<PAGE>
Pursuant to Rule 424(b)(5)
File No. 333-39127
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 23, 1999)
[C-Bass Logo]
$299,682,000 (Approximate)
C-BASS Mortgage Loan Asset-Backed Certificates, Series 1999-CB2
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>
1A $ 141,832,106 7.00% 99.625000% 0.250000% 99.375000%
1A-IO (2) (3) 3.760680% 0.009402% 3.751278%
1A-PO $ 161,894 (4) (6) (6) (6)
1M-1 $ 1,110,000 7.00% 94.751132% 0.400000% 94.351132%
1M-2 $ 740,000 7.00% 93.142020% 0.450000% 92.692020%
1M-3 $ 740,000 7.00% 87.097529% 0.500000% 86.597529%
2A-1 $ 84,958,000 (5) 100.000000% 0.300000% 99.700000%
2A-2 $ 43,008,000 (5) 100.000000% 0.300000% 99.700000%
2M-1 $ 10,529,000 7.52% 99.985337% 0.400000% 99.585337%
2M-2 $ 8,909,000 8.26% 99.971655% 0.450000% 99.521655%
2B-1 $ 7,694,000 8.30% (6) (6) (6)
============= ==== =============== =========== ===============
Total $ 299,682,000 $296,507,106.80 $845,708.34 $295,661,398.46
</TABLE>
(1) Plus or minus 5%
(2) Notional Amount of $144,160,899. No principal will be paid on the Class
1A-IO certificates.
(3) The Class 1A-IO will accrue interest at the variable rate described in this
Prospectus Supplement.
(4) No interest will accrue on the principal balance of the Class 1A-PO
certificates.
(5) The Class 2A-1 and Class 2A-2 certificates will bear interest at the
variable rate described in this Prospectus Supplement.
(6) The Class 1A-PO and Class 2B-1 Certificates will be offered by the
underwriters from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of the related
sale.
Only the eleven 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 fixed-rate
FHA insured mortgage loans and VA guaranteed mortgage loans and one
consisting of two sub-groups of conventional fixed-rate mortgage loans
and conventional and FHA insured and VA guaranteed adjustable-rate
mortgage loans.
o The Class 1A,Class 1A-IO, Class 1A-PO, Class 2A-1 and Class 2A-2
Certificates will be senior certificates.
o The Class 1M-1, Class 1M-2 and Class 1M-3 Certificates are subordinate
to and provide credit enhancement for the Class 1A Certificates.
o The Class 2M-1, Class 2M-2 and Class 2B-1 Certificates are subordinate
to and provide credit enhancement for the Class 2A-1 and Class 2A-2
Certificates.
o Except for the Class 1A-IO, Class 1A-PO, Class 2A-1 and Class 2A-2
Certificates, all certificates will accrue interest at the fixed rate
set forth above, subject to certain limitations described in this
prospectus supplement.
o The Class 2A-1 and Class 2A-2 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 of each mortgage loan
group are subordinate in right of certain payments to the related
senior certificates.
o Overcollateralization - Certain excess interest received from the
mortgage loans in mortgage loan group 2 will be applied as payments of
principal on the Class 2A-1, Class 2A-2, Class 2M-1, Class 2M-2 and
Class 2B-1 Certificates to establish and maintain a required level of
overcollateralization.
o Crosscollateralization - Certain funds received on the mortgage loans
in loan group 2 may be available to pay the certificates related to
loan group 1.
o All of the mortgage loans in loan group 1 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 June 8, 1999.
Consider carefully the risk factors beginning on page S-11 in this prospectus
supplement and on page 13 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. First Union Capital Markets Corp.
-------------------
May 27, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Summary of Prospectus Supplement.........................................S-1
Risk Factors............................................................S-11
The Mortgage Pool.......................................................S-17
The Seller..............................................................S-48
The Servicer............................................................S-50
The Pooling and Servicing Agreement.....................................S-51
Description of the Certificates.........................................S-57
Yield, Prepayment and Maturity Considerations...........................S-76
Use of Proceeds.........................................................S-90
Certain Federal Income Tax Consequences.................................S-90
State Taxes.............................................................S-93
ERISA Considerations....................................................S-93
Legal Investment Considerations.........................................S-94
Method of Distribution..................................................S-94
Legal Matters...........................................................S-96
Ratings.................................................................S-96
Index of Principal Definitions..........................................S-98
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-98 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 103 in the
accompanying prospectus.
---------------------
i
<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-CB2.
The Certificates............. The Class 1A, Class 1A-IO, Class 1A-PO, Class 1M-1, Class
1M-2, Class 1M-3, Class 1B-1, Class 1B-2, Class 1B-3, Class
2A-1, Class 2A-2, Class 2M-1, Class 2M-2, Class 2B-1, Class
2B-2, Class 2B-3, 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 Merrill Lynch Mortgage Investors, Inc., as
depositor, Litton Loan Servicing LP, as servicer and The
Chase Manhattan Bank, as trustee. The trust is offering each
class of 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 1A, Class
1A-IO, Class 1A-PO, Class 1M-1, Class 1M-2, Class 1M-3,
Class 2A-1, Class 2A-2, Class 2M-1, Class 2M-2 and Class
2B-1Certificates.
Other Certificates........... The following certificates are not being offered:
Class Principal Balance ($) Pass-Through Rate (%)
----- --------------------- ---------------------
1B-1 740,000 7.00
1B-2 740,000 7.00
1B-3 1,849,418 7.00
2B-2 3,644,000 7.00
2B-3 3,240,000 7.00
X N/A N/A
R N/A N/A
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.
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
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.
Cut-off Date................. May 1, 1999.
Closing Date................. On or about June 8, 1999.
Final Scheduled Distribution
Dates...................... The final scheduled distribution date for each class of offered
certificates is set forth below:
</TABLE>
Final Scheduled
Class Distribution Date
----- -----------------
Class 1A December 25, 2026
Class 1A-IO December 25, 2026
Class 1A-PO December 25, 2026
Class 1M-1 December 25, 2030
Class 1M-2 December 25, 2030
Class 1M-3 December 25, 2030
Class 2A-1 December 25, 2027
Class 2A-2 September 25, 2028
Class 2M-1 April 25, 2030
Class 2M-2 April 25, 2030
Class 2B-1 April 25, 2030
<TABLE>
<S> <C>
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.
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
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.
