $6,709,479.51 41.53%
Colorado 1 289,896.11 1.79
Florida 1 431,035.27 2.67
Hawaii 2 582,954.56 3.61
Illinois 1 323,024.20 2.00
Michigan 2 533,135.38 3.30
Nevada 1 310,000.00 1.92
New Jersey 1 258,892.10 1.60
New York 16 4,823,737.61 29.86
Texas 1 396,475.96 2.45
Utah 2 578,516.94 3.58
Washington 3 917,300.23 5.68
------------------------- ----------------------------- -----------------------------------
Total 50 $16,154,447.87 100.00%
========================= ============================= ===================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of the Sub-group 2A Mortgage
Loans, by Sub-group 2A Mortgage Loan Balance as of the Cut-off Date, was
approximately 3.82% in the 11003 ZIP Code.
S-38
<PAGE>
Documentation Levels of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Documentation Level Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Alternate Documentation 4 $1,125,332.82 6.97%
Full Documentation 27 8,793,372.46 54.43
Limited Documentation 13 4,188,876.76 25.93
No Documentation 5 1,650,389.87 10.22
Stated Documentation 1 396,475.96 2.45
=================== ========================= ================================
Total 50 $16,154,447.87 100.00%
=================== ========================= ================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Status of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
30 days past due 1 $396,475.96 2.45%
60 days past due 2 506,847.48 3.14
Current 47 15,251,124.43 94.41
=================== ========================== =================================
Total 50 $16,154,447.87 100.00%
=================== ========================== =================================
</TABLE>
Sub-group 2B Mortgage Loans Statistics
Sub-group 2B consists of 349 adjustable-rate Mortgage Loans. The
Sub-group 2B Loan Balance as of the Cut-off Date is equal to $36,720,604.38 and
the Arrearage is equal to approximately $667,985. The Sub-group 2B Mortgage
Loans have original terms to maturity ranging from 180 months to 372 months. The
following statistical information, unless otherwise specified, is based upon the
Sub-group 2B Loan Balance as of the Cut-off Date.
The Sub-group 2B Mortgage Loans are secured by Mortgages creating first
or second liens on the related Mortgaged Properties. Approximately 46.74% of the
Sub-group 2B Mortgage Loans had a Loan-to-Value Ratio at origination in excess
of 80%. There can be no assurance that the Loan-to-Value Ratio of any Sub-group
2B Mortgage Loan determined at any time after origination is less than or equal
to its original Loan-to-Value Ratio. Except for 2.65% of the Sub-group 2B
Mortgage Loans, all of the Sub-group 2B Mortgage Loans have Due Dates on the
first day of the month.
Approximately 10.62% of the Sub-group 2B Mortgage Loans are FHA
Mortgage Loans. Approximately 0.25% of the Sub-group 2B Mortgage Loans are VA
Mortgage Loans. See "--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 49.60% of the Sub-group 2B Mortgage Loans are Performing
Mortgage Loans. Approximately 44.11% of the Sub-group 2B Mortgage Loans are
Sub-Performing Mortgage Loans. Of the Mortgage Loans in Sub-group 2B,
approximately 26.60% are 30-59 days past due and approximately 17.51% are 60 or
more days past due. Approximately 6.30% of the Sub-group 2B Mortgage Loans are
Re-Performing Mortgage Loans including 0.52% (of the Sub-group 2B Loan Balance)
that are Forbearance Plan Mortgage Loans and 3.66% (of the Sub-group 2B Loan
Balance) that are Bankruptcy Plan Mortgage Loans.
S-39
<PAGE>
Approximately 61.01% of the Sub-group 2B Mortgage Loans provide for
payment by the Mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-group 2B Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made within six months, one year, two years, three years,
four years or five years from the date of origination of such Sub-group 2B
Mortgage Loan. The amount of the prepayment charge is provided in the related
Mortgage Note and is generally equal to 1% of the amount prepaid in excess of
20% of the then outstanding Principal Balance of the related Mortgage Loan in
any 12 month period.
The weighted average remaining term to maturity of the Sub-group 2B
Mortgage Loans will be approximately 341 months as of the Cut-off Date. None of
the Sub-group 2B Mortgage Loans had a first Due Date prior to August 1, 1982 or
after May 1, 1999 or will have a remaining term to maturity of less than 35
months or greater than 356 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 2B Mortgage Loan is April 2029.
The average Principal Balance of the Sub-group 2B Mortgage Loans at
origination was approximately $106,675. The average Cut-off Date Principal
Balance of the Sub-group 2B Mortgage Loans was approximately $105,217.
A substantial majority of the Sub-group 2B Mortgage Loans provide for
semi-annual adjustment to the Loan Rate thereon and for corresponding
adjustments to the Monthly Payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date"). On
each Adjustment Date for each Sub-group 2B Mortgage Loan, the Loan Rate thereon
will be adjusted to equal the sum, rounded to the nearest multiple of 0.125%, of
the index applicable to determining the Loan Rate on each Mortgage Loan (the
"Index") and a fixed percentage amount (the "Gross Margin"). The Loan Rate on
each such Sub-group 2B Mortgage Loan will not increase or decrease by more than
2.611% per annum on the first related Adjustment Date (the "Initial Periodic
Rate Cap") and 1.430% on any Adjustment Date thereafter (the "Periodic Rate
Cap"); provided, however, 2.60% of the Sub-group 2B Mortgage Loans do not have
an Initial Periodic Rate Cap or a Periodic Rate Cap. The Sub-group 2B Mortgage
Loans have a weighted average Initial Periodic Rate Cap of approximately 2.611%
per annum and a weighted average Periodic Rate Cap of approximately 1.430% per
annum thereafter (excluding those loans without periodic caps). Each Loan Rate
on each such Sub-group 2B Mortgage Loan will not exceed a specified maximum Loan
Rate over the life of such Sub-group 2B Mortgage Loan (the "Maximum Loan Rate")
or be less than a specified minimum Loan Rate over the life of such Sub-group 2B
Mortgage Loan (the "Minimum Loan Rate"). Effective with the first Monthly
Payment due on each Sub-group 2B Mortgage Loan after each related Adjustment
Date, the Monthly Payment amount will be adjusted to an amount that will
amortize fully the outstanding Principal Balance of the related Mortgage Loan
over its remaining term, and pay interest at the Loan Rate as so adjusted. Due
to the application of the Periodic Rate Caps and the Maximum Loan Rates, the
Loan Rate on each such Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and the related Gross Margin,
rounded as described herein. See "--The Index" herein. None of the Sub-group 2B
Mortgage Loans permits the related mortgagor to convert the adjustable Loan Rate
thereon to a fixed Loan Rate.
The Sub-group 2B Mortgage Loans had Loan Rates as of the Cut-off Date
of not less than 6.00% per annum and not more than 16.75% per annum and the
weighted average Loan Rate was approximately 10.339% per annum. As of the
Cut-off Date, the Sub-group 2B Mortgage Loans had Gross Margins ranging from
2.00% to 11.00%, Minimum Loan Rates ranging from 0.50% per annum to 16.75% per
annum and Maximum Loan Rates ranging from 10.50% per annum to 23.25% per annum
(except for 0.05% Sub-group 2B Mortgage Loans that do not have Maximum Loan
Rates). As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.534%, the weighted average Minimum Loan Rate was approximately
9.612% per annum (exclusive of the Mortgage Loans that do not have a Minimum
Loan Rate) and the weighted average Maximum Loan Rate was approximately 16.493%
per annum (exclusive of the Mortgage Loans that do not have a Maximum Loan
Rate). The latest next Adjustment Date following the Cut-off Date on any
Sub-group 2B Mortgage Loan occurs in November 2005 and the weighted average
number of months to the next Adjustment Date following the Cut-off Date for all
of the Sub-group 2B Mortgage Loans is 14 months.
No Sub-group 2B Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $348,134 or less than approximately $18,570. The
Sub-group 2B Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
S-40
<PAGE>
Cut-off Date Principal Balances of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
18,570 - 50,000 61 $2,375,593.80 6.47%
50,001 - 100,000 142 10,483,463.81 28.55
100,001 - 150,000 89 10,982,132.15 29.91
150,001 - 200,000 27 4,702,218.13 12.81
200,001 - 250,000 9 1,960,306.87 5.34
250,001 - 300,000 13 3,581,999.18 9.75
300,001 - 348,134 8 2,634,890.44 7.18
=================== ======================== =================================
Total 349 $36,720,604.38 100.00%
=================== ======================== =================================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Sub-group 2B Mortgage
Loans was approximately $105,217.
Original Terms to Maturity of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Original Term (months) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
121 - 180 1 $33,058.23 0.09%
181 - 240 5 263,035.41 0.72
301 - 360 342 36,293,472.31 98.84
361 - 372 1 131,038.43 0.36
------------------- ------------------------ ---------------------------------
Total 349 $36,720,604.38 100.00%
=================== ======================== =================================
</TABLE>
- --------------------
(1) The weighted average original term of the Sub-group 2B Mortgage Loans was
approximately 359 months.
S-41
<PAGE>
Property Types of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Single Family Detached 294 $31,414,512.54 85.55%
PUD (1) 19 1,908,488.14 5.20
Condominium 15 1,507,544.37 4.11
2-4 Family Property 10 1,036,643.99 2.82
Two Family 5 422,863.18 1.15
Townhouse 5 327,478.26 0.89
Manufactured Home 1 103,073.90 0.28
=================== ========================= =================================
Total 349 $36,720,604.38 100.00%
=================== ========================= =================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Occupancy Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Primary 330 $35,138,001.97 95.69%
Investment 17 1,402,551.22 3.82
Second Home 2 180,051.19 0.49
------------------- -------------------------- ---------------------------------
Total 349 $36,720,604.38 100.00%
=================== ========================== =================================
</TABLE>
- --------------------
(1) Based on a representation made by the borrower at the time of origination.
Purpose of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Equity Refinance 135 $14,109,777.10 38.42%
Purchase 138 13,993,792.94 38.11
Rate/Term Refinance 76 8,617,034.34 23.47
=================== ========================== =================================
Total 349 $36,720,604.38 100.00%
=================== ========================== =================================
</TABLE>
S-42
<PAGE>
Current Loan Rates of the Sub-group 2B Mortgage Loans (1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Current Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
5.51 - 6.00 1 $153,006.04 0.42%
6.01 - 6.50 2 152,281.01 0.41
6.51 - 7.00 9 1,008,511.05 2.75
7.01 - 7.50 18 1,690,247.29 4.60
7.51 - 8.00 27 2,848,868.86 7.76
8.01 - 8.50 12 1,303,019.44 3.55
8.51 - 9.00 16 2,686,630.52 7.32
9.01 - 9.50 22 2,523,281.37 6.87
9.51 - 10.00 52 5,377,689.98 14.64
10.01 - 10.50 25 2,818,176.50 7.67
10.51 - 11.00 35 3,593,003.54 9.78
11.01 - 11.50 22 3,030,757.07 8.25
11.51 - 12.00 30 2,594,066.56 7.06
12.01 - 12.50 15 1,739,373.66 4.74
12.51 - 13.00 11 847,662.24 2.31
13.01 - 13.50 18 1,822,252.80 4.96
13.51 - 14.00 14 1,299,459.91 3.54
14.01 - 14.50 4 267,919.50 0.73
14.51 - 15.00 6 338,095.91 0.92
15.01 - 15.50 6 406,081.47 1.11
15.51 - 16.00 3 122,353.45 0.33
16.51 - 16.75 1 97,866.21 0.27
=================== ======================== ==================================
Total 349 $36,720,604.38 100.00%
=================== ======================== ==================================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Sub-group 2B Mortgage Loans as of the
Cut-off Date was approximately 10.339% per annum.
S-43
<PAGE>
Original Loan-to-Value Ratios of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Original Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0.95 - 10.00 2 $261,008.81 0.71%
10.01 - 20.00 1 49,712.57 0.14
20.01 - 30.00 1 29,822.45 0.08
30.01 - 40.00 2 68,111.38 0.19
40.01 - 50.00 8 379,305.74 1.03
50.01 - 60.00 15 1,188,188.75 3.24
60.01 - 70.00 57 4,919,875.71 13.40
70.01 - 80.00 107 12,663,163.52 34.49
80.01 - 90.00 107 12,739,430.84 34.69
90.01 - 100.00 34 3,460,259.83 9.42
100.01 - 110.00 12 779,143.56 2.12
110.01 - 120.00 2 112,785.50 0.31
120.01 - 124.35 1 69,795.72 0.19
=================== ======================== ===================================
Total 349 $36,720,604.38 100.00%
=================== ======================== ===================================
</TABLE>
- --------------------------------------------------------------------------------
(1) The weighted average original Loan-to-Value Ratio of the Sub-group 2B
Mortgage Loans as of the Cut-off Date was approximately 80.65%.
S-44
<PAGE>
Geographic Distribution of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance
Number of Outstanding as of of Sub-group Outstanding as of the
Location Mortgage Loans the Cut-off Date Cut-off Date
- ---------------------------- ------------------------- --------------------------- -----------------------------------
<S> <C> <C> <C>
Alaska 4 $431,423.31 1.17%
Arizona 5 425,506.27 1.16
California 47 7,634,615.25 20.79
Colorado 9 1,289,967.98 3.51
Connecticut 3 270,917.89 0.74
Delaware 2 159,804.73 0.44
District Of Columbia 2 99,849.00 0.27
Florida 24 1,997,948.56 5.44
Georgia 12 1,036,303.70 2.82
Hawaii 4 547,664.57 1.49
Idaho 2 122,696.97 0.33
Illinois 13 1,035,057.55 2.82
Indiana 10 778,341.74 2.12
Iowa 3 266,157.00 0.72
Louisiana 2 273,754.27 0.75
Maryland 14 1,429,390.98 3.89
Massachusetts 15 1,748,043.18 4.76
Michigan 13 926,530.99 2.52
Minnesota 2 436,275.64 1.19
Missouri 5 337,239.88 0.92
Montana 2 103,434.70 0.28
Nevada 5 673,694.92 1.83
New Hampshire 1 71,817.64 0.20
New Jersey 29 3,805,180.57 10.36
New Mexico 3 316,205.76 0.86
New York 20 2,259,913.46 6.15
North Carolina 4 331,666.91 0.90
Ohio 11 884,814.03 2.41
Oklahoma 5 285,732.26 0.78
Oregon 3 421,541.47 1.15
Pennsylvania 16 884,189.82 2.41
Rhode Island 2 173,494.87 0.47
South Carolina 1 59,767.48 0.16
Tennessee 2 182,554.42 0.50
Texas 15 995,237.95 2.71
Utah 17 1,778,054.78 4.84
Virginia 8 1,069,852.78 2.91
Washington 9 832,573.54 2.27
Wisconsin 4 266,123.34 0.72
Wyoming 1 77,264.22 0.21
------------------------- --------------------------- ----------------------------------
Total 349 $36,720,604.38 100.00%
========================= =========================== ==================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Sub-group 2B Mortgage
Loans, by Sub-group 2B Loan Balance as of the Cut-off Date, was approximately
0.95% in the 95638 ZIP Code.
S-45
<PAGE>
Documentation Levels of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Documentation Level Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
Alternate Documentation 169 $17,219,459.50 46.89%
Full Documentation 99 10,043,104.18 27.35
Limited Documentation 63 6,937,085.74 18.89
No Documentation 18 2,520,954.96 6.87
=================== ========================== =================================
Total 349 $36,720,604.38 100.00%
=================== ========================== =================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Status of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Status Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- -------------------------- --------------------------------
<S> <C> <C> <C>
30 days past due 92 $9,765,925.83 26.60%
60 days past due 64 6,430,720.23 17.51
Current 173 18,212,129.44 49.60
Reperforming 20 2,311,828.88 6.30
=================== ========================== ================================
Total 349 $36,720,604.38 100.00%
=================== ========================== ================================
</TABLE>
S-46
<PAGE>
Maximum Loan Rates of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Maximum Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0.00 - 0.50 1 $18,569.93 0.05%
10.01 - 10.50 2 184,964.57 0.50
10.51 - 11.00 8 747,670.59 2.04
11.01 - 11.50 19 1,621,207.37 4.41
11.51 - 12.00 12 1,169,445.19 3.18
12.01 - 12.50 8 833,249.01 2.27
12.51 - 13.00 1 87,540.17 0.24
13.01 - 13.50 7 790,168.03 2.15
13.51 - 14.00 2 292,169.32 0.80
14.01 - 14.50 7 1,101,942.09 3.00
14.51 - 15.00 8 1,122,288.80 3.06
15.01 - 15.50 15 2,136,653.49 5.82
15.51 - 16.00 19 2,382,903.79 6.49
16.01 - 16.50 46 5,288,737.63 14.40
16.51 - 17.00 27 2,729,445.50 7.43
17.01 - 17.50 36 4,131,960.14 11.25
17.51 - 18.00 18 2,278,378.79 6.20
18.01 - 18.50 36 3,233,047.70 8.80
18.51 - 19.00 16 1,576,161.03 4.29
19.01 - 19.50 10 888,023.31 2.42
19.51 - 20.00 18 1,569,313.10 4.27
20.01 - 20.50 12 963,839.99 2.62
20.51 - 21.00 6 703,231.73 1.92
21.01 - 21.50 6 308,271.22 0.84
21.51 - 22.00 5 341,202.23 0.93
22.01 - 22.50 2 79,028.15 0.22
22.51 - 23.00 1 43,325.30 0.12
23.01 - 23.25 1 97,866.21 0.27
-------------------- ------------------------- -------------------------------
Total 349 $36,720,604.38 100.00%
==================== ========================= ===============================
</TABLE>
(1) The weighted average Maximum Loan Rate of the Sub-group 2B Mortgage Loans
as of the Cut-off Date was approximately 16.493%.
S-47
<PAGE>
Minimum Loan Rates of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Sub-group Outstanding as of
Minimum Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
0.00 - 0.50 22 $2,310,757.61 6.29%
0.51 - 1.00 6 531,539.29 1.45
1.01 - 1.50 16 1,351,428.83 3.68
1.51 - 2.00 8 664,995.91 1.81
2.01 - 2.50 7 735,436.05 2.00
2.51 - 3.00 3 451,126.35 1.23
3.01 - 3.50 4 244,203.81 0.67
3.51 - 4.00 1 60,162.01 0.16
4.51 - 5.00 1 135,720.44 0.37
5.51 - 6.00 1 97,812.96 0.27
6.01 - 6.50 1 126,723.06 0.35
7.01 - 7.50 1 232,007.31 0.63
7.51 - 8.00 4 843,742.82 2.30
8.01 - 8.50 6 800,451.12 2.18
8.51 - 9.00 17 2,571,665.37 7.00
9.01 - 9.50 22 2,561,672.89 6.98
9.51 - 10.00 52 5,940,449.03 16.18
10.01 - 10.50 22 2,512,087.55 6.84
10.51 - 11.00 30 2,897,488.89 7.89
11.01 - 11.50 22 2,864,122.38 7.80
11.51 - 12.00 32 2,833,339.40 7.72
12.01 - 12.50 12 1,107,919.99 3.02
12.51 - 13.00 10 815,401.24 2.22
13.01 - 13.50 17 1,632,818.76 4.45
13.51 - 14.00 14 1,299,459.91 3.54
14.01 - 14.50 4 271,703.59 0.74
14.51 - 15.00 6 308,271.22 0.84
15.01 - 15.50 5 341,202.23 0.93
15.51 - 16.00 2 79,028.15 0.22
16.51 - 16.75 1 97,866.21 0.27
=================== ======================== ================================
Total 349 $36,720,604.38 100.00%
=================== ======================== ================================
</TABLE>
(1) The weighted average Minimum Loan Rate of the Sub-group 2B Mortgage Loans
as of the Cut-off Date was approximately 9.612%.
S-48
<PAGE>
Gross Margins of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of
Gross Margins (%) Loans the Cut-off Date the Cut-off Date
- ---------------------------------------- ------------------- ------------------------ --------------------------------
<S> <C> <C> <C>
1.51 - 2.00 6 $485,336.16 1.32%
2.01 - 2.50 8 769,662.59 2.10
2.51 - 3.00 46 4,436,621.58 12.08
3.01 - 3.50 3 326,738.92 0.89
3.51 - 4.00 1 119,430.24 0.33
4.01 - 4.50 2 481,217.43 1.31
4.51 - 5.00 5 769,161.77 2.09
5.01 - 5.50 9 1,210,733.21 3.30
5.51 - 6.00 28 4,548,729.97 12.39
6.01 - 6.50 39 3,639,274.77 9.91
6.51 - 7.00 30 3,188,361.59 8.68
7.01 - 7.50 37 4,525,940.15 12.33
7.51 - 8.00 28 2,641,454.86 7.19
8.01 - 8.50 34 2,922,216.99 7.96
8.51 - 9.00 24 2,707,497.54 7.37
9.01 - 9.50 26 2,115,342.11 5.76
9.51 - 10.00 12 1,064,621.86 2.90
10.01 - 10.50 6 413,059.74 1.12
10.51 - 11.00 5 355,202.90 0.97
=================== ======================== ==================================
Total 349 $36,720,604.38 100.00%
=================== ======================== ==================================
</TABLE>
(1) The weighted average Gross Margin of the Sub-group 2B Mortgage Loans as of
the Cut-off Date was approximately 6.534%.
S-49
<PAGE>
Next Adjustment Date for the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate Principal
Number of Principal Balance Balance of Sub-group
Mortgage Outstanding as of Outstanding as of the Cut-
Next Adjustment Date Loans the Cut-off Date off Date
- ----------------------------------- -------------------- ----------------------- ------------------------------
<S> <C> <C> <C>
09/01/1999 10 $929,371.00 2.53%
10/01/1999 12 1,255,177.47 3.42
11/01/1999 10 816,315.98 2.22
12/01/1999 1 35,631.59 0.10
01/01/2000 13 1,081,366.28 2.94
02/01/2000 13 1,801,324.10 4.91
03/01/2000 1 119,430.24 0.33
04/01/2000 9 741,981.14 2.02
05/01/2000 6 613,564.83 1.67
06/01/2000 3 397,072.28 1.08
07/01/2000 50 4,839,960.43 13.18
07/06/2000 1 126,788.82 0.35
08/01/2000 82 8,649,499.46 23.55
09/01/2000 50 4,212,270.80 11.47
10/01/2000 9 1,199,654.70 3.27
10/02/2000 1 105,024.63 0.29
11/01/2000 11 1,367,067.85 3.72
12/01/2000 2 245,726.87 0.67
12/20/2000 1 35,053.15 0.10
01/01/2001 1 275,350.53 0.75
02/01/2001 3 432,102.80 1.18
03/01/2001 3 539,898.48 1.47
04/01/2001 1 137,655.18 0.37
05/01/2001 1 113,940.72 0.31
07/01/2001 11 1,165,917.92 3.18
08/01/2001 15 1,762,162.11 4.80
09/01/2001 6 501,085.97 1.36
10/01/2001 2 138,602.03 0.38
10/20/2001 1 125,575.06 0.34
11/01/2001 2 396,880.38 1.08
12/01/2001 6 722,644.73 1.97
01/01/2002 2 358,742.85 0.98
12/01/2002 1 92,006.72 0.25
07/01/2003 2 171,221.96 0.47
08/01/2003 1 334,674.97 0.91
09/01/2003 3 347,128.64 0.95
10/01/2003 1 167,055.67 0.45
01/01/2004 1 103,073.90 0.28
11/01/2005 1 262,602.14 0.72
-------------------- ----------------------- ------------------------------
Total 349 $36,720,604.38 100.00%
==================== ======================= ==============================
</TABLE>
S-50
<PAGE>
Indices of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Number of Principal Balance Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of
Index(1) Loans the Cut-off Date the Cut-off Date
--------------------------------- ------------------- ------------------------ ------------------------------------
<S> <C> <C> <C>
6 month LIBOR(1) 285 $30,555,245.72 83.21%
1 Year CMT(1) 59 5,667,102.03 15.44
Other(2) 5 498,256.63 1.36
=================== ======================== ====================================
Total 349 $36,720,604.38 100.00%
=================== ======================== ====================================
</TABLE>
- --------------------
(1) Each of these Indices are described under "--The Index."