Loan group 1 will consist of fixed-rate mortgage loans with
the following characteristics (percentages are based on the
aggregate principal balance as of May 1, 1999):
</TABLE>
<TABLE>
<S> <C> <C>
Loan Count 2,050
Aggregate Current Principal Balance $147,913,418
Average Current Principal Balance $72,153
Range of Current Principal Balances $1,367 to $278,075
Average Original Principal Balance $75,901
Range of Original Principal Balances $9,700 to $280,011
Weighted Average Interest Rate 8.567%
Minimum Interest Rate 6.875%
Maximum Interest Rate 15.50%
Weighted Average Original Term 357 months
Weighted Average Remaining Term 311 months
Weighted Average Seasoning 46 months
Weighted Average Loan-to-Value Ratio 98.52%
Percentage of Balloon Loans 0.01%
Max ZIP Code Concentration (%) 0.60%
Max ZIP Code Concentration (ZIP) 20735
Geographic concentration in excess of 5%:
California 21.30%
New York 10.27%
Texas 8.89%
Florida 6.19%
New Jersey 5.06%
Percentage of second liens 0.00%
FHA Mortgage Loans 73.69%
VA Mortgage Loans 26.31%
Owner-financed Mortgage Loans 0.00%
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Loan group 2 will consist of two sub-groups. Loan group 2F
will consist of fixed-rate mortgage loans with the following
characteristics (percentages are based on the aggregate
principal balance as of May 1, 1999):
</TABLE>
<TABLE>
<S> <C> <C>
Loan Count 1,268
Aggregate Current Principal Balance $107,542,175
Average Current Principal Balance $84,812
Range of Current Principal Balances $1,755 to $701,425
Average Original Principal Balance $86,430
Range of Original Principal Balances $4,000 to $715,00
Weighted Average Interest Rate 9.332%
Minimum Interest Rate 5.000%
Maximum Interest Rate 21.000%
Weighted Average Original Term 312
months Weighted Average Remaining
Term 299 months
Weighted Average Seasoning 13 months
Weighted Average Combined Loan-to-
Value Ratio 81.88%
Percentage with Pre-Payment Penalty 23.72%
Percentage of Balloon Loans 10.25%
Max ZIP Code Concentration (%) 1.09%
Max ZIP Code Concentration (ZIP) 99301
Geographic concentration in excess of 5%:
California 28.97%
Florida 11.36%
Washington 7.43%
Texas 5.69%
Percentage of second liens 6.28%
FHA Mortgage Loans 0.00%
VA Mortgage Loans 0.00%
Owner-financed Mortgage Loans 6.06%
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Loan group 2A will consist of adjustable-rate mortgage loans
with the following characteristics (percentages are based on
the aggregate principal balance as of May 1, 1999):
</TABLE>
<TABLE>
<S> <C> <C>
Loan Count 514
Aggregate Current Principal Balances $54,440,615
Average Current Principal Balances $105,916
Range of Current Principal Balances $482 to $816,005
Average Original Principal Balances $107,987.02
Range of Original Principal Balances $19,200 to $825,000
Percentage with pre-payment penalties 42.52%
Product
Six Month LIBOR 73.18%
1 Yr. CMT 26.02%
Other 0.80%
Mortgage Interest Rates
Weighted Average By Type of Index
Six Month LIBOR 10.17%
1 Yr. CMT 7.33%
Other 8.62%
Gross Margin
Weighted Average By Type of Index
Six Month LIBOR 6.38%
1 Yr. CMT 2.73%
Other 3.69%
Current Weighted Average Mortgage Interest Rate 9.42%
Range of Current Mortgage Interest Rates 5.38% to 14.30%
Weighted Average Gross Margin 5.41%
Range of Gross Margins 1.50% to 12.51%
Weighted Average Maximum Lifetime
Mortgage Interest Rate 15.52%
Weighted Average Lifetime Minimum
Mortgage Interest Rate 8.24%
Weighted Average Loan-to-Value Ratio 80.10%
Weighted Average Original Amortization Term 358 months
Weighted Average Remaining Amortization Term 340 months
Weighted Average Seasoning 18 months
Weighted Average Initial Periodic Cap 1.73%
Weighted Average Periodic Cap 1.26%
Weighted Average Months to Interest Roll 11.98 months
Weighted Average Interest Roll Frequency 8 months
Max ZIP Code Concentration (%) 1.50%
Max ZIP Code Concentration (ZIP) 94506
Geographic concentration in excess of 5%:
California 21.14%
Florida 12.94%
Illinois 9.47%
New Jersey 6.53%
Percentage of second liens 0.05%
FHA Mortgage Loans 20.04%
VA Mortgage Loans 1.53%
Owner-financed Mortgage Loans 0.13%
</TABLE>
<TABLE>
<S> <C>
See "The Mortgage Pool" in this prospectus supplement for
more information about the mortgage loans.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
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 June 25, 1999. Distributions will generally include payments
made on the mortgage loans during the related collection period.
The collection period for the distribution date in June 1999
will be from May 2, 1999 to June 1, 1999.
Record Date.................. The record date for the first distribution date will be the
closing date. The record date for each other distribution date
will be as follows: for the Class 2A-1 and Class 2A-2
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 before 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 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 2A-1 and Class 2A-2
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 2A-1 and Class
2A-2 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 2A-1 and Class
2A-2 Certificates will begin on the closing date and end on June
24, 1999. Interest will be calculated for all certificates,
except for the Class 2A-1 and Class 2A-2 Certificates, on the
basis of a 360-day year consisting of twelve 30-day months.
Interest will be calculated for the Class 2A-1 and Class 2A-2
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 1A-IO, Class 2A-1 and
Class 2A-2 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 1A-IO
Certificates will be equal to the excess of (a) the weighted
average of the net mortgage interest rates of each mortgage
loan in loan group 1 with a net mortgage interest rate of
7.00% or greater over (b) 7.00%. The pass-through rate for
the Class 1A-IO Certificates' first interest accrual period
will be approximately 1.221% per annum. The pass-through
rate with respect to the Class 2A-1 Certificates will be
equal to the least of (i) the sum of one-month LIBOR, which
is a floating interest rate, plus a margin of 0.50%, (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,
and (iii) the weighted average
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
mortgage rates in loan group 2F 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
2A-2 Certificates will be equal to the lesser of (i) the sum
of one-month LIBOR, which is a floating interest rate, plus
a margin of 0.35%, and (ii) the weighted average of the
mortgage interest rates of the mortgage loans in loan group
2A 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 in loan group 2 as described
below under the heading "Optional Termination", the margin
of basis points used in calculating the pass-through rate on
the Class 2A-1 and Class 2A-2 certificates will double, and
the pass-through rates on the Class 2M-1, Class 2M-2 and
Class 2B-1 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 certificate. 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 five
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. The mortgage loans in loan group 2
pay interest each month that in the aggregate is expected to
exceed the amount needed to pay monthly interest on the
related offered certificates and certain fees and expenses
of the trust. A portion of this excess interest is applied
to pay principal on the related offered certificates, which
reduces the principal balance of such certificates at a
faster rate than the principal balance on the mortgage loans
in loan group 2 is being reduced. As a result, the aggregate
principal balance of the mortgage loans in loan group 2 is
expected to exceed the aggregate principal balance of the
related offered certificates. This feature is referred to as
"overcollateralization". There will be no significant
overcollateralization on the closing date but over time it
is targeted to increase to approximately 1.50% of the total
original principal balance of the mortgage loans in loan
group 2 as of the cut-off date. If the level of
overcollateralization falls below what is required, the
excess interest described in the next section will be paid
to the related offered certificates as principal. This will
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
have the effect of reducing the principal balance of such
certificates faster than the principal balance of the
mortgage loans in loan group 2 so that the required level of
overcollateralization is reached.
Monthly Excess Cashflow. Because more interest is expected
to be paid by the borrowers in loan group 2 than is
necessary to pay the interest earned on the related
certificates, we expect there to be excess interest each
month. The excess interest will be used to create
overcollateralization in loan group 2, to pay interest on
the related certificates that was previously earned but not
paid and to reimburse such 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 in the related
mortgage loan group, the principal balance of the
certificates that are lower in order of payment priority
will be reduced by the amount of such excess. However,
losses on the mortgage loans in loan group 1 that are
attributable to fraud, bankruptcy and special hazards that
are in excess of certain loss coverage amounts set forth
herein will be shared equally by all outstanding classes
related to loan group 1.
Cross-collateralization. Funds available with respect to
loan group 2 may be used to make certain distributions to
the certificates relating to loan group 1 to the extent that
such funds are available after all necessary distributions
have been made on loan group 2.
Optional Termination......... The seller has the option to purchase all the mortgage loans in
a loan group and any properties that the trustee acquired in
satisfaction of any of the mortgage loans in such loan group.
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 (i) 5% or less
than the total principal balance of the mortgage loans on the
cut-off date in the case of loan group 1, or (ii) 10% or less
than the total principal balance of the mortgage loans on the
cut-off date in the case of loan group 2. If the option is
exercised, your certificate will be retired early and you will
be entitled to the following amounts:
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the
pass-through rate;
o any interest previously earned but not paid; and
o in the case of the Class 2A-2 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
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
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 2A-2 certificates, as comprising several real
estate mortgage investment conduits, or REMICs, for federal
income tax purposes.
For federal income tax reporting purposes, the Class 1A-IO
and Class 1A-PO Certificates will be, and the other classes
of offered certificates may be, treated as having been
issued with original issue discount.
For further information regarding the federal income tax
consequences of investing in the offered certificates, see
"Certain Federal Income Tax Consequences" in this prospectus
supplement and "Material Federal Income Tax Consequences" in
the prospectus.
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.:
</TABLE>
<TABLE>
<CAPTION>
Class Moody's Fitch Duff
----- ------- ----- ----
<S> <C> <C> <C> <C>
1A Aaa * AAA
1A-IO Aaa * AAA
1A-PO Aaa * AAA
1M-1 Aa2 * AA
1M-2 A2 * A
1M-3 Baa2 * BBB
2A-1 Aaa AAA AAA
2A-2 Aaa AAA AAA
2M-1 Aa2 AA AA+
2M-2 A2 A A+
2B-1 Baa3 BBB BBB+
</TABLE>
<TABLE>
<S> <C>
------------------
*Fitch was not asked to rate these certificates.
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 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.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
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 Class 1A,
Class 1A-IO, Class 1A-PO and Class 1M-1 Certificates will be
"mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended. The
Class 2A-1, Class 2A-2, Class 2M-1, Class 2M-2 and Class
2B-1 Certificates will not be "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended, because loan group 2 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. The Class 1M-2 and Class 1M-3
Certificates also will not be "mortgage-related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended. 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.
</TABLE>
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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 47% 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 23.72% of the mortgage loans in loan group 2F (by
aggregate principal balance as of the cut-off date of the mortgage
loans in loan group 2F) and approximately 42.52% of the mortgage loans
in loan group 2A (by aggregate principal balance as of the cut-off
date of the mortgage loans in loan group 2A) 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. None of the mortgage loans in loan group 1 have a
prepayment penalty. A prepayment penalty may discourage a mortgagor
from prepaying the mortgage loan during the applicable period. The
Servicer is entitled to retain any prepayment penalties paid in
connection with the prepayment of a mortgage loan, and accordingly,
the payment of a prepayment penalty will not offset the effect of the
related prepayment on your yield.
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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 group 2
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 unique risks associated with the Class 1A-IO Certificates.
Principal payments (including prepayments and collections upon defaults,
liquidations, casualties, condemnations and repurchases) applied in reduction of
the principal balances of the mortgage loans in loan group 1 will result in a
corresponding reduction of the notional amounts of the Class 1A-IO Certificates,
which will reduce the amount of interest payable on the Class 1A-IO
Certificates. In addition, the amount of interest payable on the Class 1A-IO
Certificates will decrease more significantly as a result of principal
prepayments on mortgage loans in loan group 1 with relatively high net mortgage
rates. Investors in the Class 1A-IO Certificates should consider carefully the
associated risks, including the risk that, under certain circumstances, the
investors in the Class 1A-IO Certificates will fail to recover fully their
initial investments.
There are risks related to owner-financed mortgage loans.
Reduced Underwriting Standards
Approximately 4.07% of the mortgage loans in loan group 2 (by aggregate
principal balance 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 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.
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The recovery of defaulted amounts under FHA and VA programs is uncertain.
All of the mortgage loans in loan group 1 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 senior 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. Additionally, losses on mortgage loans in loan group 1 attributable to
fraud, bankruptcy and special hazards which exceed certain loss coverage amounts
set forth herein will be borne by all related outstanding certificates,
including the senior certificates.
If substantial losses occur as a result of defaults and delinquent payments
on the mortgage loans, you may suffer losses.
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 in
loan group 2 is expected to be higher than the weighted average of the interest
rates on the related certificates, those mortgage loans are expected to generate
more interest than is needed to pay interest owed on such 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 for loan group 2. 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 certificates. As a result, interest rates on the
Class 2A-1 and Class 2A-2 Certificates may increase relative to
interest rates on the mortgage loans in loan group 2, requiring
that more of the interest generated by the mortgage loans in loan
group 2 be applied to cover interest on the Class 2A-1 and Class
2A-2 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 negatively impact your
yield:
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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 group 2 subordinate certificates are not expected to receive
principal distributions until, at the earliest, June 2002.
o The group 1 subordinate certificates are not expected to receive any
unscheduled distributions of principal (e.g., prepayments on the
mortgage loans in loan group 1) for at least 5 years.
o Losses resulting from the liquidation of defaulted mortgage loans in
loan group 2 will first reduce the level of overcollateralization, if
any, for the related certificates. If there is no
overcollateralization, losses will be allocated to the related
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 2A-1 and Class
2A-2 Certificates.
The Class 2A-1 and Class 2A-2 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 2A-1
Certificates will, in most cases, be based on the weighted average of the
interest rates on the mortgage loans in loan group 2F, net of certain expenses
of the trust. The cap on interest paid on the Class 2A-2 Certificates will
generally be based on the weighted average of the interest rates on the mortgage
loans in loan group 2A, net of certain expenses of the trust. Distributions on
the Class 2A-1 Certificates will be based on collections from loan group 2F, and
distributions on the Class 2A-2 Certificates will be based on collections from
loan group 2A. The mortgage loans in loan group 2F have fixed interest rates,
and the mortgage loans in loan group 2A have interest rates that are based on
various indices. Substantially all of the mortgage loans in loan group 2A have
periodic and maximum limitations on adjustments to the mortgage loan rate. As a
result, the Class 2A-1 and Class 2A-2 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 2A-1
and Class 2A-2 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
group 2 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 2A-2 Certificates are stable
or rising. It is also possible that interest rates on both the
adjustable-rate mortgage loans in loan group 2A and the Class 2A-2
Certificates may decline or increase during the same period, but that
the interest rates on Class 2A-2 Certificates may decline more slowly
or increase more rapidly.
o These factors may adversely affect the yields to maturity on the Class
2A-1 and Class 2A-2 Certificates.