(2) Includes two other indices, each of which represents 1.31% or less of the
Sub-group 2B Loan Balance as of the Cut-off Date.
Initial Periodic Rate Caps of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Number of Principal Balance Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of
Initial Periodic Rate Cap (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------- ---------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
0.00 10 $955,295.98 2.60%
0.90 1 262,602.14 0.72
1.00 47 4,248,896.91 11.57
1.50 28 3,221,018.43 8.77
1.95 1 97,812.96 0.27
2.00 7 779,243.76 2.12
3.00 250 26,697,927.68 72.71
4.00 2 103,749.44 0.28
5.00 2 312,607.69 0.85
6.00 1 41,449.39 0.11
---------------- ------------------------ ----------------------------------
================ ======================== ==================================
Total 349 $36,720,604.38 100.00%
================ ======================== ==================================
</TABLE>
- ------------------
(1) Relates solely to initial rate adjustments.
S-51
<PAGE>
Subsequent Periodic Rate Caps of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Number of Principal Balance Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of
Periodic Rate Cap (%) Loans the Cut-off Date the Cut-off Date
- --------------------------------------- ---------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
0.00 1 $18,569.93 0.05%
1.00 85 9,082,792.67 24.73
1.50 245 25,367,257.96 69.08
1.95 1 97,812.96 0.27
2.00 10 1,295,388.57 3.53
3.00 7 858,782.29 2.34
================ ======================== ================================
Total 349 $36,720,604.38 100.00%
======================== =================================
</TABLE>
- ------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
The Index
With respect to approximately 83.21% of the Sub-group 2B Mortgage
Loans, the Index is the average of interbank offered rates for six-month U.S.
dollar deposits in the London market based on quotations of major banks, and
most recently available as of a day specified in the related note as published
by Fannie Mae ("Six Month LIBOR"); with respect to approximately 15.44% of the
Sub-group 2B Mortgage Loans, the Index is the weekly average yield on United
States Treasury securities adjusted to a constant maturity of one year as
published by the Federal Reserve Board in Statistical Release H.15(519) and most
recently available as of a day specified in the related note ("One Year CMT");
and with respect to approximately 1.36% of the Sub-group 2B Mortgage Loans, the
Index is a variety of indices, none of which comprise more than 1.31% of the
Sub-group 2B Mortgage Loans. Listed below are some historical values for the
months indicated of two of the indices.
Six Month LIBOR
<TABLE>
<CAPTION>
Year
------------------------------------------------------------------------------------------------------
Month 1999 1998 1997 1996 1995 1994 1993
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January 5.04% 5.75% 5.71% 5.34% 6.69% 3.39% 3.44%
February 5.17% 5.78% 5.68% 5.29% 6.44% 4.00% 3.33%
March 5.08% 5.80% 5.96% 5.52% 6.44% 4.25% 3.38%
April 5.08% 5.87% 6.08% 5.42% 6.31% 4.63% 3.31%
May 5.19% 5.81% 6.01% 5.64% 6.06% 5.00% 3.44%
June 5.63% 5.87% 5.94% 5.84% 5.88% 5.25% 3.56%
July 5.68% 5.82% 5.83% 5.92% 5.88% 5.33% 3.56%
August 5.69% 5.86% 5.74% 5.94% 5.33% 3.44%
September 5.36% 5.85% 5.75% 5.99% 5.69% 3.38%
October 5.31% 5.80% 5.58% 5.95% 6.00% 3.50%
November 5.28% 6.04% 5.55% 5.74% 6.44% 3.52%
December 5.17% 6.01% 5.62% 5.56% 7.00% 3.50%
</TABLE>
S-52
<PAGE>
<TABLE>
<CAPTION>
One Year CMT
Year
--------------------------------------------------------------------------------------------------------------------
Month 1999 1998 1997 1996 1995 1994 1993
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January 4.51% 5.24% 5.61% 5.09% 7.05% 3.54% 3.50%
February 4.70% 5.31% 5.53% 4.94% 6.70% 3.87% 3.39%
March 4.78% 5.39% 5.80% 5.34% 6.43% 4.32% 3.33%
April 4.69% 5.38% 5.99% 5.54% 6.27% 4.82% 3.24%
May 4.85% 5.44% 5.87% 5.64% 6.00% 5.31% 3.36%
June 5.10% 5.41% 5.69% 5.81% 5.64% 5.27% 3.54%
July 5.36% 5.54% 5.85% 5.59% 5.48% 3.47%
August 5.21% 5.56% 5.67% 5.75% 5.56% 3.44%
September 4.71% 5.52% 5.83% 5.62% 5.76% 3.36%
October 4.12% 5.46% 5.55% 5.59% 6.11% 3.39%
November 4.53% 5.46% 5.42% 5.43% 6.54% 3.58%
December 4.52% 5.53% 5.47% 5.31% 7.14% 3.61%
</TABLE>
If any Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index which is based upon comparable
information.
FHA Mortgage Loans and VA Mortgage Loans
As noted above, all of the Sub-group 1A Mortgage Loans and
approximately 10.87% of the Sub-group 2B Mortgage Loans are subject to either
FHA insurance as described herein (the "FHA Mortgage Loans") or are subject to a
VA guarantee as described herein (the "VA Mortgage Loans"). All FHA Mortgage
Loans and VA Mortgage Loans must conform to HUD or VA origination guidelines, as
the case may be, at the time of origination. The FHA Mortgage Loans will be
insured by the Federal Housing Administration ("FHA") of the United States
Department of Housing and Urban Development ("HUD") as authorized under the
National Housing Act of 1934, as amended (the "National Housing Act"), and the
United States Housing Act of 1937, as amended (the "United States Housing Act").
No FHA Mortgage Loan may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such FHA
Mortgage Loan.
The VA Mortgage Loans will be partially guaranteed by The United States
Department of Veterans Affairs (the "VA") under the Servicemen's Readjustment
Act of 1944, as amended. The Servicemen's Readjustment Act of 1944, as amended,
permits a veteran (or in certain instances the spouse of a veteran) to obtain a
mortgage loan guarantee by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has a current mortgage loan limit of $203,000, requires no down payment
from the purchaser and permits the guarantee of mortgage loans of generally up
to 30 years' duration. However, no VA Mortgage Loan will have an original
principal amount greater than five times the amount of the related guarantee.
Insurance premiums for the FHA Mortgage Loans are collected by the
Servicer and are paid to the FHA. The regulations governing FHA-insured
single-family mortgage insurance programs generally provide that insurance
benefits are payable upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD. With respect to a defaulted FHA
Mortgage Loan, the Servicer may be limited in its ability to initiate
foreclosure proceedings. Historically, pursuant to an assignment program (the
"Assignment Program"), HUD in certain circumstances offered qualified mortgagors
who had defaulted on an FHA insured mortgage loan an opportunity to avoid
foreclosure and retain their homes. Under the Assignment Program, the FHA
serviced FHA-insured mortgage loans that had defaulted and been assigned to HUD
under the Assignment Program. In addition, HUD gave forbearance for a period of
no longer than 36 months to mortgagors who had demonstrated a temporary
inability to make full payments due to circumstances beyond the mortgagor's
control such as a reduction in income or increase in expenses. The Assignment
Program was terminated and replaced with mandatory loss mitigation procedures in
April 1996 whereby servicers of defaulted FHA-insured mortgage loans must choose
from a variety of tools to cure a default prior to filing an FHA insurance
claim.
S-53
<PAGE>
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims for most programs are being paid
in cash and, for the most part, claims have not been paid in debentures since
1965. HUD debentures issued in satisfaction of FHA insurance claims bear
interest at the applicable HUD debenture interest rate.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted
to reimburse the Servicer of that FHA Mortgage Loan for certain costs and
expenses and to deduct certain amounts received or retained by the Servicer
after default. When entitlement to insurance benefits results from foreclosure
(or other acquisition of possession) and conveyance to HUD, the Servicer is
generally compensated for no more than two-thirds of its foreclosure costs and
attorneys' fees (which costs are evaluated based upon Fannie Mae guidelines
(which are state specific)), and is compensated for accrued and unpaid mortgage
interest for a limited period prior to the institution of foreclosure or other
acquisition in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD, and the Servicer is otherwise in material
compliance with FHA regulations. Provided that the Servicer is in material
compliance with FHA regulations, the Servicer will generally be entitled to the
debenture interest which would have been earned, as of the date the cash payment
is received, had the benefits been paid in debentures. Except where unpaid
mortgage interest is recoverable pursuant to an approved special forbearance
plan, such debenture interest is generally payable from a date 60 days after the
mortgagor's first uncorrected failure to perform any obligation or make any
payment due under the mortgage loan, which results in no recovery of interest
accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require the
Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the judgment.
As of the date hereof, the maximum guarantees that may be issued by the
VA under a VA Mortgage Loan are generally (a) as to loans with an original
principal amount of $45,000 or less, 50% of such loan, (b) as to loans with an
original principal amount of greater than $45,000, but not more than $56,250,
$22,500; (c) as to loans with an original principal amount of more than $56,250,
but not more than $144,000, the lesser of $36,000 or 40% of the loan, and (d) as
to loans with an original principal amount of more than $144,000 (for an
owner-occupied, single-family home or condominium unit), the lesser of $50,750
or 25% of the loan. The liability on the guaranty is reduced or increased pro
rata with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable on the guaranty exceed the amount of the original
guaranty. The VA may, at its option and without regard to the guaranty, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
With respect to a defaulted VA Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the property to be foreclosed upon has been abandoned by the
debtor or has been or may be subject to extraordinary waste or if there exist
conditions justifying the appointment of a receiver for the property. Generally,
a claim for the guaranty is submitted after liquidation of the mortgaged
property. Upon default and subsequent termination of a VA-guaranteed loan by a
servicer, the VA makes a determination, using a formula, whether it will reduce
its maximum claim liability by acquiring and reselling the property or by paying
the claim on its guaranty without such acquisition. If the VA determines it will
acquire the property, it will establish a maximum price, known as the specified
amount, which the servicer may bid at the foreclosure sale in order for the
servicer to subsequently convey the property to the VA. If the servicer
purchases the property at the sale for no more than such specified amount, it
may convey the property to the VA in return for the payment of such amount. The
VA also pays, up to the maximum amount of the loan guaranty, the claim for the
difference between the price paid for the property and any balance remaining on
the loan. If, however, the VA determines that acquiring and disposing of the
property would increase rather than reduce the government's loss, it will not
establish a maximum bid price for the holder to bid at the foreclosure sale
(thus, a "no-bid"), but rather will solely pay the guaranty claim up to the
maximum amount of the guaranty, once the loss on the loan has been established.
In the event of a no-bid, the Servicer must foreclose on the defaulted VA
Mortgage Loan and thus a loss may be incurred on such mortgage loan in an amount
equal to the
S-54
<PAGE>
difference between (a) the total indebtedness and (b) the sum of (i) the
guaranteed amount and (ii) the proceeds of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof to the appropriate
date of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation of
the mortgaged property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
THE SELLER
General
Credit-Based Asset Servicing and Securitization LLC is a Delaware
limited liability company with its principal place of business in New York, New
York. The information set forth in the following paragraphs has been provided by
the Seller and neither the Depositor nor any other party makes any
representation as to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage
Guaranty Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc.
("EFSG") and certain members of management of the Seller. Each of MGIC and EFSG
has approximately a 48% interest in the Seller with the remainder owned by
management of the Seller. On August 17, 1999, Moody's Investors Service, Inc.
("Moody's") announced that it had downgraded the senior long-term debt of EFSG
from Aa3 to A2. Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), and Duff & Phelps Credit Rating Co. ("DCR") reaffirmed their ratings of
A+ and AA-, respectively, of the senior long-term debt of EFSG. The insurer
financial strength rating of MGIC is AA+, Aa2 and AA+ by S&P, Moody's and Fitch
IBCA, Inc., respectively. EFSG and MGIC are publicly traded companies which file
such periodic reports with the Securities and Exchange Commission (the
"Commission") as are required by the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder, as
interpreted by the staff of the Commission thereunder.
At June 30, 1999, the Seller had approximately $787 million in assets,
approximately $621 million in liabilities and approximately $166 million in
equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. Substantially all of the mortgage loans owned by the Seller are
serviced by its affiliate, Litton Loan Servicing LP. The Seller does not
originate mortgages. The Seller is a HUD-approved investing mortgagee.
Underwriting Standards
Each Mortgage Loan included in the Trust Fund has satisfied the credit,
appraisal and underwriting guidelines established by the Seller that are
described below. To determine satisfaction of such guidelines, the Seller or a
loan reviewer reviewed the files related to the Mortgage Loans in connection
with the acquisition of the Mortgage Loans by the Seller. These files include
the documentation pursuant to which the mortgage loan was originally
underwritten, as well as the mortgagor's payment history on the mortgage loan.
The Seller's underwriting guidelines when re-underwriting mortgage loans are
intended to evaluate the borrower's credit standing, repayment ability and
willingness to repay debt, as well as the value and adequacy of the mortgaged
property as collateral. In general, to establish the adequacy of the mortgaged
property as collateral, the Seller will obtain a current appraisal, broker's
price opinion, and/or drive-by or desk review of such property, prepared within
six months of the Seller's purchase. A borrower's ability and willingness to
repay debts (including the Mortgage Loan) in a timely fashion must be
demonstrated by the quality, quantity and durability of income history, history
of debt management, history of debt
S-55
<PAGE>
repayment, and net worth accumulation. Accordingly, the Seller also obtains and
reviews a current credit report for the mortgagor.
The Seller purchases mortgage loans that were originated pursuant to
one of the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "Full
Documentation" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was obtained wherein the employer reported
the length of employment with that organization, the mortgagor's salary as of
the mortgage loan's origination, and an indication as to whether it is expected
that the mortgagor will continue such employment after the mortgage loan's
origination. If a mortgagor was self-employed when such mortgagor's loan was
originated, the mortgagor submitted copies of signed tax returns. The originator
was also provided with deposit verification at all financial institutions where
the mortgagor had demand or savings accounts.
In determining the adequacy of the property as collateral at
origination, an independent appraisal was made of each property considered for
financing. The appraiser inspected the property and verified that it was in good
condition and that construction, if new, had been completed at the time of the
loan's origination. Such appraisal was based on the appraiser's judgment of
values, giving appropriate weight to both the then market value of comparable
homes and the cost of replacing the property.
Other Levels of Documentation. Other mortgage loans purchased and
re-underwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "full documentation" programs, including "No
Documentation," "Limited Documentation" and "Alternative Documentation" programs
for certain qualifying mortgage loans. Under a "No Documentation" program, no
verification of a mortgagor's income or assets is undertaken by the originator.
Under a "Limited Documentation" program, certain underwriting documentation
concerning income and employment verification is waived. "Alternative
Documentation" programs allow a mortgagor to provide W-2 forms instead of tax
returns, permits bank statements in lieu of verification of deposits and permits
alternative methods of employment verification. Under "Stated Documentation"
programs, a mortgagor's income is deemed to be that stated on the mortgage
application and is not independently verified by the originator. These are
underwriting programs designed to streamline the underwriting process by
eliminating the requirement for income verification. Depending on the facts and
circumstances of a particular case, the originator of the mortgage loan may have
accepted other mortgage loans based on limited documentation that eliminated the
need for either income verification and/or asset verification. The objective use
of limited documentation is to shift the emphasis of the underwriting process
from the credit standing of the mortgagor to the value and adequacy of the
mortgaged property as collateral.
Owner-Financed Mortgage Loans
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans ("Owner-financed Mortgage Loans"). Owner-financed mortgage loans
are originated by the individual sellers of the related mortgaged property who
generally are inexperienced in matters pertaining to mortgage banking. These
mortgage loans were originated with less stringent standards than the other
mortgage loans typically purchased by the Seller. The borrower under an
owner-financed mortgage loan generally does not complete a mortgage loan
application and the seller of the related property generally does not verify the
income or employment of the related borrower. In connection with the Seller's
acquisition of an owner-financed mortgage loan, the Seller obtained and reviewed
the credit history and payment history of the borrower. In deciding to purchase
owner-financed mortgage loans, the Seller generally places considerable emphasis
on the value of the mortgaged property. The Seller, in connection with its
underwriting of an owner-financed mortgage loan, calculates the loan-to-value
ratio of the mortgage loan at the time of acquisition for underwriting purposes
to determine the mortgagor's equity in the related mortgaged property. A
drive-by appraisal of the market value of each mortgaged property relating to an
owner-financed
S-56
<PAGE>
mortgage loan generally was obtained within 90 days prior to the purchase by the
Seller of such mortgage loan. However, in certain instances, the Seller may have
utilized a previous appraisal if it was completed within one year prior to the
purchase by the Seller, in which case the Seller will generally require the
appraiser to recertify the value in such appraisal. The Seller may have acquired
an owner-financed mortgage loan based upon a statistical valuation provided by
independent data providers of the mortgaged property and subsequently obtained a
drive-by appraisal, generally within three months of acquisition. For all
Owner-Financed Mortgage Loans included in either Loan Group acquired using
statistical valuations, appraisals (which generally are drive-by appraisals)
have been subsequently obtained.
For a discussion of the certain risks related to owner-financed
mortgage loans that a Certificateholder should consider prior to purchase, see
"Risk Factors - There are risks related to owner-financed mortgage loans."
THE SERVICER
The information set forth in the following paragraphs has been provided
by Litton Loan Servicing LP. None of the Depositor, the Seller, the Trustee,
either Underwriter or any of their respective affiliates have made or will make
any representation as to the accuracy or completeness of such information.
Litton Loan Servicing LP ("Litton") a Delaware limited partnership, and
an affiliate of the Seller, will act as the servicer of the Mortgage Loans
pursuant to the Pooling and Servicing Agreement. Litton Loan Servicing LP was
formed in December 1996, with all of the general and limited partnership
interests owned by EFSG, MGIC and C-BASS Holding LLC. On October 1, 1998 Litton
Loan Servicing, Inc., a wholly-owned subsidiary of EFSG, transferred its
business to Litton. From and after October 1, 1998 all activities formerly
conducted by Litton Loan Servicing, Inc. are being conducted by Litton. Litton
currently employs approximately 170 individuals. The main office of Litton is
located at 5373 W. Alabama, Houston, Texas 77056. Litton is currently a Fannie
Mae and Freddie Mac approved servicer and an approved FHA and VA lender with a
servicing portfolio in excess of $3.319 billion. Litton specializes in servicing
sub-performing mortgage loans and entering into workouts with the related
mortgagors. Other transactions for which Litton acts a servicer include Housing
Securities, Inc. 1995-RP1, C-BASS ABS, LLC 1997-1, C-BASS ABS, LLC 1997-3,
C-BASS ABS, LLC 1998-1, C-BASS ABS, LLC 1998-3, Merrill Lynch Mortgage
Investors, Inc. Series 1998-FF2, Series 1998-FF3, Series 1998-GN3, Series
1999-H1, Series 1999-3, Series 1999-CB1, Series 1999-CB2 and Series 1999-NC1 and
The Prudential Home Mortgage Securities Company, Inc., Series 1990-09, Series
1990-14, Series 1991-05, Series 1991-10, Series 1991-14, Series 1991-20, Series
1992-06, Series 1992-12, Series 1992-16, Series 1992-23, Series 1992-31, Series
1992-36, Series 1992-44, and Series 1993-5.
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of the mortgage loans serviced by
Litton (doing business as Litton Loan Servicing, Inc.) as of the date indicated.
The Servicer's portfolio of mortgage loans may differ significantly from the
Mortgage Loans in terms of interest rates, principal balances, geographic
distribution, types of properties and other possibly relevant characteristics.
There can be no assurance, and no representation is made, that the delinquency
and foreclosure experience with respect to the Mortgage Loans will be similar to
that reflected in the table below, nor is any representation made as to the rate
at which losses may be experienced on liquidation of defaulted Mortgage Loans.
The actual delinquency experience on the Mortgage Loans will depend, among other
things, upon the value of the real estate securing such Mortgage Loans and the
ability of the related mortgagor to make required payments. It should be noted
that the Servicer's business emphasizes to a certain degree the acquisition of
servicing rights with respect to non-performing and subperforming mortgage loans
and the Servicer has been an active participant in the market for such servicing
rights over the past several months. The acquisition of such servicing rights
may have affected the delinquency and foreclosure experience of the Servicer in
the period ending on June 30, 1999 as compared with the annual periods ending on
December 31, 1998 and December 31, 1997.
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<PAGE>
Delinquency and Foreclosure Experience(1)
<TABLE>
<CAPTION>
As of June 30, 1999 As of December 31, 1998
------------------- -----------------------
% by % by
Principal Principal Principal Principal
No. of Loans Balance(2) Balance No. of Loans Balance(2) Balance
------------- -------------------- ------------- --------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 36,156 $2,307,755,294 69.53% 39,063 $2,489,678,137.64 78.01%
Period of
Delinquency(3)
30 Days 4,662 320,345,367 9.65 3,689 $ 233,734,152.03 7.32%
60-89 1,839 123,267,410 3.71 1,497 87,944,511.34 2.76%
90 Days or more 2,384 144,420,197 4.35 2,578 $ 121,504,523.26 3.81%
----- ----------- ---- ------- ----------------- -------
Total Delinquency 8,885 588,032,974 17.72 7,764 $ 443,183,186.63 13.89%
Foreclosures/Bankruptcy(4) 4,913 369,764,648 11.14 2,780 $ 197,668,255.15 6.19%
Real Estate Owned 842 $ 53,590,945 1.61% 1,009 $ 60,867,154.24 1.91%
----- ---------------- -------- ------- ------------------ -------
Total
Portfolio 50,796 $ 3,319,143,861 100.00% 50,616 $3,191,396,733.66 100.00%
------ ---------------- ------- ------ ----------------- -------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------
Principal % by Principal
No. of Loans Balance(2) Balance
-------------- -------------------------- -------------------------
<S> <C> <C> <C>
Current Loans 28,982 $1,360,468,859.99 80.48%
Period of
Delinquency(3)
30 Days 2,534 $ 111,026,183.71 6.57%
60-89 728 29,739,191.62 1.76%
90 Days or more 1,348 $ 50,772,586.46 3.00%
----- ------------------- -------
Total Delinquency 4,610 $ 191,537,962.00 11.33%
Foreclosures/Bankruptcy(4) 1,344 $ 98,380,747.30 5.82%
Real Estate Owned 427 $ 39,978,357.34 2.37%
----- ------------------- -------
Total
Portfolio 35,363 $1,690,365,926.42 100.00%
------ ----------------- -------
</TABLE>
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the Real Estate Owned properties, the principal balance is at the time
of foreclosure.