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<PAGE>
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.
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 66.68% of the mortgage loans in loan group 1 and approximately
48.48% 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 loan group 1 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
-------------------------------- -------------------------------
California 21.30% California 26.34%
New York 10.27% Florida 11.89%
Texas 8.89% Washington 5.58%
Florida 6.19% Texas 4.85%
New Jersey 5.06%
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.
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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
10.25% of the mortgage loans in loan group 2F are balloon loans (by aggregate
principal balance as of the cut-off date).
There are risks relating to subordinate loans.
Approximately 4.19% of the mortgage loans in loan group 2 (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
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-CB2 (the "Trust Fund") will consist of a pool of 3,832
closed-end, fixed-rate and adjustable-rate mortgage loans (the "Mortgage Pool")
having original terms to maturity ranging from 24 to 480 months (the "Mortgage
Loans") and an aggregate principal balance as of May 1, 1999 (the "Cut-off
Date") of $309,896,207.67. 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 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 and
re-underwritten by the Seller in accordance with its underwriting standards as
described in "The Seller Underwriting Standards". The Mortgage Loans in the
Mortgage Pool were originated by various mortgage loan originators.
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.
The Mortgage Pool will consist of two loan groups ("Loan Group 1" and "Loan
Group 2", respectively, and each, a "Loan Group"). Loan Group 2 is further
divided into two sub-groups ("Loan Group 2F" and "Loan Group 2A", respectively.
The Mortgage Loans in Loan Group 1 (the "Group 1 Mortgage Loans") consist of
2,050 Mortgage Loans with an aggregate principal balance (the "Group 1 Loan
Balance") of $147,913,417.82 as of the
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Cut-off Date. The Mortgage Loans in Loan Group 2F (the "Group 2F Mortgage
Loans") consist of 1,268 fixed-rate Mortgage Loans with an aggregate principal
balance (the "Group 2F Loan Balance") of $107,542,174.63 as of the Cut-off Date.
The Mortgage Loans in Loan Group 2A (the "Group 2A Mortgage Loans") consist of
514 adjustable-rate Mortgage Loans with an aggregate principal balance (the
"Group 2A Loan Balance", and each of the Group 1 Loan Balance, the Group 2F Loan
Balance and the Group 2A Loan Balance, a "Loan Group Balance") of $54,440,615.22
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:
(i) 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.
(ii) 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"):
(i) 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 February 1, 1999), or
(ii) 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 January 1, 1999), or
(iii) 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 December 1, 1998).
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
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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 April 1, 1999 will be reported as current in the
calculation of delinquency status on May 1, 1999 and Delinquent as of May 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.
Group 1 Mortgage Loans Statistics
Loan Group 1 consists of 2,050 Mortgage Loans. The Group 1 Loan Balance as
of the Cut-off Date is equal to $147,913,417.82 and the Arrearage is equal to
approximately $3,650,000. The Group 1 Mortgage Loans have original terms to
maturity ranging from 120 to 360 months. The following statistical information,
unless otherwise specified, is based upon the Group 1 Loan Balance as of the
Cut-off Date.
The Group 1 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 66.68% of the Group 1
Mortgage Loans had a Loan-to-Value Ratio at origination in excess of 80.00%.
Approximately 63.44% of the Group 1 Mortgage Loans had a Loan-to-Value Ratio at
origination exceeding 90.00%. There can be no assurance that the Loan-to-Value
Ratio of any Group 1 Mortgage Loan determined at any time after origination is
less than or equal to its original Loan-to-Value Ratio. All of the Group 1
Mortgage Loans have scheduled Monthly Payments due on the first day of the month
(with respect to each Mortgage Loan, a "Due Date").
Approximately 73.69% of the Group 1 Mortgage Loans are FHA Mortgage Loans.
Approximately 26.31% of the Group 1 Mortgage Loans are VA Mortgage Loans. See
"--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 40.02% of the Group 1 Mortgage Loans are Performing Mortgage
Loans. Approximately 33.47% of the Group 1 Mortgage Loans are Sub-Performing
Mortgage Loans, including 3.70% (of the Group 1 Loan Balance) that are
Forbearance Plan Mortgage Loans and 2.79% (of the Group 1 Loan Balance) that are
Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in Loan Group 1,
approximately 19.47% are 30-59 days past due and approximately 14.00% are 60 or
more days past due. Approximately 26.51% of the Group 1 Mortgage Loans are
Re-Performing Mortgage Loans including 0.73% (of the Group 1 Loan Balance) that
are Forbearance Plan Mortgage Loans and 13.29% (of the Group 1 Loan Balance)
that are Bankruptcy Plan Mortgage Loans.
Approximately 0.01% of the Group 1 Mortgage Loans are Balloon Loans and
none are Owner-Financed Mortgage Loans.
Each Group 1 Mortgage Loan accrues interest at a rate (each, a "Loan Rate")
of not less than 6.875% per annum and not more than 15.50% per annum and as of
the Cut-off Date the weighted average Loan Rate of the Group 1 Mortgage Loans
was approximately 8.567% per annum.
The weighted average remaining term to maturity of the Group 1 Mortgage
Loans will be approximately 311 months as of the Cut-off Date. None of the Group
1 Mortgage Loans had a first Due Date prior to September 1, 1970 or after
December 1, 1998 or will have a remaining term to maturity of less than 5 months
or greater than 355 months as of the Cut-off Date. The month of the latest
maturity date of any Group 1 Mortgage Loan is November 2029.
S-19
<PAGE>
The average Principal Balance of the Group 1 Mortgage Loans at origination
was $75,901.40. The average Cut-off Date Principal Balance of the Group 1
Mortgage Loans was $72,152.89.
No Group 1 Mortgage Loan had a Cut-off Date Principal Balance of greater
than $278,074.72 or less than $1,367.04. The Group 1 Mortgage Loans are expected
to have the following characteristics as of the Cut-off Date (the sum in any
column may not equal the total indicated due to rounding):
Cut-off Date Principal Balances of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
- ------------------------------ ------------- --------------------- ----------------------------------------
<S> <C> <C> <C>
1,367 - 50,000 582 $20,439,129 13.82%
50,001 - 100,000 1,078 76,584,395 51.78
100,001 - 150,000 316 37,941,150 25.65
150,001 - 200,000 66 11,109,872 7.51
200,001 - 250,000 6 1,299,142 0.88
250,001 - 278,075 2 539,729 0.36
------------- --------------------- ----------------------------------------
Total......................... 2,050 $147,913,418 100.00%
============= ===================== ========================================
</TABLE>
- --------------------
(1) The average Cut-off Date Principal Balance of the Group 1 Mortgage Loans
was approximately $72,153.