(3) No mortgage loan is included in this section of the table as
delinquent until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
S-58
<PAGE>
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
Litton's mortgage portfolio set forth in the foregoing tables. The statistics
shown above represent the delinquency experience for the Servicer's mortgage
servicing portfolio only for the periods presented, whereas the aggregate
delinquency experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool. Litton does
not have significant historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of Mortgage Loans. There can be no assurance
that the Mortgage Loans comprising the Mortgage Pool will perform consistent
with the delinquency or foreclosure experience described herein. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by the Servicer. In addition,
adverse economic conditions may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of August 1, 1999 (the "Pooling and Servicing Agreement"),
among the Depositor, the Seller, the Servicer and the Trustee. The Trust Fund
created under the Pooling and Servicing Agreement will consist of (i) all of the
Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling and
Servicing Agreement and (v) the rights of the Depositor under the Mortgage Loan
Purchase Agreement between the Depositor and the Seller. The Offered
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee.
Assignment of the Mortgage Loans
On the Closing Date the Depositor will transfer to the Trust Fund all
of its right, title and interest in and to each Mortgage Loan, the related
mortgage notes, mortgages and other related documents (collectively, the
"Related Documents"), including all scheduled payments with respect to each such
Mortgage Loan due after the Cut-off Date and all rights under the related FHA
Insurance Agreements and the VA Guarantees. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan
transferred to the Trust Fund will be identified on a schedule (the "Mortgage
Loan Schedule") delivered to the Trustee pursuant to the Pooling and Servicing
Agreement. Such schedule will include information such as the Principal Balance
of each Mortgage Loan as of the Cut-off Date, its Loan Rate as well as other
information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
Bank One Trust Company NA, (the "Custodian"), as the Trustee's agent for such
purpose, the mortgages notes endorsed to the Trustee on behalf of the
Certificateholders and the Related Documents. In lieu of delivery of original
mortgages or mortgage notes, if such original is not available or lost, the
Seller may deliver or cause to be delivered true and correct copies thereof, or,
with respect to a lost mortgage note, a lost note affidavit executed by the
Seller.
Within 45 days of the Closing Date, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Pooling and Servicing
Agreement and if any Mortgage Loan or Related Document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification thereof to the Seller and the Trustee by the Custodian, the Seller
will be obligated to either (i) substitute for such Mortgage Loan an Eligible
Substitute Mortgage Loan; however, such substitution is permitted only within
two years of the Closing Date and may not be made unless an opinion of counsel
is provided to the effect that such substitution will not disqualify the Trust
Fund as a REMIC or result in a prohibited transaction tax under the Code or (ii)
purchase such Mortgage Loan at a price (the "Purchase Price") equal to the
outstanding Principal Balance of such Mortgage Loan
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as of the date of purchase, plus all accrued and unpaid interest thereon,
computed at the Loan Rate through the end of the calendar month in which the
purchase is effected, plus the amount of any unreimbursed Advances and Servicing
Advances made by the Servicer. The Purchase Price will be deposited in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises. The obligation of the Seller to repurchase or substitute
for a Defective Mortgage Loan is the sole remedy regarding any defects in the
Mortgage Loans and Related Documents available to the Trustee or the
Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate,
with respect to a Loan Group 1 or a Sub-group 2A Mortgage Loan, not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess of
the Loan Rate of such Defective Mortgage Loan or, with respect to a Sub-group 2B
Mortgage Loan, have a Maximum Loan Rate and Minimum Loan Rate not less than the
respective rate for the Defective Mortgage Loan and have a Gross Margin equal to
or greater than the Defective Mortgage Loan; (iii) have the same Due Date as the
Defective Mortgage Loan; (iv) have a remaining term to maturity not more than
one year earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan; (v) comply with each representation and warranty as to
the Mortgage Loans set forth in the Pooling and Servicing Agreement (deemed to
be made as of the date of substitution); (vi) have been re-underwritten by the
Seller in accordance with the same underwriting criteria and guidelines as the
Mortgage Loans being replaced; (vii) must be of the same or better credit
quality as the Mortgage Loan being replaced; and (viii) satisfy certain other
conditions specified in the Pooling and Servicing Agreement.
The Seller 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 Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan and Related
Documents, the Seller will have a period of 90 days after discovery or notice of
the breach to effect a cure. If the breach cannot be cured within the 90-day
period, the Seller will be obligated to (i) substitute for such Defective
Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase such
Defective Mortgage Loan from the Trust Fund. The same procedure and limitations
that are set forth above for the substitution or purchase of Defective Mortgage
Loans as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Defective Mortgage Loan as a result of a breach of
a representation or warranty in the Pooling and Servicing Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Servicer will
service and administer the Mortgage Loans as more fully set forth therein.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Advances and Servicing Advances, insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts
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in the Collection Account. Amounts so deposited may be invested in Eligible
Investments (as described in the Pooling and Servicing Agreement) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account. The Trustee
will establish an account (the "Distribution Account") into which will be
deposited amounts withdrawn from the Collection Account for distribution to
Certificateholders on a Distribution Date. The Distribution Account will be an
Eligible Account. Amounts on deposit therein may be invested in Eligible
Investments maturing on or before the Business Day prior to the related
Distribution Date unless such Eligible Investments are invested in investments
managed or advised by the Trustee or an affiliate thereof, in which case such
Eligible Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by Standard & Poor's (or
comparable ratings if Moody's and Standard & Poor's are not the Rating Agencies)
at the time any amounts are held on deposit therein, (ii) an account or accounts
the deposits in which are fully insured by the Federal Deposit Insurance
Corporation (to the limits established by such corporation), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to each Rating Agency without
reduction or withdrawal of their then current ratings of the Certificates as
evidenced by a letter from each Rating Agency to the Trustee. Eligible
Investments are specified in the Pooling and Servicing Agreement and are limited
to investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced at least two Business Days prior to each
Distribution Date its own funds, or funds in the Collection Account that are not
included in the Available Funds for such Distribution Date, in an amount equal
to the aggregate of all payments of principal and interest, net of the Servicing
Fee that were due during the related Prepayment Period on the Mortgage Loans,
other than Balloon Payments, and that were Delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure, and, with respect to Balloon Loans,
with respect to which the Balloon Payment is not made when due, an assumed
monthly payment that would have been due on the related Due Date based on the
original principal amortization schedule for such Balloon Loan (any such
advance, an "Advance").
Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance proceeds
or liquidation proceeds. The purpose of making such Advances is to maintain a
regular cash flow to the Certificateholders, rather than to guarantee or insure
against losses. The Servicer will not be required, however, to make any Advances
with respect to reductions in the amount of the Monthly Payments on the Mortgage
Loans due to bankruptcy proceedings or the application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"). Subject to the
recoverability standard above, the Servicer's obligation to make Advances as to
any Mortgage Loan will continue until the Mortgage Loan is paid in full or until
the recovery of all liquidation proceeds thereon.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Servicer
to be nonrecoverable from related late collections, insurance proceeds or
liquidation proceeds may be reimbursed to the Servicer out of any funds in the
Collection Account prior to the distributions on the Certificates. In the event
the Servicer fails in its obligation
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to make any such advance, the Trustee, in its capacity as successor Servicer,
will be obligated to make any such advance, to the extent required in the
Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited
to late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed, unless such amounts are deemed to be nonrecoverable by the
Servicer, in which event reimbursement will be made to the Servicer from general
funds in the Collection Account.
The Trustee
The Chase Manhattan Bank, a New York banking corporation, will act as
trustee (the "Trustee") for the Certificates pursuant to the Agreement. The
Trustee's offices for notices under the Agreement are located at 450 West 33rd
Street, New York, New York 10001, Attention: Capital Markets Fiduciary Services
and its telephone number is (212) 946-3246. The principal compensation to be
paid to the Trustee in respect of its obligations under the Agreement will be
the Trustee Fee. The Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Trust Fund
and will be held harmless against any loss, liability or expense (not including
expenses, disbursements and advances incurred or made by the Trustee, including
the compensation and the expenses and disbursements of its agents and counsel,
in the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Agreement, other than any loss, liability or expense (i) that
constitutes a specific liability of the Trustee under the Agreement or (ii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation (the "Servicing Fee") to be paid to the
Servicer in respect of its servicing activities for the Certificates will be at
the "Servicing Fee Rate" of (i) 0.375% per annum on the Principal Balance of
each Sub-group 1A Mortgage Loan (except that if an Event of Servicing
Termination occurs, then the Servicing Fee Rate shall be 0.50%) and (ii) 0.50%
per annum on the Principal Balance of each sub-group 1B and Group 2 Mortgage
Loan. As additional servicing compensation, the Servicer is entitled to retain
all service-related fees, including assumption fees, modification fees,
extension fees and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Collection Account and any escrow accounts. The Servicer is obligated to
offset any Prepayment Interest Shortfall on any Distribution Date (payments made
by the Servicer in satisfaction of such obligation, "Compensating Interest") by
an amount not in excess of one-half of its Servicing Fee for such Distribution
Date. The Servicer is obligated to pay certain insurance premiums and certain
ongoing expenses associated with the Mortgage Pool and incurred by the Servicer
in connection with its responsibilities under the Pooling and Servicing
Agreement and is entitled to reimbursement therefor as provided in the Pooling
and Servicing Agreement.
The Servicer, in its capacity as a special servicer is also entitled to
an additional servicing fee (the "Special Servicing Fee"), in connection with
Sub-group 1B, Sub-group 2A and Sub-group 2B Mortgage Loans that are 90 or more
days Delinquent. As more fully described in the Pooling and Servicing Agreement,
the Special Servicing Fee is equal to $150 per Mortgage Loan 90 or more days
Delinquent, payable monthly for eighteen consecutive months commencing in the
first month after the Cut-off Date in which payments on such Mortgage Loan are
90 or more days Delinquent, unless such Mortgage Loan becomes less than 90 days
Delinquent.
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The "Determination Date" with respect to any Distribution Date will be
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day. With respect to any Determination Date and each Mortgage Loan as to
which a principal prepayment in full was applied during the prior calendar
month, the "Prepayment Interest Shortfall" is an amount equal to the interest at
the mortgage interest rate for such Mortgage Loan (the "Mortgage Interest Rate")
(net of the Servicing Fee) on the amount of such principal prepayment for the
number of days commencing on the date on which the principal prepayment is
applied and ending on the last day of the prior calendar month.
Pledge and Assignment of Servicer's Rights
On the Closing Date, the Servicer will pledge and assign all of its
right, title and interest in, to and under the Pooling and Servicing Agreement
to First Union National Bank, as the representative of certain lenders. In the
event that an Event of Servicing Termination (as defined below) occurs, the
Trustee and the Depositor have agreed to the appointment of First Union National
Bank or its designee as the successor servicer, provided that at the time of
such appointment First Union National Bank or such designee meets the
requirements of a successor servicer described in the Pooling and Servicing
Agreement (including being acceptable to the Rating Agencies) and that First
Union National Bank or such designee agrees to be subject to the terms of the
Pooling and Servicing Agreement.
Termination
The Seller will have the right to repurchase all of the Mortgage Loans
and REO Properties in the Trust Fund and thereby effect the early retirement of
the Certificates, on any Distribution Date on which the aggregate Principal
Balance of such Mortgage Loans and REO Properties is less than 10% of the
aggregate Principal Balance of the Mortgage Loan as of the Cut-Off Date. The
first Distribution Date on which such option could be exercised is referred to
herein as the "Optional Termination Date". In the event that the option is
exercised, the repurchase will be made at a price (the "Termination Price")
generally equal to par plus accrued interest for each Mortgage Loan at the
related Loan Rate to but not including the first day of the month in which such
repurchase price is distributed plus the amount of any unreimbursed Advances and
Servicing Advances made by the Servicer. Proceeds from such repurchase will be
included in Available Funds and will be distributed to the holders of the
Certificates in accordance with the Pooling and Servicing Agreement. Any such
repurchase of Mortgage Loans and REO Properties will result in the early
retirement of the Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is Delinquent in payment by 60 days or
more, the Seller may, at its option, purchase such Mortgage Loan from the Trust
Fund at the Purchase Price for such Mortgage Loan.
Mandatory Purchase of Defaulted Loans
The Servicer will purchase each Mortgage Loan in Loan Group 1 (x) which
has a loan-to-value ratio in excess of 80% but does not have private mortgage
insurance, (y) foreclosure proceedings for which have been completed within the
first six months following the Closing Date, and (z) for which disposition of
the related mortgaged property within such six-month period would result in a
loss against which senior certificateholders would not be protected, in whole or
in part, by available credit enhancement.
Events of Servicing Termination
Events of Servicing Termination will consist, among other things, of:
(i) any failure by the Servicer to deposit in the Collection Account or
Distribution Account the required amounts or remit to the Trustee any payment
which continues unremedied for one Business Day following written notice to the
Servicer; (ii) any failure of the Servicer to make any Advance or to cover any
Prepayment Interest Shortfalls, as described herein, which failure continues
unremedied for one Business Day; (iii) any failure by the Servicer to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement, which continues unremedied for 30 days after
the first date on which (x) the Servicer has knowledge of such failure or (y)
written notice of such failure is given to the Servicer; (iv) insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, and certain actions by or on behalf of the Servicer indicating its
insolvency or inability to pay its
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obligations; or (v) cumulative Realized Losses or Delinquencies as of any
Distribution Date exceed the amount specified in the Pooling and Servicing
Agreement.
Rights upon Event of Servicing Termination
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee may, and at the direction of
the holders of Offered Certificates evidencing not less than 51% of the Voting
Rights shall, terminate all of the rights and obligations of the Servicer in its
capacity as servicer with respect to the Mortgage Loans, as provided in the
Pooling and Servicing Agreement, whereupon the Trustee will succeed to all of
the responsibilities and duties of the Servicer under the Pooling and Servicing
Agreement, including the obligation to make Advances subject to the pledge and
assignment to First Union as described above. No assurance can be given that
termination of the rights and obligations of the Servicer under the Pooling and
Servicing Agreement would not adversely affect the servicing of the related
Mortgage Loans, including the delinquency experience of such Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing 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 Offered Certificates having not less than %
of the Voting Rights evidenced by the Offered Certificates so agree and have
offered indemnity satisfactory to the Trustee.
Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of the Certificates (other than the Class
X and Class R Certificates) shall be 98% and shall be allocated among the
Classes of such Certificates in the proportion that the aggregate Certificate
Principal Balance of all the Certificates of such Class then outstanding bear to
the aggregate Certificate Principal Balance of all Certificates then
outstanding. With respect to any date of determination, the percentage of all
the Voting Rights allocated among holders of the Class X Certificates shall be
2%. The Voting Rights allocated to a Class of Certificates shall be allocated
among all holders of each such Class in proportion to the outstanding
certificate balances (or Percentage Interest) of such Certificates. The Class R
Certificates will not have any Voting Rights.
Amendment
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Servicer and the Trustee, without the consent of the holders of
the Certificates, for any of the purposes set forth under "Description of the
Agreements--Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may be amended by the Seller, the Depositor, the Servicer and the
Trustee and the holders of a majority in interest of any Class of Offered
Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the holders of
any Class of Offered Certificates; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, distributions
required to be made on any Class of Offered Certificates without the consent of
the holders of such Certificates; (ii) adversely affect in any material respect
the interests of the holders of any Class of Offered Certificates in a manner
other than as described in clause (i) above, without the consent of the holders
of such Class evidencing percentage interests aggregating at least 66%; or (iii)
reduce the aforesaid percentage of aggregate outstanding principal amounts of
Offered Certificates, the holders of which are required to consent to any such
amendment, without the consent of the holders of all such Certificates.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
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summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and Servicing
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Trust will issue the A-1 and Class A-2 Certificates (the "Senior
Certificates"), the Class M-1, Class M-2, Class B and Class X Certificates (the
"Subordinated Certificates") and the Class R Certificates (the "Residual
Certificates"). The Senior Certificates, the Subordinated Certificates and the
Residual Certificates are collectively referred to herein as the "Certificates."
Only the Class A-1, Class A-2, Class M-1, Class M-2 and Class B Certificates are
offered hereby (the "Offered Certificates").
The Offered Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus five percent. The Class R Certificates will not have
Original Certificate Principal Balances and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple thereof).
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a Business Day, on the
first Business Day thereafter, commencing in September 1999 (each, a
"Distribution Date"), to the persons in whose names such Certificates are
registered at the close of business on the Record Date. With respect to the
Class M-1 and Class M-2 Certificates, the "Record Date" is the last Business Day
of the month immediately preceding the month in which the related Distribution
Date occurs. With respect to the Class A-1, Class A-2 and Class B Certificates,
the "Record Date" is the Business Day immediately preceding such Distribution
Date; provided, however, that if any Class A-1, Class A-2 or Class B Certificate
becomes a Definitive Certificate (as defined herein), the Record Date for such
Certificate will be the last Business Day of the month immediately preceding the
month in which the related Distribution Date occurs.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificate Owners") will hold such Certificates
through DTC in the United States, or Cedelbank or Euroclear (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations of $50,000. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
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Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC 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. For information with
respect to tax documentation procedures relating to the Certificates, see
"Material Federal Income Tax Consequences -Tax Characterization of a Trust Fund
as a Partnership - Tax Consequences to Holder of the Certificates - Tax
Consequences to Foreign Certificateholders", "-Backup Withholding" and "New
Withholding Regulations" in the Prospectus and "Global Clearance, Settlement and
Tax Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
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 the Relevant 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 the
Relevant 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 European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
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Cedelbank, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Cedelbank is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Cedelbank's
stock.
Cedelbank is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedelbank holds securities for its customers ("Cedelbank Participants")
and facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedelbank provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedelbank also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedelbank
has established an electronic bridge with Morgan Guaranty Trust as the Euroclear
Operator in Brussels to facilitate settlement of trades between systems.
Cedelbank currently accepts over 70,000 securities issues on its books.
Cedelbank's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedelbank's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedelbank has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedelbank is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("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 be settled in any of 29
currencies, including United States dollars. Euroclear 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. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. 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 Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific 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 on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial
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Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to 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 the Relevant 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--Tax Characterization of a Trust
Fund as a Partnership - Tax Consequences to Holder of the Certificates - Tax
Consequences to Foreign Certificateholders", "--Backup Withholding" and "New
Withholding Regulations" in the Prospectus. Because DTC can only act on behalf
of Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Cedelbank or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Cedelbank Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Book-Entry Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than % of the
Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry 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.
Neither the Depositor, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
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Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and
the like for processing date ("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, 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 of 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.
Allocation of Available Funds
Distributions to holders of each Class of Offered Certificates will be
made on each Distribution Date from Available Funds. Available Funds will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable therefrom to the Servicer, of (i) the aggregate
amount of Monthly Payments on the Mortgage Loans due on the related Due Date and
received by the Trustee one business day prior to the related Distribution Date,
after deduction of the Servicing Fee, any accrued and unpaid Servicing Fee and
the Successor Servicer Fee, if any, (ii) certain unscheduled payments in respect
of the Mortgage Loans, including prepayments (but excluding any prepayment
penalties collected), insurance proceeds, liquidation proceeds (net of certain
expenses) and proceeds from repurchases of and substitutions for such Mortgage
Loans occurring during the related Prepayment Period, and (iii) payments from
the Servicer in connection with Advances and Prepayment Interest Shortfalls for
such Distribution Date.
The "Prepayment Period" is the prior calendar month.
Interest Distributions
On each Distribution Date, based upon the information provided to it in
the Remittance Report, the Trustee will distribute the Interest Remittance
Amount in the following order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Holders of the Class A-1 and Class A-2 Certificates, the
related Accrued Certificate Interest, plus the Class A Interest Carry Forward
Amount allocable to the Class A-1 Certificates and the Class A-2 Certificates,
respectively;
Third, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class M-1 Certificates, the related Accrued Certificate
Interest;
Fourth, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class M-2 Certificates, the related Accrued Certificate
Interest;
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Fifth, to the extent of the Interest Remittance Amount then remaining,
to the Holders of the Class B Certificates, the related Accrued Certificate
Interest; and
Sixth, the amount, if any, of the Interest Remittance Amount remaining
in the Certificate Account after application with respect to the priorities set
forth above is defined as the "Monthly Excess Interest Amount" for such
Distribution Date and will be applied as described below under "--Application of
Monthly Excess Cashflow Amounts."
"Accrued Certificate Interest" means an amount equal to the interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance of such Class of Certificates at the then-applicable Pass-Through Rate,
such amount subject to reduction only in the event of shortfalls caused by the
Relief Act.
"Interest Carry Forward Amount" means for any class of Certificates and
any Distribution Date the sum of (a) the excess, if any, of the Accrued
Certificate Interest and any Interest Carry Forward Amount for the prior
Distribution Date, over the amount in respect of interest actually distributed
on such class on such prior Distribution Date and (b) interest on such excess at
the applicable Pass-Through Rate (x) with respect to the Class M-1 and Class M-2
Certificates, on the basis of a 360-day year consisting of 12 30-day months and
(y) with respect to the Class A-1, Class A-2 and Class B Certificates, for the
actual number of days elapsed since the prior Distribution Date. The "Class A
Interest Carry Forward Amount" for any Distribution Date is the sum of the
Interest Carry Forward Amounts for the Class A-1 and Class A-2 Certificates for
such Distribution Date.
"Interest Remittance Amount" means, as of any Determination Date, the
sum, without duplication, of (i) all interest due and collected or advanced with
respect to the related Collection Period on the Mortgage Loans (less the
Servicing Fee, certain amounts available for reimbursement of Monthly Advances
and Servicing Advances as described above under "-Advances" and certain other
reimbursable expenses pursuant to the Pooling and Servicing Agreement), (ii) all
Compensating Interest paid by the Servicer on such Determination Date with
respect to the Mortgage Loans and (iii) the portion of any payment in connection
with any substitution, Purchase Price, liquidation proceeds (net of certain
expenses) or insurance proceeds relating to interest with respect to the
Mortgage Loans.
A "Collection Period" with respect to any Distribution Date means the
period from the second day of the calendar month preceding the month in which
such Distribution Date occurs through the first day of the month in which such
Distribution Date occurs.
The "Interest Accrual Period" for any Distribution Date with respect to
the Class M-1 and Class M-2 Certificates, will be the calendar month immediately
preceding the month in which such Distribution Date occurs. With respect to the
Class M-1 and Class M-2 Certificates, all calculations of interest will be made
on the basis of a 360-day year assumed to consist of twelve 30-day months. With
respect to the Class A-1, Class A-2 and Class B Certificates, the "Interest
Accrual Period" for any Distribution Date will be the period from the preceding
Distribution Date (or in the case of the first Distribution Date, from the
Closing Date) to the day prior to the current Distribution Date, and
calculations of interest will be made on the basis of the actual number of days
in the Interest Accrual Period and on a 360-day year.