Original Terms to Maturity of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Original Term (months) Loans the Cut-off Date Cut-off Date
- ------------------------------- --------------- ------------------------ ----------------------------------------
<S> <C> <C> <C>
120 - 120 1 $ 52,075 0.04%
121 - 180 41 1,591,692 1.08
181 - 240 16 660,542 0.45
241 - 300 18 1,025,118 0.69
301 - 360 1,974 144,583,991 97.75
--------------- ------------------------ ----------------------------------------
Total..................... 2,050 $147,913,418 100.00%
=============== ======================== ========================================
</TABLE>
--------------------
(1) The weighted average original term of the Group 1 Mortgage Loans was
approximately 357 months.
S-20
<PAGE>
Property Types of the Group 1 Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Property Type Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------ ----------------------------------------
<S> <C> <C> <C>
Single Family Detached 1,756 $128,134,422 86.63%
Four Family 198 11,696,071 7.91
Two Family 33 2,877,352 1.95
Condominium 25 1,740,355 1.18
PUD (1) 13 1,358,214 0.92
Three Family 9 827,817 0.56
Townhouse 9 654,329 0.44
Mixed Use 2 394,492 0.27
Manufactured Home 5 230,368 0.16
----------------- ------------------------ ----------------------------------------
Total..................... 2,050 $147,913,418 100.00%
================= ======================== ========================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance of
Number Outstanding as of Loan Group Outstanding as of the
Occupancy Status of Mortgage Loans the Cut-off Date Cut-off Date
- ------------------------------- ------------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Primary 1,982 $143,417,803 96.96%
Investment 68 4,495,615 3.04
----------------- ------------------------ -------------------------------------
Total..................... 2,050 $147,913,418 100.00%
=================== ========================= =====================================
</TABLE>
- --------------------
(1) Based on representations of the borrowers at the times of origination.
Purpose of the Group 1 Mortgage Loans
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance of
Number Outstanding as of Loan Group Outstanding as of the
Purpose of Mortgage Loans the Cut-off Date Cut-off Date
- ------------------------------- ------------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Purchase 1,777 $123,515,655 83.51%
Rate/Term Refinance 254 22,798,964 15.41
Cashout 19 1,598,799 1.08
------------------ ------------------------ -------------------------------------
Total..................... 2,050 $147,913,418 100.00%
=================== ========================= =====================================
</TABLE>
S-21
<PAGE>
Loan Rates of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance of
Number Outstanding as of Loan Group Outstanding as of the
Loan Rate (%) of Mortgage Loans the Cut-off Date Cut-off Date
- ------------------------------- ------------------- ------------------------- -------------------------------------
<S> <C> <C> <C> <C>
6.88 - 7.00 26 $ 2,720,080 1.84%
7.01 - 7.50 102 8,620,685 5.83
7.51 - 8.00 584 48,117,230 32.53
8.01 - 8.50 585 43,142,115 29.17
8.51 - 9.00 264 18,186,730 12.30
9.01 - 9.50 233 14,206,843 9.60
9.51 - 10.00 97 5,668,683 3.83
10.01 - 10.50 85 4,383,657 2.96
10.51 - 11.00 10 556,077 0.38
11.01 - 11.50 19 718,071 0.49
11.51 - 12.00 16 601,902 0.41
12.01 - 12.50 8 311,270 0.21
12.51 - 13.00 9 246,765 0.17
13.01 - 13.50 5 210,397 0.14
13.51 - 14.00 4 139,219 0.09
15.01 - 15.50 3 83,695 0.06
------------------- ------------------------- -------------------------------------
Total..................... 2,050 $147,913,418 100.00%
=================== ========================= =====================================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Group 1 Mortgage Loans as of the
Cut-off Date was approximately 8.567% per annum.
S-22
<PAGE>
Original Loan-to-Value Ratios of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Original Loan-to-Value Ratio (%) Loans the Cut-off Date Cut-off Date
- ---------------------------------------- --------------- ------------------------ -------------------------------------
<S> <C> <C> <C> <C>
N/A(2) 639 $47,166,042 31.89%
20.01 - 30.00 3 34,381 0.02
30.01 - 40.00 3 81,193 0.05
40.01 - 50.00 2 55,866 0.04
50.01 - 60.00 8 295,287 0.20
60.01 - 70.00 8 427,812 0.29
70.01 - 80.00 20 1,222,541 0.83
80.01 - 90.00 73 4,799,888 3.25
90.01 - 100.00 762 57,886,688 39.14
100.01 - 110.00 515 34,793,773 23.52
110.01 - 120.00 13 882,435 0.60
120.01 - 124.34 4 267,512 0.18
--------------- ------------------------ -------------------------------------
Total............................. 2,050 $147,913,418 100.00%
=============== ======================== =====================================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Group 1
Mortgage Loans for which the original Loan-to-Value Ratio is available
as of the Cut-off Date was approximately 98.52%.
(2) Not available.
S-23
<PAGE>
Geographic Distribution of the Group 1 Mortgaged Properties(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Location Loans the Cut-off Date Cut-off Date
- --------------------------------- --------------- --------------------- -------------------------------------
<S> <C> <C> <C>
Alabama 15 $ 785,920 0.53%
Alaska 1 44,600 0.03
Arizona 31 2,141,678 1.45
Arkansas 32 1,699,292 1.15
California 324 31,502,835 21.30
Colorado 20 1,717,107 1.16
Connecticut 14 1,416,890 0.96
Delaware 2 145,447 0.10
District of Columbia 6 555,975 0.38
Florida 145 9,148,642 6.19
Georgia 55 3,567,042 2.41
Idaho 4 282,635 0.19
Illinois 75 5,405,004 3.65
Indiana 29 1,474,398 1.00
Iowa 2 70,262 0.05
Kansas 7 391,746 0.26
Kentucky 6 247,380 0.17
Louisiana 17 868,972 0.59
Maine 5 379,628 0.26
Maryland 67 6,663,016 4.50
Massachusetts 24 2,183,403 1.48
Michigan 84 5,284,961 3.57
Minnesota 14 915,527 0.62
Mississippi 10 546,525 0.37
Missouri 38 2,203,742 1.49
Montana 9 734,862 0.50
Nebraska 6 247,321 0.17
Nevada 38 3,184,327 2.15
New Hampshire 8 750,213 0.51
New Jersey 85 7,477,639 5.06
New Mexico 5 347,122 0.23
New York 204 15,195,853 10.27
North Carolina 33 2,300,743 1.56
Ohio 53 2,884,990 1.95
Oklahoma 18 880,689 0.60
Oregon 9 846,898 0.57
Pennsylvania 77 4,646,094 3.14
Rhode Island 6 484,687 0.33
South Carolina 8 417,574 0.28
South Dakota 1 52,162 0.04
Tennessee 84 5,199,342 3.52
Texas 250 13,155,610 8.89
Utah 10 815,134 0.55
Virginia 48 3,312,111 2.24
Washington 38 3,522,017 2.38
West Virginia 11 754,183 0.51
Wisconsin 22 1,061,217 0.72
--------------- --------------------- -------------------------------------
Total.......................... 2,050 $147,913,418 100.00%
=============== ===================== =====================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Group 1 Mortgage Loans,
by Cut-off Date Principal Balance, was approximately 0.60% in the 20735 ZIP
Code.