Principal Distributions
With respect to each Distribution Date (a) before the Stepdown Date or
(b) with respect to which a Trigger Event is in effect, Holders of the Senior
Certificates will be entitled to receive 100% of the Principal Distribution
Amount, based on the Class A-1 Principal Percentage and the Class A-2 Principal
Percentage, respectively, for such Distribution Date, until the Certificate
Principal Balances thereof have been reduced to zero. Once the Certificate
Principal Balances of the Class A-1 and Class A-2 Certificates have been reduced
to zero, the Holders of the Class M-1 Certificates will be entitled to receive
100% of the Principal Distribution Amount for such Distribution Date until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero. Similarly if the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero, the Holders of the Class M-2 Certificates
will be entitled to receive 100% of the Principal Distribution Amount until the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero. Finally, if the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, the Holders of the Class B Certificates
will be entitled to receive
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100% of the Principal Distribution Amount until the Certificate Principal
Balance of the Class B Certificates has been reduced to zero.
The "Class A-1 Principal Percentage" on any Distribution Date will be
the percentage equivalent of a fraction, the numerator of which is the amount of
principal collections (including principal advanced by the Servicer) allocable
to Loan Group 1 for the related Collection Period, and the denominator of which
is the amount of principal collections (including principal advanced by the
Servicer) allocable to Loan Group 1 and Loan Group 2 for the related Collection
Period. The "Class A-2 Principal Percentage" on any Distribution Date will be
the percentage equivalent of a fraction, the numerator of which is the amount of
principal collections (including principal advanced by the Servicer) allocable
to Loan Group 2 for the related Collection Period, and the denominator of which
is the amount of principal collections (including principal advanced by the
Servicer) allocable to Loan Group 1 and Loan Group 2 for the related Collection
Period.
With respect to each Distribution Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect, the Holders of all
Classes of Certificates will be entitled to receive payments of principal, in
the order of priority and in the amounts set forth below and to the extent of
the Principal Distribution Amount:
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A-1 Principal Percentage and the Class A-2 Principal Percentage of the
Class A Principal Distribution Amount will be distributed concurrently to the
Class A-1 and Class A-2 Certificates, respectively, until the Certificate
Principal Balances thereof have been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Senior Certificates in clause
First above and (y) the Class M-1 Principal Distribution Amount will be
distributed to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Senior Certificates in
clause First above and the amount distributed to the Class M-1 Certificates in
clause Second above and (y) the Class M-2 Principal Distribution Amount will be
distributed to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Senior Certificates
pursuant to clause First above, the amount distributed to the Class M-1
Certificates pursuant to clause Second above and the amount distributed to the
Class M-2 Certificates pursuant to clause Third above and (y) the Class B
Principal Distribution Amount will be distributed to the Class B Certificates,
until the Certificate Principal Balance thereof has been reduced to zero; and
Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in Clauses First, Second, Third and Fourth above
will be included as part of the Monthly Excess Cashflow Amount and will be
applied as described below under "--Application of Monthly Excess Cashflow
Amounts."
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class A Principal Distribution Amount" means as of any Distribution
Date (a) prior to the Stepdown Date or with respect to which a Trigger Event is
in effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii)
the sum of the Certificate Principal Balances of the Class A-1 and Class A-2
Certificates and (b) on or after the Stepdown Date and as long as a Trigger
Event is not in effect, the excess of (x) the sum of the Certificate Principal
Balances of the Class A-1 and Class A-2 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 60% and (ii) the
Pool Balance as of the last day of the related Collection Period and (B) the
Pool Balance as of the last day of the related Collection Period minus the
product of 0.50% and the Pool Balance on the Closing Date.
"Class M-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A-1 and Class A-2 Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date) and (ii) the Certificate Principal Balance of the Class M-1
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Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 72% and (ii) the Pool Balance as of the last day of the
related Collection Period and (B) the Pool Balance as of the last day of the
related Collection Period minus the product of 0.50% and the Pool Balance on the
Closing Date.
"Class M-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A-1 and Class A-2 Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date) and (iii) the Certificate Principal Balance of
the Class M-2 Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) 83% and (ii) the Pool Balance as of the
last day of the related Collection Period and (B) the Pool Balance as of the
last day of the related Collection Period minus the product of 0.50% and the
Pool Balance on the Closing Date.
"Class B Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the excess of (x) the sum of (i) the sum of the Certificate Principal
Balances of the Class A-1 and Class A-2 Certificates (after taking into account
the payment of the Class A Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the payment of the Class
M-2 Principal Distribution Amount on such Distribution Date), and (iv) the
Certificate Principal Balance of the Class B Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 90% and
(ii) the Pool Balance as of the last day of the related Collection Period and
(B) the Pool Balance as of the last day of the related Collection Period minus
the product of 0.50% and the Pool Balance on the Closing Date.
"Extra Principal Distribution Amount" means, as of any Distribution
Date, the lesser of (x) the Monthly Excess Interest Amount for such Distribution
Date and (y) the Overcollateralization Deficiency for such Distribution Date.
"Overcollateralization Amount" means, as of any Distribution Date the
excess, if any, of (x) the Pool Balance as of the last day of the immediately
preceding Collection Period over (y) the aggregate Certificate Principal Balance
of all Classes of Certificates (after taking into account all distributions of
principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date,
the excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Certificate Principal Balances of all
Classes of Certificates resulting from the distribution of the Principal
Distribution Amount (but not the Extra Principal Distribution Amount) on such
Distribution Date, but prior to taking into account any Applied Realized Loss
Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date after the Stepdown Date on which a Trigger Event is not in
effect, the lesser of (x) the Principal Remittance Amount for such Distribution
Date and (y) the excess, if any, of (i) the Overcollateralization Amount for
such Distribution Date, assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on the Certificates on such Distribution Date,
over (ii) the Targeted Overcollateralization Amount for such Distribution Date.
"Principal Distribution Amount" means as of any Distribution Date, the
sum of (i) the Principal Remittance Amount (minus, for Distribution Dates
occurring on and after the Stepdown Date and for which a Trigger Event is not in
effect, the Overcollateralization Release Amount, if any) and (ii) the Extra
Principal Distribution Amount, if any.
"Principal Remittance Amount" means, with respect to any Distribution
Date, to the extent of funds available therefor as described herein the amount
equal to the sum (less certain amounts available for reimbursement of Monthly
Advances and Servicing Advances as described above under "-Advances" and certain
other reimbursable expenses pursuant to the Agreement) of the following amounts
(without duplication) with respect to the Mortgage Loans and the immediately
preceding Collection Period: (i) each payment of principal on a Mortgage Loan
due during such Collection Period and received by the Servicer on or prior to
the related Determination Date, including
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all full and partial principal prepayments received by the Servicer during the
related Prepayment Period and any Advances with respect thereto, (ii) the
liquidation proceeds (net of certain expenses) allocable to principal actually
collected by the Servicer during the related Collection Period, (iii) the
portion of the Purchase Price allocable to principal of all repurchased
Defective Mortgage Loans with respect to such Collection Period and (iv) any
Substitution Adjustment Amounts received on or prior to the previous
Determination Date and not yet distributed.
"Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such Distribution Date by
(y) the Pool Balance as of the last day of the related Collection Period.
"Senior Specified Enhancement Percentage" on any date of determination
thereof means 40.00%.
"60+ Day Delinquent Loan" means each Mortgage Loan with respect to
which any portion of a Monthly Payment is, as of the last day of the prior
Collection Period, two months or more past due (without giving effect to any
grace period), each Mortgage Loan in foreclosure, all REO Property and each
Mortgage Loan for which the Mortgagor has filed for bankruptcy after the Closing
Date.
"Stepdown Date" means the later to occur of (x) the Distribution Date
in September 2002 and (y) the first Distribution Date on which the Senior
Enhancement Percentage is greater than or equal to the Senior Specified
Enhancement Percentage.
"Targeted Overcollateralization Amount" means as of any Distribution
Date, (x) prior to the Stepdown Date, 5.00% of the initial Pool Balance and (y)
on and after the Stepdown Date and assuming a Trigger Event is not in effect,
the greater of (i) 10.00% of the Pool Balance as of the last day of the related
Collection Period and (ii) 0.50% of the initial Pool Balance. If a Trigger Event
is in effect on and after the Stepdown Date, the Targeted Overcollateralization
Amount shall be equal to the Targeted Overcollateralization Amount for the
immediately preceding Distribution Date.
A "Trigger Event" has occurred on a Distribution Date if the
three-month rolling average of 60+ Day Delinquent Loans equals or exceeds 42% of
the Senior Enhancement Percentage; provided, that if the Certificate Principal
Balance of the Senior Certificates has been reduced to zero, a Trigger Event
will have occurred if the three-month rolling average of 60+ Day Delinquent
Loans equals or exceeds 16.80%.
Allocation of Losses. Realized Losses will, in effect, be absorbed
first by the Class X Certificates (through the application of the Monthly Excess
Interest Amount to fund such deficiency, as well as through a reduction in the
Overcollateralization Amount).
If, after giving effect to the distribution of the Principal
Distribution Amount on any Distribution Date the aggregate Certificate Principal
Balance of the Certificates exceeds the Pool Balance as of the end of the
related Collection Period, such excess will be allocated against the Class B,
Class M-2 and Class M-1 Certificates, and the Class A-1 and Class A-2
Certificates pro rata, in that order and until the respective Certificate
Principal Balances thereof are reduced to zero. Any allocation of such excess in
reduction of a Certificate Principal Balance is referred to as an "Applied
Realized Loss Amount." Any such reduction of a Certificate Principal Balance
will not be reversed or reinstated. However, on future Distribution Dates,
Certificateholders of the related Class may receive amounts in respect of prior
reductions in the related Certificate Principal Balances as described below.
Such subsequent payments will be applied in the reverse of the order set forth
above.
Application of Monthly Excess Cashflow Amounts. The weighted average
Net Mortgage Rate for the Mortgage Loans is generally expected to be higher than
the weighted average of the Pass-Through Rates on the Certificates, thus
generating certain excess interest collections which, in the absence of losses,
will not be necessary to fund interest distributions on the Certificates. This
excess interest for a Collection Period, together with interest on the
Overcollateralization Amount itself, is the "Monthly Excess Interest Amount."
The required level of overcollateralization for any Distribution Date
is the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially (i.e., prior to the Stepdown Date) $8,097,517.
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If Realized Losses not accounted for by an application of the Monthly
Excess Interest Amount occur, such Realized Losses will result in an
Overcollateralization Deficiency (since it will reduce the Pool Balance without
giving rise to a corresponding reduction of the aggregate Certificate Principal
Balance of the Certificates). The cashflow priorities of the Trust Fund require
that, in this situation, an Extra Principal Distribution Amount be paid (subject
to the availability of any Monthly Excess Cashflow Amount in subsequent months)
for the purpose of re-establishing the Overcollateralization Amount at the
then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not
in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a Distribution Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such
Distribution Date not to be passed through as a distribution of principal on
such Distribution Date. This has the effect of decelerating the amortization of
the Certificates relative to the Pool Balance, thereby reducing the actual level
of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the Certificates therefore releases
overcollateralization from the Trust Fund. The amount of such releases are the
"Overcollateralization Release Amounts."
On any Distribution Date, the sum of the Monthly Excess Interest Amount
and the Overcollateralization Release Amount is the "Monthly Excess Cashflow
Amount", which is required to be applied in the following order of priority on
such Distribution Date:
(i) to fund the remaining Class A Interest Carry Forward
Amount, if any, pro rata, between the Class A-1 and Class A-2
Certificates;
(ii) to fund the Extra Principal Distribution Amount for such
Distribution Date;
(iii) to fund the Class M-1 Interest Carry Forward Amount, if
any;
(iv) to fund the Class M-1 Realized Loss Amortization Amount
for such Distribution Date;
(v) to fund the Class M-2 Interest Carry Forward Amount, if
any;
(vi) to fund the Class M-2 Realized Loss Amortization Amount
for such Distribution Date;
(vii) to fund the Class B Interest Carry Forward Amount, if
any;
(viii) to fund the Class B Realized Loss Amortization Amount
for such Distribution Date;
(ix) to fund the aggregate amount of any LIBOR Carryover
Amount;
(x) to pay the Special Servicing Fee;
(xi) to fund a distribution to the Holders of the Class X
Certificates; and
(xii) to fund a distribution to the Holders of the Class R
Certificates.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-1 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the Applied Realized Loss Amount as
of such Distribution Date over (ii) the sum of the Class M-2 Applied Realized
Loss Amount and the Class B Applied Realized Loss Amount, in each case as of
such Distribution Date.
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"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-1 Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess
of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A
Interest Carry Forward Amount, the Extra Principal Distribution Amount and the
Class M-1 Interest Carry Forward Amount, in each case for such Distribution
Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class M-2 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the Class B Applied Realized Loss
Amount as of such Distribution Date.
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any Distribution Date, the lesser of (x) the Class
M-2 Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess
of (i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-1 Realized Loss
Amortization Amount and the related Class M-2 Interest Carry Forward Amount, in
each case for such Distribution Date.
"Class B Applied Realized Loss Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Certificate
Principal Balance thereof (after taking into account the distribution of the
Principal Distribution Amount on such Distribution Date, but prior to the
application of the Class B Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Distribution Date over (ii) the related Applied Realized Loss
Amount as of such Distribution Date.
"Class B Realized Loss Amortization Amount" means, as to the Class B
Certificates and as of any Distribution Date, the lesser of (x) the Class B
Unpaid Realized Loss Amount as of such Distribution Date and (y) the excess of
(i) the Monthly Excess Cashflow Amount over (ii) the sum of the Class A Interest
Carry Forward Amount, the Extra Principal Distribution Amount, the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized Loss Amortization
Amount, the Class M-1 Interest Carry Forward Amount, the Class M-2 Interest
Carry Forward Amount and the Class B Interest Carry Forward Amount, in each case
for such Distribution Date.
"Unpaid Realized Loss Amount" means for any Class of Subordinated
Certificates and as to any Distribution Date, the excess of (x) the cumulative
amount of related Applied Realized Loss Amounts with respect to such Class for
all prior Distribution Dates over (y) the cumulative amount of related Realized
Loss Amortization Amounts with respect to such Class for all prior Distribution
Dates.
Pass-Through Rates
The Pass-Through Rate on any Distribution Date with respect to the
Class M-1 and Class M-2 Certificates, will equal the lesser of (a) the rate
identified on the cover of this Prospectus Supplement and (b) the weighted
average Mortgage Interest Rate of the Mortgage Loans, less the annualized rates
at which the Servicing Fee and the Trustee Fee are calculated.
The Pass-Through Rate on any Distribution Date with respect to the
Class A-1 Certificates will equal the lesser of (a) the Class A-1 Formula Rate
and (b) the Group 1 Available Funds Cap for such Distribution Date. The
"Pass-Through Rate" on any Distribution Date with respect to the Class A-2
Certificates will equal the lesser of (a) the Class A-2 Formula Rate and (b) the
Group 2 Available Funds Cap for such Distribution Date. The Pass-Through Rate on
any Distribution Date with respect to the Class B Certificates will equal the
lesser of (a) the Class B Formula Rate and (b) the Pool Available Funds Cap for
such Distribution Date. With respect to the Certificates, except for the Class
A-1, Class A-2 and Class B Certificates, interest in respect of any Distribution
Date will accrue during the related Accrual Period on the basis of a 360-day
year consisting of twelve 30-day months. With respect to the Class A-1, Class
A-2 and Class B Certificates, interest in respect of any Distribution Date will
accrue during the related Accrual Period on the basis of a 360-day year and the
actual number of days elapsed.
S-75
<PAGE>
The "Class A-1 Formula Rate" will be the sum of the interbank offered
rate for one-month United States dollar deposits in the London market
("One-Month LIBOR") as of the related LIBOR Determination Date plus a margin
(the "Class A-1 Certificate Margin"). The Class A-1 Certificate Margin on each
Distribution Date on or prior to the Optional Termination Date will equal 0.85%
and on each Distribution Date after the Optional Termination Date, the Class A-1
Certificate Margin will equal 1.35%.
The "Class A-2 Formula Rate" will be the sum of One-Month LIBOR as of
the related LIBOR Determination Date plus a margin (the "Class A-2 Certificate
Margin"). The Class A-2 Certificate Margin on each Distribution Date on or prior
to the Optional Termination Date will equal 0.55% and on each Distribution Date
after the Optional Termination Date, the Class A-2 Certificate Margin will equal
1.05%.
The "Class B Formula Rate" will be the sum of the interbank offered
rate for one-month United States dollar deposits in the London market
("One-Month LIBOR") as of the related LIBOR Determination Date plus a margin
(the "Class B Certificate Margin"). The Class B Certificate Margin on each
Distribution Date on or prior to the Optional Termination Date will equal 2.75%
and on each Distribution Date after the Optional Termination Date, the Class B
Certificate Margin will equal 3.25%.
The "Group 1 Available Funds Cap" for any Distribution Date will equal
the lesser of (i) the average of the Mortgage Interest Rates of the Mortgage
Loans as of the first day of the month preceding the month of such Distribution
Date (or, in the case of the first Distribution Date, the Cut-off Date),
weighted on the basis of the related Principal Balances of the Mortgage Loans as
of such date, minus the sum of the Servicing Fee Rate and the rate at which the
Trustee Fee is calculated, and (ii) the average of the Mortgage Interest Rates
of the Group 1 Mortgage Loans as of the first day of the month preceding the
month of such Distribution Date (or, in the case of the first Distribution Date,
the Cut-off Date), weighted on the basis of the related Principal Balances as of
such date, minus the sum of the Servicing Fee Rate and the rate at which the
Trustee Fee is calculated.
The "Group 2 Available Funds Cap" for any Distribution Date will equal
the difference between (i) the average of the Mortgage Interest Rates of the
Group 2 Mortgage Loans as of the first day of the month preceding the month of
such Distribution Date (or, in the case of the first Distribution Date, the
Cut-off Date), weighted on the basis of the related Principal Balances of the
Group 2 Mortgage Loans as of such date and (ii) the sum of the Servicing Fee
Rate and the rate at which the Trustee Fee Rate is calculated.
The "Pool Available Funds Cap" for any Distribution Date will equal the
difference between (i) the average of the Mortgage Interest Rates of the
Mortgage Loans as of the first day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, the Cut-off
Date), weighted on the basis of the related Principal Balances of all of the
Mortgage Loans as of such date and (ii) the sum of the Servicing Fee Rate and
the rate at which the Trustee Fee is calculated.
If on any Distribution Date, the Pass-Through Rate for the Class A-2
Certificates is based upon the Group 2 Available Funds Cap, the excess of (i)
the amount of interest the Class A-2 Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject to
the Group 2 Available Funds Cap, up to the Maximum Cap, over (ii) the amount of
interest the Class A-2 Certificates received on such Distribution Date based on
the Group 2 Available Funds Cap, together with the unpaid portion of any such
excess from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate on the Class A-2 Certificates, without giving
effect to the Group 2 Available Funds Cap) will be the "Class A-2 LIBOR
Carryover Amount". If on any Distribution Date, the Pass-Through Rate for the
Class B Certificates is based upon the Pool Available Funds Cap, the excess of
(i) the amount of interest the Class B Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject to
the Pool Available Funds Cap, up to the Pool Maximum Cap, over (ii) the amount
of interest the Class B Certificates received on such Distribution Date based on
the Pool Available Funds Cap, together with the unpaid portion of any such
excess from prior Distribution Dates (and interest accrued thereon at the then
applicable Pass-Through Rate on the Class B Certificates, without giving effect
to the Pool Available Funds Cap) will be, together with the Class A-2 LIBOR
Carryover Amount, the "LIBOR Carryover Amount". Any LIBOR Carryover Amount on
the Class A-2 and Class B Certificates will be paid on future Distribution Dates
from and to the extent of funds available in a reserve fund maintained by the
Trustee (the "Basis Risk Reserve Fund"). The source of funds on deposit in the
Basis Risk
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<PAGE>
Reserve Fund will be limited to an initial deposit of $5,000 and, as provided in
the Pooling and Servicing Agreement, amounts that would otherwise be distributed
on the Class X Certificate.
The "Maximum Cap" for any Distribution Date is the weighted average of
the Mortgage Interest Rates on the Sub-group 2A Mortgage Loans and the Maximum
Loan Rates on the Sub-group 2B Mortgage Loans, excluding those Mortgage Loans
that have no fixed Maximum Loan Rate.
The "Pool Maximum Cap" for any Distribution Date is the weighted
average of the Mortgage Interest Rates on the Loan Group 1 and Sub-group 2A
Mortgage Loans and the Maximum Loan Rates on the Sub-group 2B Mortgage Loans,
excluding those Mortgage Loans that have no fixed Maximum Loan Rate.
Calculation of One-Month LIBOR
The Pass-Through Rate on the Senior Certificates for the first
Distribution Date will be determined on the second business day preceding the
Closing Date and for each subsequent Distribution Date will be determined on the
second business day prior to the immediately preceding Distribution Date (each
such date, an "Interest Determination Date"). With respect to each Distribution
Date, One-Month LIBOR will equal the interbank offered rate for one-month United
States dollar deposits in the London market as quoted on Telerate Page 3750 as
of 11:00 A.M., London time, on the related Interest Determination Date.
"Telerate Page 3750" means the display designated as page 3750 on the Bridge
Telerate (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposit in the U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Servicer) as of
11:00 A.M., London time, on the related Interest Determination Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Senior
Certificates and Class B Certificates. The Trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate will be the arithmetic
mean of the quotations. If on such date fewer than two quotations are provided
as requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Servicer, as of 11:00 A.M., New York City time, on such date for loans
in U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Senior
Certificates and Class B Certificates. If no such quotations can be obtained,
the rate will be LIBOR for the prior Distribution Date.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Senior Certificates for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yields to maturity and weighted average lives of the Offered
Certificates will depend upon, among other things, the price at which such
Offered Certificates are purchased, the amount and timing of principal payments
on the applicable Mortgage Loan Group, the allocation of Available Funds to
various Classes of Offered Certificates, the amount and timing of Mortgagor
delinquencies and defaults on the Mortgage Loans, the rate of liquidations and
Realized Losses and the allocation of Realized Losses to various Classes of
Offered Certificates.
The rate of payment of principal, the aggregate amount of distributions
and the yield to maturity of the Offered Certificates will be affected by the
rate of defaults resulting in Realized Losses, by the severity of these losses
and by the timing thereof. If a purchaser of an Offered Certificate calculates
its anticipated yield based on an assumed rate of default and amount of Realized
Losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated.
The timing of Realized Losses
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<PAGE>
will also affect an investor's actual yield to maturity, even if the average
rate of defaults and severity of losses are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater is the effect
on an investor's yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans.
Some of the Mortgage Loans have a greater than normal risk of future defaults
and delinquencies, as compared to newly originated, high quality one- to
four-family residential mortgage loans of comparable size and geographic
concentration because such Mortgage Loans have in the past defaulted, and in
addition, the Bankruptcy Plan Mortgage Loans have been involved in subsequent
proceedings under the federal Bankruptcy Code, either as liquidations under
Chapter 7 or reorganizations with approved bankruptcy plans under Chapters 11 or
13. See "The Mortgage Pool--General" herein.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Seller or Servicer). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" herein.