S-24
<PAGE>
Documentation Level of the Group 1 Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance of
Number Outstanding as of Loan Group Outstanding as of the
Documentation Level of Mortgage Loans the Cut-off Date Cut-off Date
- ---------------------------------- ------------------ --------------------- --------------------------------------
<S> <C> <C> <C>
Alternate Documentation 66 $ 4,519,266 3.06%
Full Documentation 1,737 120,946,169 81.77
Limited Documentation 246 22,330,514 15.10
No Documentation 1 117,468 0.08
------------------ --------------------- --------------------------------------
Total........................ 2,050 $147,913,418 100.00%
================== ===================== ======================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Group 2F Mortgage Loans Statistics
Loan Group 2F consists of 1,268 fixed-rate Mortgage Loans. The Group 2F
Loan Balance as of the Cut-off Date is equal to $107,542,174.63 and the
Arrearage is equal to approximately $570,000. The Group 2F Mortgage Loans have
original terms to maturity ranging from 24 months to 480 months. The following
statistical information, unless otherwise specified, is based upon the Group 2F
Loan Balance as of the Cut-off Date.
The Group 2F Mortgage Loans are secured by Mortgages creating first or
second liens on the related Mortgaged Properties. Approximately 48.08% of the
Group 2F Mortgage Loans had a Combined Loan-to-Value Ratio at origination in
excess of 80.00%. Approximately 26.41% of the Group 2F Mortgage Loans had a
Combined Loan-to-Value Ratio at origination exceeding 90.00%. There can be no
assurance that the Combined Loan-to-Value Ratio of any Group 2F Mortgage Loan
determined at any time after origination is less than or equal to its original
Combined Loan-to-Value Ratio. Except for 13.40% of the Group 2F Mortgage Loans,
all of the Group 2F Mortgage Loans have scheduled Monthly Payments due on the
first day of the month. Approximately 6.28% of the Group 2F Mortgage Loans are
secured by second liens on the related Mortgaged Properties.
Approximately 90.18% of the Group 2F Mortgage Loans are Performing Mortgage
Loans. Approximately 8.42% of the Group 2F Mortgage Loans are Sub-Performing
Mortgage Loans, including 0.10% (of the Group 2F Loan Balance) that are
Forbearance Plan Mortgage Loans and 0.00% (of the Group 2F Loan Balance) that
are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in Loan Group 2F,
approximately 6.32% are 30-59 days past due and approximately 2.10% are 60 or
more days past due. Approximately 1.41% of the Group 2F Mortgage Loans are
Re-Performing Mortgage Loans including 0.04% (of the Group 2F Loan Balance) that
are Forbearance Plan Mortgage Loans and 1.08% (of the Group 2F Loan Balance)
that are Bankruptcy Plan Mortgage Loans.
Approximately 23.72% of the Group 2F Mortgage Loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Group 2F 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 Group 2F Mortgage Loan. The amount of
the prepayment charge is provided in the related mortgage note and is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding principal balance of the related Mortgage Loan in any 12 month
period.
There are 138 Group 2F Mortgage Loans (representing approximately 10.25% of
the Group 2F Loan Balance) that are balloon payment mortgage loans (each, a
"Balloon Loan"). The Monthly Payment for each Balloon Loan is based on an
amortization schedule ranging from 96 months to 361 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.
S-25
<PAGE>
There are 185 Group 2F Mortgage Loans (representing approximately 6.06% of
the Group 2F Loan Balance) that were originated by the individual seller of the
related mortgaged property (each, an "Owner-Financed Mortgage Loan").
Each Group 2F Mortgage Loan accrues interest at a Loan Rate of not less
than 5.00% per annum and not more than 21.00% per annum and as of the Cut-off
Date the weighted average Loan Rate of the Group 2F Mortgage Loans was
approximately 9.332% per annum.
The weighted average remaining term to maturity of the Group 2F Mortgage
Loans will be approximately 299 months as of the Cut-off Date. None of the Group
2F Mortgage Loans had a first Due Date prior to January 5, 1978 or after April
15, 1999 or will have a remaining term to maturity of less than 8 months or
greater than 359 months as of the Cut-off Date. The month of the latest maturity
date of any Group 2F Mortgage Loan is March 2029.
The average Principal Balance of the Group 2F Mortgage Loans at origination
was $86,429.82. The average Cut-off Date Principal Balance of the Group 2F
Mortgage Loans was $84,812.44.
No Group 2F Mortgage Loan had a Cut-off Date Principal Balance of greater
than $701,425.14 or less than $1,755.46. The Group 2F Mortgage Loans are
expected to have the following characteristics as of the Cut-off Date (the sum
in any column may not equal the total indicated due to rounding):
Cut-off Date Principal Balances of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Principal Balance % of Aggregate Principal Balance of
Number of Outstanding as of Loan Group Outstanding as of
Principal Balance ($) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ----------------- ---------------------- --------------------------------------
<S> <C> <C> <C>
1,755 - 50,000 552 $16,659,693 15.49%
50,001 - 100,000 359 25,482,792 23.70
100,001 - 150,000 158 19,424,331 18.06
150,001 - 200,000 104 17,828,936 16.58
200,001 - 250,000 38 8,651,833 8.05
250,001 - 300,000 27 7,384,333 6.87
300,001 - 350,000 13 4,221,815 3.93
350,001 - 400,000 3 1,119,259 1.04
400,001 - 450,000 6 2,532,032 2.35
450,001 - 500,000 6 2,867,247 2.67
650,001 - 700,000 1 668,479 0.62
700,001 - 701,425 1 701,425 0.65
----------------- ---------------------- --------------------------------------
Total...................... 1,268 $107,542,175 100.00%
================= ====================== ======================================
</TABLE>
- ----------------------
(1) The average Cut-off Date Principal Balance of the Group 2F Mortgage Loans
was approximately $84,812.
S-26
<PAGE>
Original Terms to Maturity of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Original Term (months) Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- --------------------------------------
<S> <C> <C> <C>
24 - 60 13 $ 490,921 0.46%
61 - 120 54 1,740,560 1.62
121 - 180 362 19,862,178 18.47
181 - 240 100 4,091,078 3.80
241 - 300 51 6,261,208 5.82
301 - 360 687 75,072,829 69.81
421 - 480 1 23,401 0.02
----------------- ------------------------- --------------------------------------
Total..................... 1,268 $107,542,175 100.00%
================= ========================= ======================================
</TABLE>
- --------------------
(1) The weighted average original term of the Group 2F Mortgage Loans was
approximately 312 months.
Property Types of the Group 2F Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Property Type Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- --------------------------------------
<S> <C> <C> <C>
Single Family Detached 1,085 $ 93,314,423 86.77%
Two Family 38 3,877,935 3.61
Condominium 44 3,275,476 3.05
PUD (1) 29 2,653,203 2.47
Manufactured Home 47 2,250,478 2.09
Four Family 10 954,707 0.89
Three Family 6 622,154 0.58
Townhouse 6 362,478 0.34
Mixed Use 1 142,339 0.13
Multi Family 2 88,981 0.08
----------------- ------------------------- --------------------------------------
Total..................... 1,268 $107,542,175 100.00%
================= ========================= ======================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
S-27
<PAGE>
Occupancy Status of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Occupancy Status Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- --------------------------------------
<S> <C> <C> <C>
Primary 1,135 $ 97,917,764 91.05%
Investment 126 8,829,661 8.21
Second Home 7 794,749 0.74
----------------- ------------------------- --------------------------------------
Total..................... 1,268 $107,542,175 100.00%
================= ========================= ======================================
</TABLE>
- --------------------
(1) Based on representations of the borrowers at the times of origination.
Purpose of the Group 2F Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- --------------------------------------
<S> <C> <C> <C>
Purchase 656 $ 53,331,062 49.59%
Rate/Term Refinance 235 27,836,804 25.88
Cashout 377 26,374,309 24.52
================= ========================= ======================================
Total..................... 1,268 $107,542,175 100.00%
================= ========================= ======================================
</TABLE>
S-28
<PAGE>
Loan Rates of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Current Loan Rate (%) Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- --------------------------------------
- ------------------------------- ----------------- ------------------------- --------------------------------------
<S> <C> <C> <C>
5.00 - 5.50 3 $ 84,056 0.08%
5.51 - 6.00 4 283,714 0.26
6.01 - 6.50 25 3,373,087 3.14
6.51 - 7.00 65 8,199,607 7.62
7.01 - 7.50 83 10,692,881 9.94
7.51 - 8.00 76 9,346,647 8.69
8.01 - 8.50 119 13,035,486 12.12
8.51 - 9.00 87 8,802,491 8.19
9.01 - 9.50 73 7,127,162 6.63
9.51 - 10.00 149 10,957,876 10.19
10.01 - 10.50 120 10,023,229 9.32
10.51 - 11.00 101 7,179,758 6.68
11.01 - 11.50 71 4,710,563 4.38
11.51 - 12.00 89 5,577,940 5.19
12.01 - 12.50 43 2,394,458 2.23
12.51 - 13.00 43 2,178,657 2.03
13.01 - 13.50 17 572,428 0.53
13.51 - 14.00 46 1,543,783 1.44
14.01 - 14.50 14 413,115 0.38
14.51 - 15.00 15 455,348 0.42
15.01 - 15.50 10 274,617 0.26
15.51 - 16.00 6 113,324 0.11
16.01 - 16.50 1 19,286 0.02
16.51 - 17.00 2 45,240 0.04
17.51 - 18.00 5 118,319 0.11
20.51 - 21.00 1 19,102 0.02
---------------- ------------------------ --------------------------------------
Total..................... 1,268 $107,542,175 100.00%
================= ========================= ======================================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Group 2F Mortgage Loans as of the
Cut-off Date was approximately 9.332% per annum.
S-29
<PAGE>
Original Combined Loan-to-Value Ratios of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Combined Loan-to Value (%) Loans the Cut-off Date Cut-off Date
- ------------------------------------- ---------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
13.89 - 20.00 3 $ 59,546 0.06%
20.01 - 30.00 12 704,767 0.66
30.01 - 40.00 13 886,203 0.82
40.01 - 50.00 23 1,786,656 1.66
50.01 - 60.00 36 3,603,439 3.35
60.01 - 70.00 110 10,053,033 9.35
70.01 - 80.00 391 38,738,041 36.02
80.01 - 90.00 286 23,304,277 21.67
90.01 - 100.00 365 26,899,298 25.01
100.01 - 110.00 24 1,239,339 1.15
110.01 - 120.00 2 208,356 0.19
120.01 - 130.00 2 42,238 0.04
130.01 - 138.82 1 16,982 0.02
---------------- --------------------- -------------------------------------
Total........................... 1,268 $107,542,175 100.00%
================ ====================== =====================================
</TABLE>
- ------------------
(1) The weighted average original Combined Loan-to-Value Ratio of the Group
2F Mortgage Loans as of the Cut-off Date was approximately 81.88%.
S-30
<PAGE>
Geographic Distribution of the Group 2F Mortgaged Properties(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Location Loans the Cut-off Date Cut-off Date
- ------------------------------------ --------------- ---------------------- --------------------------------------
<S> <C> <C> <C>
Alabama 41 $ 2,110,341 1.96%
Alaska 3 293,131 0.27
Arizona 27 1,414,935 1.32
Arkansas 2 91,876 0.09
California 242 31,156,208 28.97
Colorado 27 2,348,481 2.18
Connecticut 16 736,669 0.69
Delaware 1 24,188 0.02
Florida 188 12,221,757 11.36
Georgia 32 2,344,423 2.18
Hawaii 20 3,013,485 2.80
Idaho 2 39,449 0.04
Illinois 12 1,131,086 1.05
Indiana 20 1,333,905 1.24
Iowa 2 366,495 0.34
Kansas 2 73,573 0.07
Kentucky 13 786,249 0.73
Louisiana 34 3,743,858 3.48
Maryland 13 1,537,382 1.43
Massachusetts 6 464,106 0.43
Michigan 22 1,089,947 1.01
Minnesota 4 326,436 0.30
Mississippi 15 581,545 0.54
Missouri 31 1,190,904 1.11
Montana 1 29,321 0.03
Nebraska 1 45,256 0.04
Nevada 9 938,233 0.87
New Hampshire 2 83,164 0.08
New Jersey 31 3,275,918 3.05
New Mexico 7 542,787 0.50
New York 37 4,942,586 4.60
North Carolina 38 2,035,861 1.89
Ohio 35 2,265,801 2.11
Oklahoma 36 1,430,994 1.33
Oregon 26 2,675,235 2.49
Pennsylvania 20 1,335,363 1.24
Rhode Island 3 347,507 0.32
South Carolina 12 916,378 0.85
Tennessee 45 2,807,550 2.61
Texas 102 6,118,013 5.69
Utah 2 239,635 0.22
Virginia 4 534,445 0.50
Washington 77 7,987,537 7.43
Wisconsin 4 248,729 0.23
Wyoming 1 321,429 0.30
--------------- ---------------------- --------------------------------------
Total.......................... 1,268 $107,542,175 100.00%
=============== ====================== ======================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Group 2F Mortgage Loans,
by Cut-off Date Principal Balance, was approximately 1.09% in the 99301 ZIP
Code.