Unscheduled payments of principal (whether resulting from prepayments,
repurchases, liquidations, casualties or condemnations) will result in
distributions on the related Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which such Class of Offered Certificates is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of the
Mortgage Loans. Further, an investor should consider the risk that, in the case
of any Offered Certificate purchased at a discount, a slower than anticipated
rate of principal payments (including prepayments) on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, a
faster than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Loan Rates on the Mortgage
Loans, such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with the Group 1 and Sub-group 2A Mortgage
Loans, the Sub-group 2B Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors with adjustable-rate Mortgage
Loans may be inclined to refinance their adjustable-rate Mortgage Loans with a
fixed-rate loan to "lock in" a lower interest rate. The existence of the
applicable Periodic Rate Cap and Maximum Rate also may affect the likelihood of
prepayments resulting from refinancings. No assurances can be given as to the
rate of prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Sub-group
2B Mortgage Loans may differ from that on the Group 1 Mortgage Loans and
Sub-group 2A Mortgage Loans because the amount of the Monthly Payments on the
Sub-group 2B Mortgage Loans are subject to adjustment on each Adjustment Date.
In addition, a majority of the Sub-group 2B Mortgage Loans will not have their
initial Adjustment Date for one to five years after the origination thereof. The
prepayment experience of the Delayed First Adjustment Mortgage Loans may differ
from that of the other Sub-group 2B Mortgage Loans. The Delayed First Adjustment
Mortgage Loans may be subject to greater rates of prepayments as they approach
their initial Adjustment Dates even if market interest rates are only slightly
higher or lower than the Loan Rates on the Delayed First Adjustment Mortgage
Loans as borrowers seek to avoid changes in their Monthly Payments.
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<PAGE>
The weighted average life and yield to maturity of each Class of
Certificates will also be influenced by the amount of Monthly Excess Cashflow
Amount generated by the Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Monthly Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balance of the Certificates will be influenced by,
among other factors, (i) the overcollateralization level of the Mortgage Loans
at such time (i.e., the extent to which interest on the Mortgage Loans is
accruing on a higher Principal Balance than the Certificate Principal Balance of
the Certificates); (ii) the delinquency and default experience of the Mortgage
Loans, and (iii) the level of the various indices for the Sub-group 2B Mortgage
Loans. To the extent that greater amounts of Monthly Excess Cashflow Amounts are
distributed in reduction of the Certificate Principal Balance of a Class of
Certificates, the weighted average life thereof can be expected to shorten. No
assurance can be given as to the amount of Monthly Excess Cashflow Amounts
distributed at any time or in the aggregate.
For ease of presentation, each Loan Group has been divided into two
sub-groups. Each sub-group consists of Mortgage Loans with distinct
characteristics which are likely to produce differing prepayment, delinquency
and loss experience among the sub-groups. However, since the Class A-1
certificates represent an interest in Loan Group 1 (including both sub-groups)
and the Class A-2 Certificates represent an interest in Loan Group 2 (including
both sub-groups), the prepayment, delinquency and loss experience on a Class of
Senior Certificates will represent a combination of the experience on the two
related sub-groups. Similarly, the prepayment, delinquency and loss experience
on the Subordinate Certificates will reflect a combination of the experience of
both Loan Groups, consisting of all four sub-groups. There can be no assurance
that any such combined experience will correlate with the experience expected on
a particular sub-group of Mortgage Loans.
The Subordinate Certificates are not expected to receive any principal
distributions until at least the Distribution Date in September 2002 (unless the
Certificate Principal Balances of the Senior Certificates are reduced to zero
prior thereto). As a result, the weighted average lives of the Subordinate
Certificates will be longer than would have been the case if principal
distributions were to be made on a pro rata basis. The longer weighted average
lives may increase the risk that an Applied Loss Amount will be allocated to one
or more Classes of Subordinate Certificates.
Additional Information
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Class A Certificates with the
Commission in a report on Form 8-K and may file certain additional yield tables
and other computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by one or more of the Underwriters at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of any Class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date, until each dollar of principal is scheduled to be repaid to the investors
in such Class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the Classes of Offered Certificates are expected to vary substantially
from the weighted average remaining terms to stated maturity of the Mortgage
Loans as set forth herein under "The Mortgage Pool."
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The model used in this Prospectus Supplement, the "Constant Prepayment
Rate" or "CPR" represents an assumed rate of prepayment each month expressed as
an annual rate relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The tables on pages S-81 through S-85 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There are
certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-81 through S-85. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-81
through S-85 were determined assuming that (the "Structuring Assumptions"): (i)
the Mortgage Loans consist of 4 sub-groups of loans with the characteristics set
forth in the table below, (ii) the closing date for the Offered Certificates
occurs on August 27, 1999 and the Offered Certificates were sold to investors on
such date, (iii) distributions on the Certificates are made on the 25th day of
each month regardless of the day on which the Distribution Date actually occurs,
commencing in September 1999, in accordance with the allocation of Available
Funds set forth above under "Description of the Certificates", (iv) the Mortgage
Loans prepay in accordance with the Prepayment Scenarios indicated, (v)
prepayments include thirty days' interest thereon, (vi) the Seller is not
required to substitute or repurchase any or all of the Mortgage Loans pursuant
to the Pooling and Servicing Agreement and no optional termination is exercised,
except with respect to the entries identified by the row heading "Weighted
Average Life (years) to Optional Termination" in the tables below, (vii) the
Overcollateralization Target Amount is set initially as specified herein and
thereafter decreases as described in the definition thereof, (viii) scheduled
payments for all Mortgage Loans are received on the first day of each month
commencing in September 1999, the principal portion of such payments is computed
prior to giving effect to prepayments received in such month and there are no
losses or delinquencies with respect to such Mortgage Loans, (ix) all Mortgage
Loans prepay at the same rate and all such payments are treated as prepayments
in full of individual Mortgage Loans, with no shortfalls in collection of
interest, (x) such prepayments are received on the last day of each month
commencing in August 1999, (xi) the aggregate of the rates at which the
Servicing Fee and the Trustee Fee are calculated is 0.3875% for Sub-group 1A and
0.5125% for Sub-group 1B and Group 2, (xii) One-Month LIBOR is at all times
equal to 5.325%, (xiii) the Pass-Through Rates for the Offered Certificates are
as set forth herein, (xiv) the Mortgage Interest Rate for each Adjustable Rate
Mortgage Loan is adjusted on its next Adjustment Date (and on subsequent
Adjustment Dates, if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject to the
applicable Periodic Rate Caps, Minimum Loan Rates and Maximum Loan Rates), and
(xv) with respect to the Adjustable Rate Mortgage Loans, the 1 Year T-Bill Index
is equal to 5.18%; and 6 Month LIBOR is equal to 5.88125%. Nothing contained in
the foregoing assumptions should be construed as a representation that the
Mortgage Loans will not experience delinquencies or losses.
Based on the foregoing assumptions and the following prepayment
scenarios and assumed mortgage loan characteristics, the tables indicate the
projected weighted average lives of each Class of Offered Certificates, and set
forth the percentages of the Original Certificate Principal Balance of each such
Class that would be outstanding after each of the dates shown.
<TABLE>
<CAPTION>
Loan Group Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII
<S> <C> <C> <C> <C> <C> <C> <C>
Sub-group 1A 3.0 6.0 9.0 12.0 15.0 18.0 21.0
Sub-group 1B 5.5 11.0 16.5 22.0 27.5 33.0 38.5
Sub-group 2A 5.5 11.0 16.5 22.0 27.5 33.0 38.5
Sub-group 2B 7.5 15.0 22.5 30.0 37.5 45.0 52.5
</TABLE>
S-80
<PAGE>
Assumed Mortgage Loan Characteristics
<TABLE>
<CAPTION>
Amortized
Remaining Amortized Remaining
Principal Loan Rate Term Original Term Original Balloon Balloon Term
Description Balance ($) (%) (months) (months) Term (months) (months)
Sub-group 1A
- ------------
<S> <C> <C> <C> <C> <C> <C>
FHA/VA 3,370,395 9.993 194 349 N/A N/A
FHA/VA 5,285,257 8.740 275 357 N/A N/A
FHA/VA 22,578,137 8.301 332 360 N/A N/A
Sub-group 1B
- ------------
Fixed 8,604,056 10.433 178 212 N/A N/A
Fixed 29,556 9.990 174 180 N/A N/A
Fixed 70,801 9.990 176 180 N/A N/A
Fixed 1,034,993 10.916 202 209 N/A N/A
Fixed 1,990,547 9.852 196 201 N/A N/A
Fixed 1,657,453 10.385 282 314 N/A N/A
Fixed 1,260,978 10.937 294 300 N/A N/A
Fixed 386,067 9.840 295 300 N/A N/A
Fixed 39,079,180 8.953 356 360 N/A N/A
Fixed 616,214 10.755 352 360 N/A N/A
Fixed 487,626 9.658 356 360 N/A N/A
Fixed 3,922,172 10.209 354 360 N/A N/A
Fixed 900,814 10.055 356 360 N/A N/A
Fixed 11,943,013 9.882 355 360 N/A N/A
Fixed 2,600,574 9.755 339 360 158 137
Fixed 127,315 11.990 351 360 180 171
Fixed 185,417 11.654 336 360 180 156
Fixed 2,286,927 10.864 350 360 180 170
Fixed 657,787 10.244 352 360 180 172
Sub-group 2A
- -------------
Fixed 252,200 8.000 179 180 N/A N/A
Fixed 698,146 9.305 213 217 N/A N/A
Fixed 290,070 9.500 290 360 N/A N/A
Fixed 9,527,611 8.367 356 360 N/A N/A
Fixed 479,093 9.750 356 360 N/A N/A
Fixed 3,845,318 9.220 356 360 N/A N/A
Fixed 1,062,010 10.447 352 360 225 217
<CAPTION>
Gross Margin Lifetime Lifetime Months to Next Initial Periodic Periodic Rate
Description (%) Cap (%) Floor (%) Adjustment Date Rate Cap (%) Cap (%)
Sub-group 1A
- ------------
<S> <C> <C> <C> <C> <C> <C>
FHA/VA N/A N/A N/A N/A N/A N/A
FHA/VA N/A N/A N/A N/A N/A N/A
FHA/VA N/A N/A N/A N/A N/A N/A
Sub-group 1B
- ------------
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Sub-group 2A
- -------------
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
Fixed N/A N/A N/A N/A N/A N/A
</TABLE>
S-81
<PAGE>
Assumed Mortgage Loan Characteristics (cont'd)
<TABLE>
<CAPTION>
Amortized
Remaining Amortized Remaining
Principal Loan Rate Term Original Term Original Balloon Balloon Term
Description Balance ($) (%) (months) (months) Term (months) (months)
Sub-group 2B
- ------------
<S> <C> <C> <C> <C> <C> <C>
6 month LIBOR 61,271 13.340 338 360 N/A N/A
6 month LIBOR 1,108,264 10.498 344 356 N/A N/A
6 month LIBOR 1,971,207 10.993 334 360 N/A N/A
6 month LIBOR 890,362 12.086 347 360 N/A N/A
6 month LIBOR 2,709,337 10.999 348 360 N/A N/A
6 month LIBOR 5,681,523 11.057 348 360 N/A N/A
6 month LIBOR 6,770,527 11.234 349 360 N/A N/A
6 month LIBOR 5,241,859 10.093 344 354 N/A N/A
6 month LIBOR 3,541,896 10.599 348 360 N/A N/A
6 month LIBOR 603,404 10.541 349 360 N/A N/A
6 month LIBOR 1,009,213 12.340 348 360 N/A N/A
6 month LIBOR 92,007 9.250 352 360 N/A N/A
6 month LIBOR 518,351 10.670 348 360 N/A N/A
6 month LIBOR 501,731 8.156 349 360 N/A N/A
6 month LIBOR 103,074 8.750 353 360 N/A N/A
1 Year Treasury 259,576 10.125 350 360 N/A N/A
1 Year Treasury 5,657,003 7.567 312 360 N/A N/A
<CAPTION>
Gross Margin Lifetime Lifetime Months to Next Initial Periodic Periodic Rate
Description (%) Cap (%) Floor (%) Adjustment Date Rate Cap (%) Cap (%)
Sub-group 2B
- ------------
<S> <C> <C> <C> <C> <C> <C>
6 month LIBOR 8.590 19.840 13.340 2 3.000 1.500
6 month LIBOR 5.373 15.865 9.348 4 1.500 1.500
6 month LIBOR 6.407 16.796 9.905 5 1.966 1.368
6 month LIBOR 7.233 17.406 10.946 6 1.621 1.460
6 month LIBOR 7.901 17.590 10.953 12 3.000 1.491
6 month LIBOR 7.410 17.780 11.017 13 2.991 1.451
6 month LIBOR 7.840 17.818 11.234 13 2.867 1.440
6 month LIBOR 6.460 16.593 10.093 14 3.000 1.500
6 month LIBOR 7.614 17.088 10.645 24 2.964 1.435
6 month LIBOR 7.657 17.041 10.541 25 3.000 1.500
6 month LIBOR 7.078 18.516 11.896 27 2.424 1.500
6 month LIBOR 5.750 16.250 9.250 40 3.000 1.500
6 month LIBOR 7.078 17.170 10.670 48 3.000 1.500
6 month LIBOR 6.166 14.656 8.156 49 3.000 1.500
6 month LIBOR 5.150 15.250 8.750 53 3.000 1.500
1 Year Treasury 7.375 17.125 10.125 2 2.000 2.000
1 Year Treasury 2.733 12.128 2.375 11 1.497 1.243
</TABLE>
S-82
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class A-1
-----------------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
August 25, 2000 93 87 81 75 69 63 57
August 25, 2001 86 75 65 55 46 38 30
August 25, 2002 79 64 51 39 29 20 8
August 25, 2003 73 55 41 33 27 20 8
August 25, 2004 67 46 35 27 21 17 8
August 25, 2005 61 40 30 22 17 12 8
August 25, 2006 55 36 26 19 13 9 6
August 25, 2007 49 32 22 15 10 6 4
August 25, 2008 44 28 19 13 8 5 3
August 25, 2009 39 25 16 10 6 3 2
August 25, 2010 36 22 14 8 4 3 2
August 25, 2011 33 19 12 6 3 2 1
August 25, 2012 30 17 10 5 3 1 0
August 25, 2013 27 15 8 4 2 1 0
August 25, 2014 24 13 7 3 2 0 0
August 25, 2015 22 11 5 2 1 0 0
August 25, 2016 20 10 4 2 1 0 0
August 25, 2017 18 9 4 2 0 0 0
August 25, 2018 16 8 3 1 0 0 0
August 25, 2019 14 6 2 1 0 0 0
August 25, 2020 13 5 2 0 0 0 0
August 25, 2021 11 4 1 0 0 0 0
August 25, 2022 9 3 1 0 0 0 0
August 25, 2023 8 3 0 0 0 0 0
August 25, 2024 6 2 0 0 0 0 0
August 25, 2025 5 1 0 0 0 0 0
August 25, 2026 3 0 0 0 0 0 0
August 25, 2027 2 0 0 0 0 0 0
August 25, 2028 0 0 0 0 0 0 0
August 25, 2029 0 0 0 0 0 0 0
Weighted Ave. Life 9.94 6.89 5.10 3.96 3.15 2.51 1.89
to (Mat) (1)
Weighted Ave. Life 9.67 6.39 4.61 3.52 2.76 2.18 1.61
to (Call) (1)
</TABLE>
* Rounded to the nearest whole percentage.
- -----------
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on each
Distribution Date on such Class of Certificates by the number of years from the
date of issuance of the certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in principal amount on such Class of Certificates.
S-83
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class A-2
---------------------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
------------ ------------ --------------- ------------ --------------- ------------ -------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
August 25, 2000 91 82 73 65 56 48 39
August 25, 2001 82 67 53 40 28 18 9
August 25, 2002 74 54 36 22 10 0 0
August 25, 2003 66 42 25 16 8 0 0
August 25, 2004 59 33 19 10 4 0 0
August 25, 2005 53 26 14 6 1 0 0
August 25, 2006 46 21 10 3 0 0 0
August 25, 2007 41 18 7 1 0 0 0
August 25, 2008 35 15 5 0 0 0 0
August 25, 2009 31 12 3 0 0 0 0
August 25, 2010 28 10 1 0 0 0 0
August 25, 2011 25 7 0 0 0 0 0
August 25, 2012 23 6 0 0 0 0 0
August 25, 2013 21 4 0 0 0 0 0
August 25, 2014 18 3 0 0 0 0 0
August 25, 2015 16 2 0 0 0 0 0
August 25, 2016 14 1 0 0 0 0 0
August 25, 2017 12 0 0 0 0 0 0
August 25, 2018 10 0 0 0 0 0 0
August 25, 2019 9 0 0 0 0 0 0
August 25, 2020 7 0 0 0 0 0 0
August 25, 2021 6 0 0 0 0 0 0
August 25, 2022 5 0 0 0 0 0 0
August 25, 2023 3 0 0 0 0 0 0
August 25, 2024 2 0 0 0 0 0 0
August 25, 2025 1 0 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0 0
August 25, 2028 0 0 0 0 0 0 0
August 25, 2029 0 0 0 0 0 0 0
Weighted Ave. Life 8.31 4.53 2.96 2.14 1.58 1.15 0.94
to (Mat) (1)
Weighted Ave. Life 8.24 4.52 2.96 2.14 1.58 1.15 0.94
to (Call) (1)
</TABLE>
- -----------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on each
Distribution Date on such Class of Certificates by the number of years from the
date of issuance of the certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in principal amount on such Class of Certificates.
S-84
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class M-1
---------------------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
----------------- ------------ -------------- -------------- ----------- ------------- ------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
August 25, 2000 100 100 100 100 100 100 100
August 25, 2001 100 100 100 100 100 100 100
August 25, 2002 100 100 100 100 100 100 100
August 25, 2003 100 100 95 73 56 77 100
August 25, 2004 100 100 79 58 42 30 54
August 25, 2005 100 94 66 46 31 22 15
August 25, 2006 100 83 55 36 24 16 10
August 25, 2007 100 72 46 29 18 11 7
August 25, 2008 100 64 38 23 14 8 5
August 25, 2009 98 56 32 18 10 6 4
August 25, 2010 90 48 26 14 8 5 1
August 25, 2011 81 41 21 11 6 3 0
August 25, 2012 74 36 18 9 5 0 0
August 25, 2013 67 31 15 7 4 0 0
August 25, 2014 59 26 12 6 1 0 0
August 25, 2015 53 22 10 4 0 0 0
August 25, 2016 48 19 8 3 0 0 0
August 25, 2017 43 16 6 1 0 0 0
August 25, 2018 38 14 5 0 0 0 0
August 25, 2019 33 11 4 0 0 0 0
August 25, 2020 29 9 3 0 0 0 0
August 25, 2021 25 8 0 0 0 0 0
August 25, 2022 20 6 0 0 0 0 0
August 25, 2023 17 5 0 0 0 0 0
August 25, 2024 13 3 0 0 0 0 0
August 25, 2025 10 0 0 0 0 0 0
August 25, 2026 6 0 0 0 0 0 0
August 25, 2027 2 0 0 0 0 0 0
August 25, 2028 0 0 0 0 0 0 0
August 25, 2029 0 0 0 0 0 0 0
Weighted Ave. Life
to (Mat) (1) 17.56 12.16 8.91 6.87 5.76 5.30 5.51
Weighted Ave. Life
to (Call) (1) 17.02 11.29 8.08 6.14 5.13 4.75 4.95
</TABLE>
- ------------
* Rounded to the nearest whole percentage
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on each
Distribution Date on such Class of Certificates by the number of years from the
date of issuance of the certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in principal amount on such Class of Certificates.
S-85
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class M-2
--------------------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------- -------------- ------------ -------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
August 25, 2000 100 100 100 100 100 100 100
August 25, 2001 100 100 100 100 100 100 100
August 25, 2002 100 100 100 100 100 100 100
August 25, 2003 100 100 95 73 56 43 51
August 25, 2004 100 100 79 58 42 30 22
August 25, 2005 100 94 66 46 31 22 15
August 25, 2006 100 83 55 36 24 16 10
August 25, 2007 100 72 46 29 18 11 7
August 25, 2008 100 64 38 23 14 8 4
August 25, 2009 98 56 32 18 10 6 0
August 25, 2010 90 48 26 14 8 3 0
August 25, 2011 81 41 21 11 6 0 0
August 25, 2012 74 36 18 9 3 0 0
August 25, 2013 67 31 15 7 0 0 0
August 25, 2014 59 26 12 5 0 0 0
August 25, 2015 53 22 10 2 0 0 0
August 25, 2016 48 19 8 0 0 0 0
August 25, 2017 43 16 6 0 0 0 0
August 25, 2018 38 14 4 0 0 0 0
August 25, 2019 33 11 2 0 0 0 0
August 25, 2020 29 9 0 0 0 0 0
August 25, 2021 25 8 0 0 0 0 0
August 25, 2022 20 6 0 0 0 0 0
August 25, 2023 17 2 0 0 0 0 0
August 25, 2024 13 0 0 0 0 0 0
August 25, 2025 10 0 0 0 0 0 0
August 25, 2026 6 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0 0
August 25, 2028 0 0 0 0 0 0 0
August 25, 2029 0 0 0 0 0 0 0
Weighted Ave.
Life to (Mat) (1) 17.54 12.11 8.84 6.80 5.61 4.96 4.69
Weighted Ave. Life
to (Call)(1) 17.02 11.29 8.08 6.14 5.04 4.46 4.26
</TABLE>
- ------------
* Rounded to the nearest whole percentage
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on each
Distribution Date on such Class of Certificates by the number of years from the
date of issuance of the certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in principal amount on such Class of Certificates.
S-86
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
----------- -------------- -------------- ----------- ------------ ----------------- ------------------
Distribution Date
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
August 25, 2000 100 100 100 100 100 100 100
August 25, 2001 100 100 100 100 100 100 100
August 25, 2002 100 100 100 100 100 100 100
August 25, 2003 100 100 95 73 56 43 32
August 25, 2004 100 100 79 58 42 30 22
August 25, 2005 100 94 66 46 31 22 15
August 25, 2006 100 83 55 36 24 16 10
August 25, 2007 100 72 46 29 18 11 3
August 25, 2008 100 64 38 23 14 6 0
August 25, 2009 98 56 32 18 10 1 0
August 25, 2010 90 48 26 14 5 0 0
August 25, 2011 81 41 21 11 1 0 0
August 25, 2012 74 36 18 8 0 0 0
August 25, 2013 67 31 15 3 0 0 0
August 25, 2014 59 26 12 0 0 0 0
August 25, 2015 53 22 9 0 0 0 0
August 25, 2016 48 19 5 0 0 0 0
August 25, 2017 43 16 1 0 0 0 0
August 25, 2018 38 14 0 0 0 0 0
August 25, 2019 33 11 0 0 0 0 0
August 25, 2020 29 8 0 0 0 0 0
August 25, 2021 25 4 0 0 0 0 0
August 25, 2022 20 0 0 0 0 0 0
August 25, 2023 17 0 0 0 0 0 0
August 25, 2024 13 0 0 0 0 0 0
August 25, 2025 9 0 0 0 0 0 0
August 25, 2026 1 0 0 0 0 0 0
August 25, 2027 0 0 0 0 0 0 0
August 25, 2028 0 0 0 0 0 0 0
August 25, 2029 0 0 0 0 0 0 0
Weighted Ave. Life
to (Mat) (1) 17.49 11.99 8.70 6.67 5.45 4.73 4.31
Weighted Ave. Life
to (Call)(1) 17.02 11.29 8.08 6.13 5.00 4.33 3.97
</TABLE>
- ------------
* Rounded to the nearest whole percentage
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on each
Distribution Date on such Class of Certificates by the number of years from the
date of issuance of the certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the aggregate amount of the
assumed net reduction in principal amount on such Class of Certificates.
S-87
<PAGE>
Final Scheduled Distribution Dates
The Final Scheduled Distribution Date of each Class of Offered
Certificates is set forth under "Summary of Prospectus Supplement." The Final
Scheduled Distribution Date for the Class A-1 and Class A-2 Certificates has
been calculated on the basis of the Structuring Assumptions and the assumptions
that there are no prepayments and no Monthly Excess Interest Amounts are used to
create overcollateralization. The Final Scheduled Distribution Date for each
other Class of Offered Certificates has been set to equal the Distribution Date
in the thirteenth month after the month of maturity of the latest maturing
Mortgage Loan. Since the rate of distributions in reduction of the Certificate
Principal Balance of each Class of Offered Certificates will depend on the rate
of payment (including prepayments) of the Mortgage Loans, the Certificate
Principal Balance of any such Class could be reduced to zero significantly
earlier or later than the Final Scheduled Distribution Date. The rate of
payments on the Mortgage Loans will depend on their particular characteristics,
as well as on prevailing interest rates from time to time and other economic
factors, and no assurance can be given as to the actual payment experience of
the Mortgage Loans.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust Fund. See "Method of Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the Basis Risk Reserve Fund, will comprise multiple REMICs
organized in a tiered REMIC structure. Each Lower Tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the Lower Tier
REMICs and the Upper Tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Class R Certificate will represent
beneficial ownership of the residual interests in each of the REMICs. Elections
will be made to treat each Lower Tier REMIC and the Upper Tier REMIC as a REMIC
for federal income tax purposes.
Each Class of Offered Certificates will represent beneficial ownership
of a corresponding class of regular interests issued by the Upper Tier REMIC. In
addition, the Class A-2 and Class B Certificates will represent a beneficial
interest in the right to receive payments under the cap contract from the Basis
Risk Reserve Fund.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ( "Tax
Counsel" ) will deliver its opinion to the effect that, assuming compliance with
the Pooling and Servicing Agreement, for federal income tax purposes, each Lower
Tier REMIC and the Upper Tier REMIC will qualify as a REMIC within the meaning
of Section 860D of the Internal Revenue Code of 1986, as amended (the "Code").
In addition, Tax Counsel will deliver an opinion to the effect that the Basis
Risk Reserve Fund is an "outside reserve fund" that is beneficially owned by the
holders of the Class X Certificates. Moreover, Tax Counsel will deliver an
opinion to the effect that the rights of the holders of the Senior Certificates
to receive payments from the Basis Risk Reserve Fund represent, for federal
income tax purposes, interests in an interest rate cap contract (the "Cap
Contract").
Taxation of Regular Interests
A holder of a Class A-2 and Class B Certificate will be treated for
federal income tax purposes as owning an interest in the corresponding Class of
Regular Interest in the Upper Tier REMIC and an interest in the Cap Contract. A
holder of a Class A-2 or Class B Certificate must allocate its purchase price
for the Offered Certificate between its two components - the REMIC Regular
Interest component and the Cap Contract component. For information reporting
purposes, the Trustee will assume that, with respect to any Class A-2 and Class
B Certificate, the Cap Contract component will have only nominal value relative
to the value of the Regular Interest component. The Internal Revenue Service
(the "IRS") could, however, argue that the Cap Contract component has a greater
value than that allocated, and if that argument were to be sustained, the
Regular Interest component could be viewed as having been issued with an
additional amount of original issue discount ( "OID" ) (which could cause the
total amount of OID to exceed a statutorily defined de minimis amount). See
"Material Federal
S-88
<PAGE>
Income Tax Consequences - Taxation of Owners REMIC Regular Certificates -
Original Issue Discount and Premium" in the Prospectus.
For federal income tax reporting purposes, the classes of Offered
Certificates may be treated as having been issued with original issue discount.
The prepayment assumption that will be used in determining the rate of accrual
of original issue discount, premium and market discount, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Mortgage Loans in each sub-group will prepay at the
applicable prepayment percentage under Prepayment Scenario IV. No representation
is made that the Mortgage Loans will prepay at such rate or at any other rate.
See "Material Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount" in the Prospectus.
The IRS has issued regulations (the "OID Regulations") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Offered Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, securities such as the Offered
Certificates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates, and because the rules of the OID
Regulations relating to debt instruments having an adjustable rate of interest
are limited in their application in ways that could preclude their application
to such Certificates even in the absence of Section 1272(a)(6) of the Code, the
IRS could assert that the Offered Certificates should be treated as issued with
original issue discount or should be governed by the rules applicable to debt
instruments having contingent payments or by some other manner not yet set forth
in regulations. Prospective purchasers of the Offered Certificates are advised
to consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates if such Certificates are
required to be treated as issued with original issue discount generally would be
to report all income with respect to such Certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable Index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable Index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class A-2 or Class B
Certificate, the holder thereof must allocate the amount realized between the
two components of such Certificate based on the relative fair market values of
those components at the time of sale. Assuming that a Class A-2 or Class B
Certificate is held as a "capital asset" within the meaning of Section 1221 of
the Code, gain or loss on the disposition of an interest in the Cap Contract
component should be capital gain or loss, and gain or loss on the disposition of
the Regular Interest component should, subject to the limitation described
below, be capital gain or loss. Gain attributable to the Regular Interest
component of a Class A-2 or Class B Certificate will be treated as ordinary
income, however, to the extent such gain does not exceed the excess, if any, of
(i) the amount that would have been includible in the holder's gross income with
respect to the Regular Interest component had income thereon accrued at a rate
equal to 110% of the applicable federal rate as defined in Section 1274(d) of
the Code determined as of the date of purchase of the Class A-2 or Class B
Certificate over (ii) the amount actually included in such holder's income.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code, generally to the extent that the Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. Investors are cautioned that since the Class A-2 and Class B
Certificates comprise rights in addition to the rights under the Class A-2 and
Class B Regular Interests, the Class A-2 and Class B Certificates will not in
their entirety constitute assets described in Section 7701(a)(19) of the Code or
real estate assets described in Section 856(c)(4)(A) of the Code, and income
earned on the Class A-2 and Class B Regular Certificates will qualify as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code only to the extent that the income reflects the income
so qualifying earned by the Class A Regular Interests. The Class A-2 and Class B
Certificates also will not be treated as "qualified mortgages" under Section
860G(a)(3) of the Code in their entirety and may not be appropriate investments
for REMICs. See "Material Federal Income Tax Consequences--REMICs--
Characterization of Investments in REMIC Certificates" in the Prospectus.
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As indicated above, a portion of the purchase price paid by a holder to
acquire a Class A-2 or Class B Certificate will be attributable to the Cap
Contract component of such Certificate. The portion of the overall purchase
price attributable to the Cap Contract component must be amortized over the life
of a Class A-2 or Class B Certificate, taking into account the declining balance
of the related Regular Interest component. Treasury regulations concerning
notional principal contracts provide alternative methods for amortizing the
purchase price of an interest rate cap contract. Under one method - the level
yield constant interest method - the price paid for an interest rate cap is
amortized over the life of the cap as though it were the principal amount of a
loan bearing interest at a reasonable rate. Holders are urged to consult their
tax advisors concerning the methods that can be employed to amortize the portion
of the purchase price paid for the Cap Contract component of a Senior
Certificate.
Any payments made to a holder of a Class A-2 or Class B Certificate
from the Basis Risk Reserve Fund will be treated as periodic payments on an
interest rate cap contract. To the extent the sum of such periodic payments for
a year exceeds that year's amortized costs of the Cap Contract components, such
excess is ordinary income. If for any year the amount of that year's amortized
cost exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction.
Any LIBOR Carryover Amount received by the Class A-2 and Class B
Certificates will be treated by the Trustee as a payment in respect of a Cap
Contract. Although unexpected, there is a theoretical possibility that payment
of a Class A-2 LIBOR Carryover Amount will require a reduction in payments to
the Class M-1, M-2 and B Certificates. In such case, the Trustee will treat any
reductions as paid to the Holders of a Class of Certificates having its payments
reduced and then advanced or loaned by such Certificateholder to the Basis Risk
Reserve Fund. Any such advance would be treated as reimbursed from monies
otherwise available to the Class X Certificates. It is possible that the IRS
could disagree with the above characterization of these deemed payments.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any such tax
is imposed on the Trust Fund, such tax will be borne (i) by the Trustee, if the
Trustee has breached its obligations with respect to REMIC compliance under the
Agreement, (ii) the Servicer, if the Servicer has breached its obligations with
respect to REMIC compliance under the Agreement, and (iii) otherwise by the
Trust Fund, with a resulting reduction in amounts otherwise distributable to
Holders of the Offered Certificates. See "Description of the
Certificates--General" and "Material Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee and/or the Servicer. See "Material
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Material Federal Income Tax
Consequences--REMICs" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
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 Offered Certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement (including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its legal advisors whether the purchase or
holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975 of
the Code.
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The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), on May 24, 1990 to the
Representative which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes and civil
penalties imposed on such prohibited transactions pursuant to Sections 4975(a)
and (b) of the Code and Section 502(i) of ERISA, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of mortgage pass-through certificates underwritten by
an Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this discussion, the term
"Underwriter" shall include (a) the Underwriters, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with any Underwriter and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to the Offered Certificates.
The Exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Offered Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Offered Certificates by employee benefit and other plans
subject to Section 406 of ERISA or Section 4975 of the Code (each, a "Plan"),
must be on terms that are at least as favorable to the Plan as they would be in
an arm's-length transaction with an unrelated party. Second, the rights and
interests evidenced by the Offered Certificates must not be subordinate to the
rights and interests evidenced by the other certificates of the same trust.
Third, the Offered Certificates at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (
"National Credit Ratings Agencies" ). Fourth, the Trustee cannot be an affiliate
of any member of the "Restricted Group," which consists of any Underwriter, the
Depositor, the Servicer, each sub-servicer, any insurer and any mortgagor with
respect to the Mortgage Loans constituting more than 5% of the aggregate
unamortized principal balance of the Mortgage Loans as of the date of initial
issuance of the Offered Certificates. Fifth, the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable compensation
for underwriting the Offered Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage Loans to
the Trust Fund must represent not more than the fair market value of such
obligations; the sum of all payments made to and retained by the Servicer and
any sub-servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Sixth, the investing Plan must be
an accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Seventh, (i) the investment pool consists only of assets of the type enumerated
in the Exemption and which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been rated
in one of the three highest generic rating categories by one of the National
Credit Rating Agencies for at least one year prior to a Plan's acquisition of
certificates; and (iii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to a Plan's acquisition of certificates. See "ERISA
Considerations" in the Prospectus.
In addition, the Exemption will not apply to a Plan's investment in the
Offered Certificates if the plan fiduciary responsible for the decision to
invest in the Offered Certificates is a mortgagor or obligor with respect to
more than 5% of the fair market value of the obligations constituting the
Mortgage Loans or an affiliate of such a person, unless: (1) in the case of an
acquisition in connection with the initial issuance of any Certificates, at
least 50% of each Class of Certificates in which Plans have invested is acquired
by persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of acquisition;
(3) immediately after such acquisition, no more than 25% of the assets of any
Plan with respect to which the investing fiduciary has discretionary authority
or renders investment advice are invested in Certificates evidencing interest in
trusts sponsored or containing assets sold or serviced by the same entity; and
(4) the Plan is not sponsored by any member of the Restricted Group.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that such Certificates constitute "certificates" for purposes
of the Exemption and (b) that the specific and general conditions of the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
Because the characteristics of the Class M-1, Class M-2 and Class B
Certificates may not meet the requirements of the Exemption or any other issued
exemption under ERISA, the purchase and holding of the Class M-1, Class M-2 and
Class B Certificates by a Plan or by individual retirement accounts or other
plans subject to Section 4975 of the Code may result in prohibited transactions
or the imposition of excise taxes or civil penalties. Consequently, transfers of
the Class M-1, Class M-2 and Class B Certificates will not be registered by the
Trustee unless the Trustee receives: (i) a representation from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Code, nor a person acting on behalf of any
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such plan or arrangement nor using the assets of any such plan or arrangement to
effect such transfer; (ii) if the purchaser is an insurance company, a
representation that the purchaser is an insurance company which is purchasing
such Certificates with funds contained in an "insurance company general account"
(as such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of such
Certificates are covered under Sections I and III of PTCE 95-60; or (iii) an
opinion of counsel satisfactory to the Trustee that the purchase or holding of
such Certificate by a Plan, any person acting on behalf of a Plan or using such
Plan's assets, will not result in the assets of the Trust Fund being deemed to
be "plan assets" and subject to the prohibited transaction requirements of ERISA
and the Code and will not subject the Trustee to any obligation in addition to
those undertaken in the Agreement. Such representation as described above shall
be deemed to have been made to the Trustee by a beneficial owner's acceptance of
a Class M-1, Class M-2 or Class B Certificate in book-entry form. In the event
that such representation is violated, or any attempt to transfer to a Plan or
person acting on behalf of a Plan or using a Plan's assets is attempted without
the opinion of counsel described above, such attempted transfer or acquisition
shall be void and of no effect.
Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because Loan Group 1 includes second lien mortgage loans and
Owner-Financed Mortgage Loans that were originated by individuals and not by
financial institutions or mortgagees approved by the Secretary of Housing and
Urban Development.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, between the Depositor and Merrill Lynch, Pierce, Fenner & Smith, an
affiliate of the Depositor ("Merrill Lynch"), as representative (in such
capacity, the "Representative") of Merrill Lynch and Banc of America Securities
LLC (together with Merrill Lynch, the "Underwriters"), the Underwriters have
severally agreed to purchase and the Depositor has agreed to sell to the
Underwriters the principal amount of Certificates set forth opposite their names
in the tables below:
Principal Amount of:
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class M-1
Underwriter Certificates Certificates Certificates
- ----------------------------------------- --------------------- ------------------------- ----------------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............... $ 87,260,000 $ 33,840,000 $ 7,773,600
Banc of America Securities LLC......... $ 0.00 $ 8,460,000 $ 1,943,400
<CAPTION>
Principal Amount of:
Class M-2 Class B
Underwriter Certificates Certificates
- ----------------------------------------- ---------------------- ------------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............. $ 7,125,600 $ 4,534,400
Banc of America Securities LLC........ $ 1,781,400 $ 1,133,600
</TABLE>
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The Underwriters have advised the Depositor that they propose initially
to offer the Offered 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 0.125% of the Certificate denomination. The Underwriters may allow and
such dealers may reallow a concession not in excess of 0.125% 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 Offered 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
Offered Certificates. As an exception to these rules, the Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Offered Certificates. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Offered 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 Seller 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 Offered Certificates. In addition, neither
the Depositor, the Seller 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 been advised by the Underwriters that they intend to
make a market in the Offered Certificates but have no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
Certain of the Mortgage Loans in sub-group 2B are being acquired by the
Seller from an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
LEGAL MATTERS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor by Brown & Wood LLP, New York, New York and for
the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive the following ratings from Moody's Investors Service, Inc.,
Fitch IBCA, Inc. and Duff & Phelps Credit Rating Co.:
Class Moody's Fitch Duff
----- ------- ----- ----
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
M-1 Aa2 AA AA
M-2 A2 A A
B Baa2 BBB BBB
A securities rating addresses the likelihood of the receipt by
a certificateholder of distributions on the Mortgage Loans. The rating
takes into consideration the characteristics of the Mortgage Loans and
the structural, legal and tax aspects associated with the certificates.
The ratings on the Offered Certificates do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the
Mortgage Loans, the payment of any LIBOR Carryover Amount (with respect
to the Class A-2 or Class B Certificates) or the possibility that a
holder of an Offered Certificate might realize a lower than anticipated
yield.
The Depositor has not engaged any rating agency other than the
Rating Agencies to provide ratings on the Offered Certificates.
However, there can be no assurance as to whether any other rating
agency will rate the Offered Certificates, or, if it does, what rating
would be assigned by any such other rating agency. Any rating on the
Offered
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Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates by the Rating
Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by
the assigning rating organization. Each security rating should be
evaluated independently of any other security rating. In the event that
the ratings initially assigned to any of the Offered Certificates by
the Rating Agencies are subsequently lowered for any reason, no person
or entity is obligated to provide any additional support or credit
enhancement with respect to such Offered Certificates.
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INDEX OF PRINCIPAL DEFINITIONS
"60+ Day Delinquent Loan"....................................................73
"Accrued Certificate Interest"...............................................70
"Adjustment Date"............................................................40
"Advance"....................................................................61
"Alternative Documentation"..................................................56
"Applied Realized Loss Amount"...............................................73
"arrearage"..................................................................15
"Arrearage"..................................................................24
"Assignment Program".........................................................53
"Bankruptcy Code"............................................................23
"Bankruptcy Plan Mortgage Loan"..............................................23
"Basis Risk Reserve Fund"....................................................76
"beneficial owner"...........................................................65
"Book-Entry Certificates"....................................................65
"Cap Contract"...............................................................88
"capital asset"..............................................................89
"Cedelbank Participants".....................................................67
"Certificate Owners".........................................................65
"Certificateholder"..........................................................65
"Certificates"...............................................................65
"Class A Principal Distribution Amount"......................................71
"Class A-1 Certificate Margin"...............................................76
"Class A-1 Formula Rate".....................................................76
"Class A-1 Principal Percentage".............................................71
"Class A-2 Certificate Margin"...............................................76
"Class A-2 Formula Rate".....................................................76
"Class A-2 Principal Percentage".............................................71
"Class B Applied Realized Loss Amount".......................................75
"Class B Principal Distribution Amount"......................................72
"Class B Realized Loss Amortization Amount"..................................75
"Class M-1 Applied Realized Loss Amount".....................................74
"Class M-1 Principal Distribution Amount"....................................71
"Class M-1 Realized Loss Amortization Amount"................................75
"Class M-2 Applied Realized Loss Amount".....................................75
"Class M-2 Principal Distribution Amount"....................................72
"Class M-2 Realized Loss Amortization Amount"................................75
"Code".......................................................................88
"Collection Account".........................................................60
"Compensating Interest"......................................................62
"Constant Prepayment Rate"...................................................80
"Cooperative"................................................................67
"CPR"........................................................................80
"Custodian"..................................................................59
"Cut-off Date Principal Balance".............................................22
"Cut-off Date"...............................................................22
"Defective Mortgage Loans"...................................................60
"Definitive Certificate".....................................................65
"Delinquent".................................................................24
"Determination Date".........................................................63
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"Distribution Account".......................................................61
"Distribution Date"..........................................................65
"due-on-sale"................................................................78
"EFSG".......................................................................55
"Eligible Account"...........................................................61
"Eligible Substitute Mortgage Loan"..........................................60
"Euroclear Operator".........................................................67
"Euroclear Participants".....................................................67
"Euroclear"..................................................................67
"European Depositaries"......................................................65
"Exemption"..................................................................91
"Extra Principal Distribution Amount"........................................72
"FHA Mortgage Loans".........................................................53
"FHA"........................................................................53
"Financial Intermediary".....................................................65
"Forbearance Plan Mortgage Loan".............................................23
"full documentation".........................................................56
"Global Securities"...........................................................1
"Gross Margin"...............................................................40
"Group 1 Available Funds Cap"................................................76
"Group 2 Available Funds Cap"................................................76
"HUD"........................................................................53
"IML"........................................................................67
"Index"......................................................................40
"Industry"...................................................................69
"Initial Periodic Rate Cap"..................................................40
"Interest Accrual Period"....................................................70
"Interest Carry Forward Amount"..............................................70
"Interest Determination Date"................................................77
"Interest Remittance Amount".................................................70
"IRS"........................................................................88
"Limited Documentation"......................................................56
"Litton".....................................................................57
"Loan Group 1"...............................................................23
"Loan Group 2"...............................................................23
"Loan Group Balance".........................................................23
"Loan Group".................................................................23
"Loan Rate"..............................................................24, 30
"lock-up".....................................................................1
"Maximum Cap"................................................................77
"Maximum Loan Rate"..........................................................40
"Merrill Lynch"..............................................................92
"MGIC".......................................................................55
"Minimum Loan Rate"..........................................................40
"Modified Scheduled Payments"................................................23
"Monthly Excess Cashflow Amount".............................................74
"Monthly Excess Interest Amount".........................................70, 73
"Monthly Payment"............................................................24
"Moody's"....................................................................55
"Mortgage Interest Rate".....................................................63
"Mortgage Loan Purchase Agreement"...........................................22
"Mortgage Loan Schedule".....................................................59
"Mortgage Loans".............................................................22
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"Mortgage Pool"..............................................................22
"mortgage related securities"............................................14, 92
"Mortgage"...................................................................24
"Mortgaged Property".........................................................24
"National Credit Ratings Agencies"...........................................91
"National Housing Act".......................................................53
"No Documentation"...........................................................56
"no-bid".....................................................................54
"Offered Certificates".......................................................65
"OID Regulations"............................................................89
"OID"........................................................................88
"One Year CMT"...............................................................52
"One-Month LIBOR"............................................................76
"Optional Termination Date"..................................................63
"Overcollateralization Amount"...............................................72
"Overcollateralization Deficiency"...........................................72
"Overcollateralization Release Amount".......................................72
"Pass-Through Rate"..........................................................75
"Performing Mortgage Loan"...................................................23
"Periodic Rate Cap"..........................................................40
"plan assets"................................................................92
"Plan".......................................................................91
"Pooling and Servicing Agreement"............................................59
"Prepayment Interest Shortfall"..............................................63
"Prepayment Period"..........................................................69
"Principal Balance"..........................................................22
"Principal Distribution Amount"..............................................72
"Principal Remittance Amount"................................................72
"PTCE 95-60".................................................................92
"Purchase Price".............................................................59
"qualified mortgages"........................................................89
"real estate assets".........................................................89
"Record Date"................................................................65
"Reference Bank Rate"........................................................77
"Regular Scheduled Payments".................................................23
"Related Documents"..........................................................59
"Relevant Depositary"........................................................65
"Relief Act".................................................................61
"Re-Performance Test"........................................................23
"Re-Performing Mortgage Loan"................................................23
"Representative".............................................................92
"Residual Certificates"......................................................65
"Restricted Group"...........................................................91
"Rules"......................................................................66
"Seller".....................................................................22
"Senior Certificates"........................................................65
"Senior Enhancement Percentage"..............................................73
"Senior Specified Enhancement Percentage"....................................73
"Servicing Advance"..........................................................62
"Servicing Fee Rate".........................................................62
"Servicing Fee"..............................................................62
"Six Month LIBOR"............................................................52
"SMMEA"......................................................................92
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"Special Servicing Fee"......................................................62
"Stated Documentation".......................................................56
"Stepdown Date"..............................................................73
"step-down"..................................................................74
"Structuring Assumptions"....................................................80
"Sub-group 1A"...............................................................23
"Sub-group 1B"...............................................................23
"Sub-group 2A"...............................................................23
"Sub-group 2B"...............................................................23
"Subordinated Certificates"..................................................65
"Sub-Performing Mortgage Loan"...............................................23
"Substitution Adjustment"....................................................60
"Systems"....................................................................69
"Targeted Overcollateralization Amount"......................................73
"Tax Counsel"................................................................88
"Telerate Page 3750".........................................................77
"Termination Price"..........................................................63
"Terms and Conditions".......................................................67
"Trigger Event"..............................................................73
"Trust Fund".................................................................22
"Trustee"....................................................................62
"U.S. Person".................................................................4
"Underwriter"................................................................91
"Underwriters"...............................................................92
"United States Housing Act"..................................................53
"Unpaid Realized Loss Amount"................................................75
"VA Mortgage Loans"..........................................................53
"VA".........................................................................53
"Collection Period"..........................................................70
Cedelbank............................................1, 65, 66, 67, 68, 1, 2, 3
DCR..........................................................................55
DTC.................................................65, 66, 67, 68, 69, 1, 2, 3
Pool Maximum Cap.............................................................77
S&P..........................................................................55
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered
Certificates will be offered globally (the "Global Securities") and
will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The
Depository Trust Company ("DTC"), Cedelbank or Euroclear. The Global
Securities will be tradable 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.