S-31
<PAGE>
Documentation Level of the Group 2F Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Documentation Level Loans the Cut-off Date Cut-off Date
- -------------------------------------- --------------- ---------------------- -------------------------------------
<S> <C> <C> <C>
Alternate Documentation 255 $20,279,296 18.86%
Full Documentation 510 47,129,232 43.82
Limited Documentation 198 24,600,585 22.88
No Documentation 302 15,214,874 14.15
Stated Documentation 3 318,187 0.30
-------------- ---------------------- -------------------------------------
Total............................ 1,268 $107,542,175 100.00%
=============== ====================== =====================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Group 2A Mortgage Loans Statistics
Loan Group 2A consists of 514 adjustable-rate Mortgage Loans. The Group 2A
Loan Balance as of the Cut-off Date is equal to $54,440,615.22 and the Arrearage
is equal to approximately $425,000. The Group 2A Mortgage Loans have original
terms to maturity ranging from 180 months to 360 months. The following
statistical information, unless otherwise specified, is based upon the Group 2A
Loan Balance as of the Cut-off Date.
The Group 2A Mortgage Loans are secured by Mortgages creating first or
second liens on the related Mortgaged Properties. Approximately 49.27% of the
Group 2A Mortgage Loans had a Loan-to-Value Ratio at origination in excess of
80.00%. Approximately 19.95% of the Group 2A Mortgage Loans had a Loan-to-Value
Ratio at origination exceeding 90.00%. There can be no assurance that the
Loan-to-Value Ratio of any Group 2A Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio. Except
for 6.31% of the Group 2A Mortgage Loans, all of the Group 2A Mortgage Loans
have Due Dates on the first day of the month. Approximately 0.05% of the Group
2A Mortgage Loans are secured by second liens on the related Mortgaged
Properties.
Approximately 20.04% of the Group 2A Mortgage Loans are FHA Mortgage Loans.
Approximately 1.53% of the Group 2A Mortgage Loans are VA Mortgage Loans. See
"--FHA Mortgage Loans and VA Mortgage Loans."
None of the Group 2A Mortgage Loans are Balloon Loans and 0.13% are
Owner-Financed Mortgage Loans.
Approximately 76.37% of the Group 2A Mortgage Loans are Performing Mortgage
Loans. Approximately 19.77% of the Group 2A Mortgage Loans are Sub-Performing
Mortgage Loans, including 2.60% (of the Group 2A Loan Balance) that are
Forbearance Plan Mortgage Loans and 0.81% (of the Group 2A Loan Balance) that
are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in Loan Group 2A,
approximately 14.09% are 30-59 days past due and approximately 5.68% are 60 or
more days past due. Approximately 3.85% of the Group 2A Mortgage Loans are
Re-Performing Mortgage Loans including 0.19% (of the Group 2A Loan Balance) that
are Forbearance Plan Mortgage Loans and 2.09% (of the Group 2A Loan Balance)
that are Bankruptcy Plan Mortgage Loans.
Approximately 42.52% of the Group 2A Mortgage Loans provide for payment by
the Mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such 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 Group 2A Mortgage Loan. The amount of
the prepayment charge is provided in the related Mortgage Note and is generally
equal to six months' interest on any amounts prepaid in excess of 20% of the
then outstanding Principal Balance of the related Mortgage Loan in any 12 month
period.
S-32
<PAGE>
The weighted average remaining term to maturity of the Group 2A Mortgage
Loans will be approximately 340 months as of the Cut-off Date. None of the Group
2A Mortgage Loans had a first Due Date prior to October 1, 1981 or after March
1, 1999 or will have a remaining term to maturity of less than 28 months or
greater than 357 months as of the Cut-off Date. The month of the latest maturity
date of any Group 2A Mortgage Loan is February 2029.
The average Principal Balance of the Group 2A Mortgage Loans at origination
was $107,987.20. The average Cut-off Date Principal Balance of the Group 2A
Mortgage Loans was $105,915.59.
A substantial majority of the Group 2A 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");
provided, that the first adjustment for such Mortgage Loans will occur after an
initial period of one year, in the case of 26.49% of the Group 2A Mortgage
Loans, two years, in the case of 55.44% of the Group 2A Mortgage Loans, three
years, in the case of 1.52% of the Group 2A Mortgage Loans, and five years, in
the case of 2.38% of the Group 2A Mortgage Loans (each such Mortgage Loan, a
"Delayed First Adjustment Mortgage Loan "). On each Adjustment Date for each
Group 2A 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 Group 2A
Mortgage Loan will not increase or decrease by more than 7.00% per annum on the
first related Adjustment Date (the "Initial Periodic Rate Cap") and 3.00% on any
Adjustment Date thereafter (the "Periodic Rate Cap"); provided, however, 0.46%
of the Group 2 Mortgage Loans do not have an Initial Periodic Rate Cap or a
Periodic Rate Cap. The Group 2A Mortgage Loans have a weighted average Initial
Periodic Rate Cap of approximately 1.73% per annum and a weighted average
Periodic Rate Cap of approximately 1.26% per annum thereafter (excluding those
loans without periodic caps). Each Loan Rate on each such Group 2A Mortgage Loan
will not exceed a specified maximum Loan Rate over the life of such Group 2A
Mortgage Loan (the "Maximum Loan Rate") or be less than a specified minimum Loan
Rate over the life of such Group 2A Mortgage Loan (the "Minimum Loan Rate"),
except that 4 and 38 Group 2 Mortgage Loans do not have Maximum Loan Rates and
Minimum Loan Rates, respectively. The Delayed First Adjustment Mortgage Loans
have a weighted average Initial Periodic Rate Cap of approximately 1.83% per
annum and a weighted average Periodic Rate Cap of approximately 1.33% per annum
thereafter. Effective with the first Monthly Payment due on each Group 2A
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 Group 2A Mortgage Loans permits the related mortgagor to
convert the adjustable Loan Rate thereon to a fixed Loan Rate.
The Group 2A Mortgage Loans had Loan Rates as of the Cut-off Date of not
less than 5.38% per annum and not more than 14.30% per annum and the weighted
average Loan Rate was approximately 9.42% per annum. As of the Cut-off Date, the
Group 2A Mortgage Loans had Gross Margins ranging from 1.50% to 12.51%, Minimum
Loan Rates ranging from 0.00% per annum to 14.30% per annum and Maximum Loan
Rates ranging from 10.00% per annum to 21.30% per annum (except for 1.07% Group
2A Mortgage Loans that do not have Maximum Loan Rates). As of the Cut-off Date,
the weighted average Gross Margin was approximately 5.41%, the weighted average
Minimum Loan Rate was approximately 8.24% per annum (exclusive of the Mortgage
Loans that do not have a Minimum Loan Rate) and the weighted average Maximum
Loan Rate was approximately 15.52% 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 Group 2A Mortgage Loan occurs in July 2003 and the
weighted average number of months to the next Adjustment Date following the
Cut-off Date for all of the Group 2A Mortgage Loans is 12 months.
No Group 2A Mortgage Loan had a Cut-off Date