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 conventional
eurobonds, except that there will be no temporary global security and
no "lock-up" or restricted period. Investor 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 payment 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 prior mortgage loan asset backed certificates issues in
same-day funds.
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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, on the basis
of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of
360 days, as applicable. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global
Securities will be system and by the clearing system, in accordance
with its usual procedures, to the Cedelbank Participant's or Euroclear
Participant's account. The securities credit will appear the next day
(European time) and the cash debt 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 debt 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 preposition 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 preposition 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 European 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 Participants 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 Global Securities to the DTC
Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of either a
360-day year comprised of 30-day months or the actual number of days in
such accrual period and a year assumed to consist of 360 days, as
applicable. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of
the Cedelbank Participant or Euroclear
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<PAGE>
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 debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish
any overdraft 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 Global Securities 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
Owners or his 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).
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<PAGE>
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, his 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, partnership or other entity treated
as a corporation or partnership for United States federal income tax
purposes organized in or under the laws of the United States or any
state thereof or the District of Columbia or (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration
of the trust and one or more United States persons have 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.
A-4
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
Consider carefully the risk factors beginning on page 3 of this prospectus.
The securities of each series will not represent an obligation of or interest
in the depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, any
master servicer, any sub-servicer or any of their respective affiliates,
except to the limited extent described herein and in the related prospectus
supplement.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
The Securities
Merrill Lynch Mortgage Investors, Inc., as depositor, will sell the
securities, which may be in the form of asset backed certificates or asset
backed notes. Each issue of securities will have its own series designation
and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
o Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified
portion of future interest payments and a specified portion of future
principal payments on the assets in the related trust fund. In each
case, the specified portion may equal from 0% to 100%. A series may
include one or more classes of securities that are senior in right of
payment to one or more other classes. One or more classes of
securities may be entitled to receive distributions of principal,
interest or both prior to one or more other classes, or before or
after certain specified events have occurred. The related prospectus
supplement will specify each of these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund
will consist primarily of assets from one of the following categories:
o one or more segregated pools of various types of mortgage loans
and/or closed-end and/or revolving home equity loans (or certain
balances of these loans), in each case secured by first and/or junior
liens on one- to five-family residential properties, or security
interests in shares issued by cooperative housing corporations,
including mixed residential and commercial structures;
o home improvement installment sales contracts or installment loan
agreements originated by a home improvement contractor and secured by
a mortgage on the related mortgaged property that is junior to other
liens on the mortgaged property; and
o mortgage pass-through certificates or mortgage-backed securities
evidencing interests in mortgage loans or secured thereby or certain
direct obligations of the United States, agencies thereof or agencies
created thereby.
Each trust fund may be subject to early termination in certain
circumstances.
Market for the Securities
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued
and sold, there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities are made through Merrill Lynch, Pierce,
Fenner & Smith Incorporated and the other underwriters listed in the related
prospectus supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved these securities or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
MERRILL LYNCH & CO.
The date of this Prospectus is July 13, 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series. If the
prospectus supplement contains information about a particular series
that differs from the information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home improvement contracts
and/or securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home improvement contracts and/or securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Merrill Lynch Mortgage Investors, Inc., 250
Vesey Street, World Financial Center-North Tower, 10th Floor, New York, New
York 10281-1310, Attention: Secretary, and our telephone number is (212)
449-0357. For other means of acquiring additional information about us or a
series of securities, see "Incorporation of Certain Information by Reference"
beginning on page 93 of this prospectus.
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<PAGE>
RISK FACTORS
You should consider the following information carefully, since it identifies
certain significant sources of risk associated with an investment in the
securities.
There is a risk that the securities will have limited liquidity.
At the time a series of securities is issued, there will not be a
secondary market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated
currently expects to make a secondary market in the offered securities, but it
is not required to. We cannot assure you that a secondary market for the
securities of any series will develop or, if it does develop, that it will
provide holders of those securities with liquidity of investment or will
continue while those securities remain outstanding.
There is a risk associated with limited assets and that those assets will not
be sufficient to pay the securities in full.
o The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their affiliates.
o The only obligations with respect to the securities or the assets
securing them will be the obligations (if any) of any "warranting
party" (as further described in this prospectus) pursuant to certain
limited representations and warranties made with respect to the
mortgage loans, the master servicer's and any sub-servicer's
servicing obligations under the related agreements (including the
limited obligation to make certain advances in the event of
delinquencies on the mortgage loans, but only to the extent they deem
such advances recoverable) and, if described in the related
prospectus supplement, certain limited obligations of the master
servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible adjustable-rate
mortgage loan (as more fully described in this prospectus) upon
conversion to a fixed rate or a different index.
o Since certain representations and warranties with respect to the
mortgage assets may have been made and/or assigned in connection with
transfers of the mortgage assets prior to the closing date, the
rights of the trustee and the securityholders with respect to such
representations or warranties will be limited to their rights as an
assignee thereof.
o Unless otherwise specified in the related prospectus supplement, none
of the depositor, the master servicer or any affiliate thereof will
have any obligation with respect to representations or warranties
made by any other entity.
o Unless otherwise specified in the related prospectus supplement,
neither the securities nor the underlying assets will be guaranteed
or insured by any governmental agency or instrumentality, or by the
depositor, the master servicer, any sub-servicer or any of their
affiliates.
o Proceeds of the assets included in the related trust fund for each
series of securities (including the assets and any form of credit
enhancement) will be the sole source of payments on the securities,
and there will be no recourse to the depositor or any other entity in
the event that these proceeds are insufficient or otherwise
unavailable to make all payments provided for under the securities.
o Unless otherwise specified in the related prospectus supplement, a
series of securities will not have any claim against or security
interest in the trust funds for any other series. If the related
trust fund is insufficient to make payments on these securities, no
other assets will be available for payment of the deficiency.
Additionally, certain amounts remaining in certain funds or accounts,
including the collection account and any accounts maintained as
credit support, may be withdrawn under certain conditions, as
described in the related prospectus supplement. In the event of such
withdrawal, such amounts will not be available for future payment of
principal of or interest on the securities.
o If provided in the prospectus supplement for a series of securities
consisting of one or more classes of subordinate securities, on
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any distribution date in respect of which losses or shortfalls in
collections on the assets have been incurred, the amount of such
losses or shortfalls will be borne first by one or more classes of
the subordinate securities, and, thereafter, by the remaining classes
of securities in the priority and manner and subject to the
limitations specified in that prospectus supplement.
We refer you to "Description of the Trust Funds" for further information.
There is a risk that prepayments on the assets in a trust fund will adversely
affect the average life and yields of the related securities.
o Prepayments (including those caused by defaults) on the assets in any
trust fund generally will result in a faster rate of principal
payments on one or more classes of the related securities than if
payments on these assets were made as scheduled. Thus, the prepayment
experience on the assets may affect the average life of each class of
related securities. The rate of principal payments on pools of
mortgage loans varies between pools and from time to time is
influenced by a variety of economic, demographic, geographic, social,
tax, legal and other factors. We can't assure you as to the rate of
prepayment on the assets in any trust fund or that the rate of
payments will conform to any model we describe here or in any
prospectus supplement. If prevailing interest rates fall
significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain
at or above the rates borne by the mortgage loans underlying or
comprising the mortgage assets in any trust fund. As a result, the
actual maturity of any class of securities evidencing an interest in
a trust fund containing mortgage assets could occur significantly
earlier than expected.
o A series of securities may include one or more classes of securities
with priorities of payment and, as a result, yields on other classes
of securities, including classes of offered securities, of such
series may be more sensitive to prepayments on assets. A series of
securities may include one or more classes offered at a significant
premium or discount. Yields on these classes of securities will be
sensitive, and in some cases extremely sensitive, to prepayments on
mortgage assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the
amount of principal, as with certain classes of stripped interest
securities, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of securities may include
one or more classes of securities, including classes of offered
securities, that provide for distribution of principal thereof from
amounts attributable to interest accrued but not currently
distributable on one or more classes of accrual securities and, as a
result, yields on such securities will be sensitive to (a) the
provisions of such accrual securities relating to the timing of
distributions of interest thereon and (b) if such accrual securities
accrue interest at a variable or adjustable pass-through rate or
interest rate, changes in such rate.
We refer you to "Yield Considerations" in the prospectus and, if applicable,
in the related prospectus supplement for further information.
There is a risk that defaults by obligors or declines in the values of
mortgaged properties will result in losses to investors.
o An investment in securities such as the securities which generally
represent interests in mortgage loans may be affected by, among other
things, a decline in real estate values and changes in the
mortgagors' financial condition. No assurance can be given that
values of the mortgaged properties have remained or will remain at
their levels on the dates of origination of the related mortgage
loans. If the relevant residential real estate market should
experience an overall decline in property values such that the
outstanding balances of the related mortgage loans, and any secondary
financing on the mortgaged properties, become equal to or greater
than the value of the mortgaged properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry in that
market. In addition, in the case of mortgage loans that are subject
to negative amortization, due to the addition to principal balance of
deferred interest, the principal balances of such mortgage loans
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<PAGE>
could be increased to an amount equal to or in excess of the value of
the underlying mortgaged properties, thereby increasing the
likelihood of default.
o To the extent that these losses are not covered by the applicable
credit support, if any, holders of securities of the series
evidencing interests in the related mortgage loans will bear all risk
of loss resulting from default by mortgagors and will have to look
primarily to the value of the mortgaged properties for recovery of
the outstanding principal and unpaid interest on the defaulted
mortgage loans. Certain of the types of mortgage loans may involve
additional uncertainties not present in traditional types of loans.
o For example, certain of the mortgage loans provide for escalating or
variable payments by the mortgagor under the mortgage loan, as to
which the mortgagor is generally qualified on the basis of the
initial payment amount. In some cases the mortgagor's income may not
be sufficient to enable them to continue to make their loan payments
as such payments increase and thus the likelihood of default will
increase.
o In addition to the foregoing, certain geographic regions of the
United States from time to time will experience weaker regional
economic conditions and housing markets, and will thus experience
higher rates of loss and delinquency than the mortgage loans
generally will experience. The mortgage loans underlying certain
series of securities may be concentrated in these regions, and this
concentration may present risk considerations in addition to those
generally present for similar mortgage-backed securities without this
concentration.
o Further, the rate of default on mortgage loans that are refinance or
limited documentation mortgage loans, and on mortgage loans with high
loan-to-value ratios, may be higher than for other types of mortgage
loans. Additionally, a decline in the value of the mortgaged
properties will increase the risk of loss particularly with respect
to any related junior mortgage loans.
We refer you to "--There is a risk that there will be reduced or no proceeds
available when junior lien mortgage loans are liquidated." in this prospectus
for further information.
o In addition, a prospectus supplement may specify that the
loan-to-value ratios for the mortgage loans in the related trust will
exceed 100%. The related mortgaged properties will thus be highly
unlikely to provide adequate security for these mortgage loans. To
the extent specified in that prospectus supplement, the assessment of
the credit history of a borrower and that borrower's capacity to make
payments on the related mortgage loan will have been the primary
considerations in underwriting the mortgage loans included in that
trust. The evaluation of the adequacy of the loan-to-value ratio, if
so specified in the related prospectus supplement, will have been
given less consideration, and in certain cases no consideration, in
underwriting those mortgage loans.
There is a risk that there will be reduced or no proceeds available when
junior lien mortgage loans are liquidated.
o Certain mortgage loans may be secured by junior liens and the related
first and other senior liens, if any, may not be included in the
mortgage pool.
o The primary risk to holders of mortgage loans secured by junior liens
is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior lien to satisfy
fully both the senior lien and the mortgage loan. If a holder of the
senior lien forecloses on a mortgaged property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of
court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due
and owing to the holder of the senior lien. The claims of the holder
of the senior lien will be satisfied in full out of proceeds of the
liquidation of the mortgage loan, if these proceeds are sufficient,
before the trust fund as holder of the junior lien
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<PAGE>
receives any payments in respect of the mortgage loan.
o If the master servicer were to foreclose on any mortgage loan, it
would do so subject to any related senior lien. In order for the debt
related to the mortgage loan to be paid in full at such sale, a
bidder at the foreclosure sale of that mortgage loan would have to
bid an amount sufficient to pay off all sums due under the mortgage
loan and the senior lien or purchase the mortgaged property subject
to the senior lien. In the event that such proceeds from a
foreclosure or similar sale of the related mortgaged property were
insufficient to satisfy both loans in the aggregate, the trust fund,
as the holder of the junior lien, and, accordingly, holders of the
certificates, would bear the risk of delay in distributions while a
deficiency judgment against the borrower was being obtained and the
risk of loss if the deficiency judgment were not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject
to the senior mortgage.
We refer you to "Certain Legal Aspects of the Mortgage Loans -- Junior
Mortgages" in this prospectus for further information.
There is a risk that any applicable credit support will not cover all losses.
o The prospectus supplement for a series of certificates will describe
any credit support in the related trust fund, which may include
letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or combinations of these. Any credit
support will be subject to the conditions and limitations described
here and in the related prospectus supplement. Moreover, this credit
support may not cover all potential losses or risks; for example,
credit support may or may not cover fraud or negligence by a mortgage
loan or other parties.
o A series of securities may include one or more classes of subordinate
securities (which may include offered securities), if we provide for
that in the related prospectus supplement. Although subordination is
designed to reduce the risk to holders of senior securities of
delinquent distributions or ultimate losses, the amount of
subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more
classes of securities of a series are made in a specified order of
priority, any limits with respect to the aggregate amount of claims
under any related credit support may be exhausted before the
principal of the lower priority classes of securities of this series
has been repaid. As a result, the impact of significant losses and
shortfalls on the assets may fall primarily upon those classes of
securities having a lower priority of payment. Moreover, if a form of
credit support covers more than one series of securities (we refer to
this as a "covered trust"), holders of securities evidencing an
interest in a covered trust will be subject to the risk that this
credit support will be exhausted by the claims of other covered
trusts.
o The amount of any applicable credit support supporting one or more
classes of offered securities, including the subordination of one or
more classes of securities, will be determined on the basis of
criteria established by each rating agency rating such classes of
securities based on an assumed level of defaults, delinquencies,
other losses or other factors. We can't assure you, however, that the
loss experience on the related assets will not exceed these assumed
levels.
o Regardless of the form of credit enhancement, the amount of coverage
will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The
master servicer will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series
of securities, if the applicable rating agency indicates that the
then-current rating of those securities will not be adversely
affected.
o The rating agency rating a series of securities may lower their
rating following the initial issuance of the securities if the
obligations of any applicable credit support
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<PAGE>
provider have been downgraded, or as a result of losses on the
related assets substantially in excess of the levels contemplated by
that rating agency when they performed their initial rating analysis.
None of the depositor, the master servicer or any of their affiliates
will have any obligation to replace or supplement any credit support
or to take any other action to maintain any rating of any series of
securities.
We refer you to "--There are risks in relying on the limited nature of
ratings.", "Description of the Securities" and "Description of Credit Support"
for further information.
There is a risk to holders of subordinate securities that losses will have a
greater impact on them.
o The rights of subordinate securityholders to receive distributions to
which they would otherwise be entitled with respect to the assets
will be subordinate to the rights of the master servicer (to the
extent that the master servicer is paid its servicing fee, including
any unpaid servicing fees with respect to one or more prior due
periods, and is reimbursed for certain unreimbursed advances and
unreimbursed liquidation expenses) and the senior securityholders to
the extent described in the related prospectus supplement. As a
result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover
their initial investments in the subordinate securities.
We refer you to "Description of the Securities -- General" and "-- Allocation
of Losses and Shortfalls" in this prospectus for further information.
o The yields on the subordinate securities may be extremely sensitive
to the loss experience of the assets and the timing of any such
losses. If the actual rate and amount of losses experienced by the
assets exceed the rate and amount of such losses assumed by an
investor, the yields to maturity on the subordinate securities may be
lower than you anticipated.
There is a risk that obligors on balloon loans will not be able to make
balloon payments.
Some of the mortgage loans as of the cut-off date may not be fully
amortizing over their terms to maturity (we call these "balloon loans") and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related mortgaged property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale
or refinancing, the mortgagor's equity in the related mortgaged property, the
financial condition of the mortgagor, the value of the mortgaged property, tax
laws, prevailing general economic conditions and the availability of credit
for single family or multifamily real properties generally.
There is a possibility, if the related prospectus supplement provides for it,
that upon an optional termination of a trust fund, the proceeds may be less
than the outstanding principal amount of the securities plus accrued interest.
o If specified in the related prospectus supplement, a series of
securities may be subject to optional early termination through the
repurchase of the assets in the related trust fund by the party
specified therein, under the circumstances and in the manner set
forth therein. If provided in the related prospectus supplement, upon
the reduction of the security balance of a specified class or classes
of securities to a specified percentage or amount, the party
specified therein will solicit bids for the purchase of all assets of
the trust fund, or of a sufficient portion of such assets to retire
such class or classes or purchase such class or classes at a price
set forth in the related prospectus supplement, in each case, under
the circumstances and in the manner set forth therein.
o In either such case, if the related prospectus supplement provides
for it, the proceeds available for distribution to securityholders
may be less than the outstanding principal balance of their
securities plus accrued interest. If this happens, these
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securityholders could incur a loss on their investment.
There are risks relating to certain federal income tax considerations
regarding REMIC residual certificates.
o Holders of REMIC residual certificates must report on their federal
income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of
their receipt of cash payments, as described in "Material Federal
Income Tax Consequences -- REMICs." Under certain circumstances,
holders of offered securities that are REMIC residual certificates
may have taxable income and tax liabilities arising from such
investment during a taxable year in excess of the cash received
during such period. Individual holders of REMIC residual certificates
may be limited in their ability to deduct servicing fees and other
expenses of the REMIC.
o In addition, REMIC residual certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of
REMIC residual certificates, the taxable income arising in a given
year on a REMIC residual certificate will not be equal to the taxable
income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax
yield. Therefore, the after-tax yield on the REMIC residual
certificate may be significantly less than that of a corporate bond
or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC residual certificate
should be aware that recently issued temporary regulations provide
restrictions on the ability to mark-to-market certain "negative
value" REMIC residual interests.
We refer you to "Material Federal Income Tax Consequences -- REMICs" in this
prospectus for further information.
There are risks in relying on the limited nature of ratings.
Any rating assigned by a rating agency to a class of securities will
reflect that rating agency's assessment solely of the likelihood that holders
of securities of that class will receive payments to which those
securityholders are entitled under the related agreement. This rating will not
be an assessment of the likelihood that principal prepayments (including those
caused by defaults) on the related mortgage assets will be made, the degree to
which the rate of such prepayments might differ from that you originally
anticipated or the likelihood of early optional termination of the series of
securities. This rating will not address the possibility that prepayment at
higher or lower rates than you anticipated may cause you to experience a yield
lower than you anticipated or that an investor purchasing a security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each prospectus supplement will identify any payment to
which holders of offered securities of the related series are entitled that is
not covered by the applicable rating.
We refer you to "Rating" in this prospectus for further information.
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DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets") will include:
(i) one- to five-family mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home
Equity Loans and Home Improvement Contracts,
(ii) pass-through certificates or other mortgage-backed securities
(such as debt obligations or participation interests or certificates)
evidencing interests in or secured by one or more Mortgage Loans or other
similar participations, certificates or securities ("MBS") or
(iii) direct obligations of the United States, agencies thereof or
agencies created thereby which are:
(a) interest-bearing securities,
(b) non-interest-bearing securities,
(c) originally interest-bearing securities from which
coupons representing the right to payment of interest have been
removed, or
(d) interest-bearing securities from which the right to
payment of principal has been removed (the "Government Securities").
As used herein, "Mortgage Loans" refers to both whole Mortgage Loans
(or certain balances thereof) and Mortgage Loans underlying MBS. Mortgage
Loans that secure, or interests in which are evidenced by, MBS are herein
sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans (or
certain balances thereof) that are not Underlying Mortgage Loans are sometimes
referred to as "Whole Loans." Any pass-through certificates or other
asset-backed certificates in which an MBS evidences an interest or which
secure an MBS are sometimes referred to herein also as MBS or as "Underlying
MBS." Mortgage Loans and MBS are sometimes referred to herein as "Mortgage
Assets." The Mortgage Assets will not be guaranteed or insured by Merrill
Lynch Mortgage Investors, Inc. (the "Depositor") or any of its affiliates or,
unless otherwise provided in the Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. Each Asset will be selected
by the Depositor for inclusion in a Trust Fund from among those purchased,
either directly or indirectly, from a prior holder thereof (an "Asset
Seller"), which may be an affiliate of the Depositor and, with respect to
Assets, which prior holder may or may not be the originator of such Mortgage
Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in, or indebtedness of, another
trust fund that contains the Assets.
Mortgage Loans
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by:
(i) a lien on a Mortgaged Property consisting of a one- to
five-family residential property (a "Single Family Property" and the related
Mortgage Loan a "Single Family Mortgage Loan") or
(ii) a security interests in shares issued by private cooperative
housing corporations ("Cooperatives"). If so specified in the related
Prospectus Supplement, a Mortgaged Property may include some commercial use.
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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,
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(viii) information with respect to the prepayment provisions, if any, of the
Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum Mortgage Rate or
monthly payment variation at the time of any adjustment thereof and
over the life of the ARM Loan and
(x) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other
amortization provisions.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report which will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K
with the Securities and Exchange Commission within fifteen days after such
initial issuance.
The related Prospectus Supplement may specify whether the Mortgage
Loans include closed-end and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans"), which may be secured by Mortgages that
are junior to other liens on the related Mortgaged Property and/or home
improvement installment sales contracts or installment loan agreements (the
"Home Improvement Contracts") originated by a home improvement contractor and
secured by a Mortgage on the related Mortgaged Property that is junior to
other liens on the Mortgaged Property. Except as otherwise described in the
related Prospectus Supplement, the home improvements purchased with the Home
Improvement Contracts will generally be replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling goods
and solar heating panels. The related Prospectus Supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified
period of time, automatically become part of the Trust Fund for a series. As a
result, the aggregate balance of the revolving Home Equity Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal collections are applied to purchase such balances. Such
amounts will usually differ each day, as more specifically described in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, principal
collections received on the Mortgage Loans may be applied to purchase
additional Mortgage Loans which will become part of the Trust Fund for a
series. Such additions may be made to the extent that such additions could be
made in connection with a Trust Fund with respect to which a REMIC election
has been made. The related Prospectus Supplement will set forth the
characteristics that such additional Mortgage Loans will be required to meet.
Such characteristics will be specified in terms of the categories described in
the second preceding paragraph.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all
of the Mortgage Loans will:
(i) have individual principal balances at origination of not less than
$25,000,
(ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due dates
that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related Prospectus Supplement.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over
its term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate,
or from a fixed to an adjustable Mortgage Rate, from time to time pursuant to
an election or as otherwise specified on the related Mortgage Note, in
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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,
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(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.
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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."
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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
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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.
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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
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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
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executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310. Its
telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected
in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture (an
"Indenture"). Each series of Securities will consist of one or more classes of
Securities that may:
(i) provide for the accrual of interest thereon based on fixed, variable
or adjustable rates;
(ii) be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other classes
of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped
Principal Securities");
(iv) be entitled to interest distributions, with disproportionately low,
nominal or no principal distributions (collectively, "Stripped
Interest Securities");
(v) provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of
one or more other classes of Securities of such series (collectively,
"Accrual Securities");
(vi) provide for payments of principal as described in the related
Prospectus Supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described
in this paragraph including a Stripped Principal Security component
and a Stripped Interest Security component.
If so specified in the related Prospectus Supplement, a Trust Fund
may include additional Mortgage Loans (or certain balances thereof) that will
be transferred to the Trust from time to time and/or, in the case of revolving
Home Equity loans or certain balances thereof, any additional balances
advanced to the borrowers under the revolving Home Equity loans during certain
periods. If so specified in the related Prospectus Supplement, distributions
on one or more classes of a series of Securities may be limited to collections
from a designated portion of the Whole Loans in the related Mortgage Pool
(each such portion of Whole Loans, a "Mortgage Loan Group"). Any such classes
may include classes of Offered Securities.
Each class of Offered Securities of a series will be issued in
minimum denominations corresponding to the Security Balances or, in case of
Stripped Interest Securities, notional amounts or percentage interests
specified in the related Prospectus Supplement. The transfer of any Offered
Securities may be registered and such Securities may be exchanged without the
payment of any service charge payable in connection with such registration of
transfer or exchange, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other governmental
charge. One or more classes of Securities of a series may be issued in
definitive form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus
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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;
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(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
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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
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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;
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(vii) the number and aggregate principal balance of Whole
Loans in respect of which:
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are
delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the
related Due Period, the portion of such liquidation proceeds payable
or reimbursable to the Master Servicer (or any other entity) in
respect of such Mortgage Loan, and the amount of any loss to
Securityholders;
(ix) with respect to each REO Property relating to a Whole
Loan and included in the Trust Fund as of the end of the related Due
Period, the loan number of the related Mortgage Loan and the date of
acquisition;
(x) with respect to each REO Property relating to a Whole
Loan and included in the Trust Fund as of the end of the related Due
Period:
(a) the book value,
(b) the principal balance of the related
Mortgage Loan immediately following such
Distribution Date (calculated as if such
Mortgage Loan were still outstanding
taking into account certain limited
modifications to the terms thereof
specified in the Agreement),
(c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed
advances in respect thereof and
(d) if applicable, the aggregate amount of
interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the
related Due Period:
(a) the aggregate amount of sale proceeds,
(b) the portion of such sales proceeds payable
or reimbursable to the Master Servicer in
respect of such REO Property or the
related Mortgage Loan and
(c) the amount of any loss to Securityholders
in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as
the case may be, of each class of Securities (including any class of
Securities not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Security Balance due to the allocation of any loss and increase in
the Security Balance of a class of Accrual Securities in the event
that Accrued Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made
during the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on
such Distribution Date;
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(xv) the amount remaining in the reserve fund, if any, as of
the close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if
any, on each class of Securities at the close of business on such
Distribution Date;
(xvii) in the case of Securities with a variable
Pass-Through Rate or interest rate, the Pass-Through Rate or interest
rate applicable to such Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance
with the method specified in the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable
Pass-Through Rate or interest rate, for statements to be distributed
in any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such Distribution
Date, if available, and the immediately succeeding Distribution Date
as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xix) as to any series which includes Credit Support, the
amount of coverage of each instrument of Credit Support included
therein as of the close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of
default interest, late charges and assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each series
of Offered Securities will describe any additional information to be included
in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each person who at any time during the
calendar year was a holder of a Security a statement containing the
information set forth in subclauses (i)-(iv) above, aggregated for such
calendar year or the applicable portion thereof during which such person was a
Securityholder. Such obligation of the Master Servicer or the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Master Servicer or the Trustee pursuant
to any requirements of the Code as are from time to time in force. See
"Description of the Securities--Registration and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and (ii)
the purchase of all of the assets of the Trust Fund by the party entitled to
effect such termination, under the circumstances and in the manner set forth
in the related Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the Agreement will be
given to each Securityholder, and the final distribution will be made only
upon presentation and surrender of the Securities at the location to be
specified in the notice of termination.
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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
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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.
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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
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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
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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
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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
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servicing expenses that are reimbursable to the Master Servicer. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase a Whole Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Certificates, to cause the removal of such Whole Loan from the Trust Fund and
substitute in its place one or more other Whole Loans in accordance with the
standards described in the related Prospectus Supplement. If so provided in
the Prospectus Supplement for a series, a Warranting Party, rather than
repurchase or substitute a Whole Loan as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. Unless otherwise specified in the related
Prospectus Supplement, this reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities
or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for
a Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of
a specified date, with respect to such Government Securities or MBS, covering
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and covering the authority of
the Warranting Party to sell such Assets. The related Prospectus Supplement
will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests of
the Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach
to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
Collection Account and Related Accounts
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either
(i) an account or accounts the deposits in which are insured by
the Federal Deposit Insurance Corporation ("FDIC") (to the
limits established by the FDIC) and, if so specified in the
related Prospectus Supplement, the uninsured deposits in
which are otherwise secured such that the Trustee have a
claim with respect to the funds in the Collection Account or
a perfected first priority security interest against any
collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the
institution with which the Collection Account is maintained
or
(ii) otherwise maintained with a bank or trust company, and in a
manner, satisfactory to the Rating Agency or Agencies rating
any class of Securities of such series.
The collateral eligible to secure amounts in the Collection Account is limited
to United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date
in certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Collection
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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;
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(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";
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(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
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would follow with respect to mortgage loans that are comparable to the Whole
Loans and held for its own account, provided such procedures are consistent
with:
(i) the terms of the related Agreement and any related hazard
insurance policy or instrument of Credit Support, if any,
included in the related Trust Fund described herein or under
"Description of Credit Support,"
(ii) applicable law and
(iii) the general servicing standard specified in the related
Prospectus Supplement or, if no such standard is so
specified, its normal servicing practices (in either case,
the "Servicing Standard").
In connection therewith, the Master Servicer will be permitted in its
discretion to waive any late payment charge or penalty interest in respect of
a late payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures or repossessions;
inspecting and managing Mortgaged Properties under certain circumstances; and
maintaining accounting records relating to the Whole Loans. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole
Loans under any applicable instrument of Credit Support. See "Description of
Credit Support."
The Master Servicer may agree to modify, waive or amend any term of
any Whole Loan in a manner consistent with the Servicing Standard so long as
the modification, waiver or amendment will not affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or, in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent, and
in its judgment, such modification, waiver or amendment is reasonably likely
to produce a greater recovery with respect to the Whole Loan on a present
value basis than would liquidation. The Master Servicer is required to notify
the Trustee in the event of any modification, waiver or amendment of any Whole
Loan.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect
of the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest; Servicing
Compensation and Payment of Expenses."
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Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if
cure is likely, inspect the Mortgaged Property and take such other actions as
are consistent with the Servicing Standard. A significant period of time may
elapse before the Master Servicer is able to assess the success of such
corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes
of Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified
number of scheduled payments thereunder are delinquent. Any such right granted
to the holder of an Offered Security will be described in the related
Prospectus Supplement. The related Prospectus Supplement will also describe
any such right granted to any person if the predetermined purchase price is
less than the Purchase Price described under "Representations and Warranties;
Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Master Servicer accept the highest cash bid
received from any person (including itself, an affiliate of the Master
Servicer or any Securityholder) that constitutes a fair price for such
defaulted Whole Loan. In the absence of any bid determined in accordance with
the related Agreement to be fair, the Master Servicer shall proceed with
respect to such defaulted Mortgage Loan as described below. Any bid in an
amount at least equal to the Purchase Price described under "Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise,
if such action is consistent with the Servicing Standard and a default on such
Whole Loan has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Master Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless the Internal Revenue Service grants an extension of time
to sell such property, or unless the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to three years after its acquisition will not result in
the imposition of a tax on the Trust Fund or cause the Trust Fund to fail to
qualify as a REMIC under the Code at any time that any Security is
outstanding. Subject to the foregoing, the Master Servicer will be required to
solicit bids for any Mortgaged Property so acquired in such a manner as will
be reasonably likely to realize a fair price for such property and accept the
first (and, if multiple bids are contemporaneously received, the highest) cash
bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
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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.
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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
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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.
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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
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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
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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 66K% (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:
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(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
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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
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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
66K% (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
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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.
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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
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bank or financial institution specified in such Prospectus Supplement (the
"L/C Bank"). Under a letter of credit, the L/C Bank will be obligated to honor
draws thereunder in an aggregate fixed dollar amount, net of unreimbursed
payments thereunder, generally equal to a percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Assets on the
related Cut-off Date or of the initial aggregate Security Balance of one or
more classes of Securities. If so specified in the related Prospectus
Supplement, the letter of credit may permit draws in the event of only certain
types of losses and shortfalls. The amount available under the letter of
credit will, in all cases, be reduced to the extent of the unreimbursed
payments thereunder and may otherwise be reduced as described in the related
Prospectus Supplement. The obligations of the L/C Bank under the letter of
credit for each series of Securities will expire at the earlier of the date
specified in the related Prospectus Supplement or the termination of the Trust
Fund.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such
instruments may cover, with respect to one or more classes of Securities of
the related series, timely distributions of interest and/or full distributions
of principal on the basis of a schedule of principal distributions set forth
in or determined in the manner specified in the related Prospectus Supplement.
Reserve Funds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a
combination thereof will be deposited, in the amounts so specified in such
Prospectus Supplement. The reserve funds for a series may also be funded over
time by depositing therein a specified amount of the distributions received on
the related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with
the reinvestment income thereon, if any, will be applied for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement.
A reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of losses
and shortfalls. Following each Distribution Date amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from
the reserve fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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(iii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual
period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of
the first accrual period is its issue price; the adjusted issue price of a
REMIC Regular Certificate at the beginning of a subsequent accrual period is
the adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease (but never below zero) in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue
price but less than the stated redemption price at maturity), however, the
daily portion is reduced by the amount that would be the daily portion for
such day (computed in accordance with the rules set forth above) multiplied by
a fraction, the numerator of which is the amount, if any, by which the price
paid by such holder for that REMIC Regular Certificate exceeds the following
amount:
(a) the sum of the issue price plus the aggregate amount of OID
that would have been includible in the gross income of an
original REMIC Regular Certificateholder (who purchased the
REMIC Regular Certificate at its issue price), less
(b) any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that REMIC
Regular Certificate for all days beginning on the date after the purchase date
and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a variable
rate will constitute qualified stated interest and not contingent interest if,
generally,
(i) such interest is unconditionally payable at least annually,
(ii) the issue price of the debt instrument does not exceed the
total noncontingent principal payments, and
(iii) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating
rate," or a combination of "qualified floating rates" that do
not operate in a manner that significantly accelerates or
defers interest payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing
a variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest
on a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest. In such case, the
weighted
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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
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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
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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.
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Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date
may or may not exceed such interval. Purchasers of Payment Lag Certificates
for which the period between the Closing Date and the first Distribution Date
does not exceed such interval could pay upon purchase of the REMIC Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date. If a portion of the initial purchase
price of a REMIC Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the REMIC
Regular Certificate provides for a payment of stated interest on the first
payment date (and the first payment date is within one year of the issue date)
that equals or exceeds the amount of the pre-issuance accrued interest, then
the REMIC Regular Certificates' issue price may be computed by subtracting
from the issue price the amount of pre-issuance accrued interest, rather than
as an amount payable on the REMIC Regular Certificate. However, it is unclear
under this method how the OID Regulations treat interest on Payment Lag
Certificates. Therefore, in the case of a Payment Lag Certificate, the Trust
Fund intends to include accrued interest in the issue price and report
interest payments made on the first Distribution Date as interest to the
extent such payments represent interest for the number of days that the
Certificateholder has held such Payment Lag Certificate during the first
accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those REMIC Regular
Certificateholders that are "pass-through interest holders."
Certificateholders that are pass-through interest holders should consult their
own tax advisors about the impact of these rules on an investment in the REMIC
Regular Certificates. See "Pass-Through of Non-Interest Expenses of the REMIC"
under "Taxation of Owners of REMIC Residual Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all
Mortgage Assets remaining in the related Trust Fund have been liquidated or
the Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person and is not engaged in
a trade or business within the United States will not be subject to federal
withholding tax if (i) such REMIC Regular Certificateholder does not actually
or constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions
of interest 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.
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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.
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A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would
equal the amounts that would have been reported for the same days by an
original REMIC Residual Certificateholder, as described above. The Legislative
History indicates that certain adjustments may be appropriate to reduce (or
increase) the income of a subsequent holder of a REMIC Residual Certificate
that purchased such REMIC Residual Certificate at a price greater than (or
less than) the adjusted basis such REMIC Residual Certificate would have in
the hands of an original REMIC Residual Certificateholder. See "--Sale or
Exchange of REMIC Residual Certificates" below. It is not clear, however,
whether such adjustments will in fact be permitted or required and, if so, how
they would be made. The REMIC Regulations do not provide for any such
adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed
to the REMIC for interest and OID on the REMIC Regular Certificates and,
except as described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that:
(i) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply,
(ii) all bad loans will be deductible as business bad debts, and
(iii) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC's gross income includes interest, original issue discount income,
and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the REMIC Regular Certificates. Note
that the timing of cancellation of indebtedness income recognized by REMIC
Residual Certificateholders resulting from defaults and delinquencies on
Mortgage Assets may differ from the time of the actual loss on the Mortgage
Asset. The REMIC's deductions include interest and original issue discount
expense on the REMIC Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC and realized losses on the
Mortgage Loans. The requirement that REMIC Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC will continue
until there are no Certificates of any class of the related Series
outstanding.
For purposes of determining its taxable income, the REMIC will have
an initial aggregate tax basis in its assets equal to the sum of the issue
prices of the REMIC Regular Certificates and the REMIC Residual Certificates
(or, if a class of Certificates is not sold initially, its fair market value).
Such aggregate basis will be allocated among the Mortgage Assets and other
assets of the REMIC in proportion to their respective fair market value. A
Mortgage Asset will be deemed to have been acquired with discount or premium
to the extent that the REMIC's basis therein is less than or greater than its
principal balance, respectively. Any such discount (whether market discount or
OID) will be includible in the income of the REMIC as it accrues, in advance
of receipt of the cash attributable to such income, under a method similar to
the method described above for accruing OID on the REMIC Regular Certificates.
The REMIC expects to elect under Code Section 171 to amortize any premium on
the Mortgage Assets. Premium on any Mortgage Asset to which such election
applies would be amortized under a constant yield method. It is not clear
whether the yield of a Mortgage Asset would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to the yield with respect to
any underlying mortgage loan originated on or before September 27, 1985.
Instead, premium with respect to such a mortgage loan would be allocated among
the principal payments thereon and would be deductible by the REMIC as those
payments become due.
The REMIC will be allowed a deduction for interest and OID on the
REMIC Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above
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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.
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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
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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
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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
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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.
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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
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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
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(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
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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
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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
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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.
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Tax Treatment of Certificates as Debt for Tax Purposes
A. Characterization of the Certificates as Indebtedness
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based on
the application of existing law to the facts as set forth in the Trust
Agreement and other relevant documents and assuming compliance with the terms
of the Trust Agreement as in effect on the date of issuance of the
Certificates, Brown & 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
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(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.
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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.
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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.
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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
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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.
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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
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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");
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(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting
such Certificates; the sum of all payments made to and retained by
the Asset Seller pursuant to the sale of the Assets to the Trust Fund
represents not more than the fair market value of such Assets; the
sum of all payments made to and retained by the Master Servicer
represent not more than reasonable compensation for the Master
Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933
as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of
the Exemption and (b) that the specific and general conditions set forth in
the Exemption and the other requirements set forth in the Exemption would be
satisfied.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
particular, in connection with a contemplated purchase of Securities
representing a beneficial ownership interest in a pool of single family
residential first mortgage loans, such Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Securities may
contain additional information regarding the application of the Exemption,
PTCE 83-1, or any other exemption, with respect to the Securities offered
thereby. PTCE 83-1 is not applicable to manufactured housing contract pool
investment trusts or multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case
interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual
Life Insurance Co. v. Harris Trust & Savings Bank (decided December 13, 1993).
In John Hancock, the Supreme Court ruled that assets held in an insurance
company's general account may be deemed to be "plan assets" for ERISA purposes
under certain circumstances. Prospective purchasers should determine whether
the decision affects their ability to make purchases of the Securities. In
particular, such an insurance company should consider the exemptive relief
granted by Labor for transactions involving insurance company general accounts
in Prohibited Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12,
1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of
issuance in one of the four highest rating categories by at least one Rating
Agency. The related Prospectus Supplement will specify which classes of the
Securities, if any, will constitute "mortgage related securities" ("SMMEA
Securities") for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). SMMEA Securities will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee retirement
systems) created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Maryland,
Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina, Ohio,
South Dakota, Utah, Virginia and West Virginia enacted legislation before the
October 4, 1991 cutoff established by
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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
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this Offered Security under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase such
Offered Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity
of the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of
the investor's assets. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Securities of any class constitute legal investments or are subject to
investment, capital or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
so specified in the related Prospectus Supplement, the Offered Securities will
be distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters
may receive compensation from the Depositor or from purchasers of Offered
Securities in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the
Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with
respect to Offered Securities that it has previously purchased or agreed to
purchase. If Merrill Lynch or such persons act as agents in the sale of
Offered Securities, they will receive a selling commission with respect to
such Offered Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance or notional amount of such
Offered Securities as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the related Prospectus Supplement.
To the extent that Merrill Lynch or such persons elect to purchase Offered
Securities as principal, they may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Offered
Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch
or any other Underwriter in connection with offers and sales related to market
making transactions.
The Depositor will indemnify Merrill Lynch and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Merrill Lynch and any underwriters
may be required to make in respect thereof.
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In the ordinary course of business, Merrill Lynch and its affiliates
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's or Asset
Seller's Assets pending the sale of such Assets or interests therein,
including the Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an
electronic Prospectus Supplement and Prospectus from the Underwriter or a
request by such investor's representative within the period during which there
is an obligation to deliver a Prospectus Supplement and Prospectus, the
Depositor or the Underwriter will promptly deliver, or cause to be delivered,
without charge, a paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the Depositor
by Brown & Wood LLP, New York, New York. Certain matters with respect to
Delaware law will be passed upon for the Depositor by Richards, Layton &
Finger, P.A., Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Securities. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request
by any person to whom this prospectus is delivered in connection with the
offering of one or more Classes of Offered Securities, the Depositor will
provide or cause to be provided without charge a copy of any of the documents
and/or reports incorporated herein by reference, in each case to the extent
the documents or reports relate to such Classes of Offered Securities, other
than the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, telephone number (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Investors may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt
by securityholders of all distributions on the underlying assets. These
ratings address the structural, legal and issuer-related aspects associated
with such certificates, the nature of the underlying assets and the credit
quality of the guarantor, if any. Ratings on asset backed securities do not
represent any assessment of the likelihood of principal prepayments by
borrowers or of the
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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.
101
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
1986 Act.................................................. 70, 74
Accrual Securities........................................ 9, 27
Accrued Security Interest................................. 29
adjusted issue price...................................... 71, 83
Agreement................................................. 36
Agreements................................................ 9
Amortizable Bond Premium Regulations...................... 67
an accrual period......................................... 76
Applicable Amount......................................... 83
ARM Loans................................................. 20, 70
Asset Seller.............................................. 19
Assets.................................................... 1, 6, 18
Available Distribution Amount............................. 28
Balloon Mortgage Loans.................................... 17
benefit plan investors.................................... 100
Book-Entry Securities..................................... 28
Buydown Mortgage Loans.................................... 26
Buydown Period............................................ 26
capital asset............................................. 72, 79
Cash Flow Agreement....................................... 8, 22
Cash Flow Agreements...................................... 1
Cede...................................................... 3, 33
CEDEL..................................................... 34
CEDEL Participants........................................ 34
Certificateholder......................................... 95
Certificates.............................................. 1, 6, 101
clearing agency........................................... 33
clearing corporation...................................... 33, 38
Closing Date.............................................. 74
Code...................................................... 11
Collection Account........................................ 40
Commission................................................ 3
Contributions Tax......................................... 84
Cooperative............................................... 35, 56
Cooperative Loans......................................... 56
Cooperatives.............................................. 19
Covered Trust............................................. 16, 53
CPR....................................................... 25
Credit Support............................................ 1, 8, 22
Crime Control Act......................................... 64
Cut-off Date.............................................. 10
daily accruals............................................ 83
Daily portions............................................ 71, 75
Deferred Interest......................................... 71
Definitive Securities..................................... 28, 36
Depositor................................................. 6, 19
Determination Date........................................ 28
disqualified organization................................. 86
Distribution Date......................................... 10
DTC....................................................... 3, 33
102
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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
103
<PAGE>
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
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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
105
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[LOGO]
$153,852,000
(APPROXIMATE)
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES,
SERIES 1999-CB4
CREDIT-BASED ASSET SERVICING AND
SECURITIZATION LLC
SELLER
LITTON LOAN SERVICING LP
SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------------
MERRILL LYNCH & CO. BANC OF AMERICA SECURITIES LLC
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the C-BASS Mortgage Loan Asset-Backed Certificates,
Series 1999-CB4 in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the C-BASS Mortgage Loan Asset-Backed Certificates, Series
1999-CB4 and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 1999-CB4 will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
August 24, 1999
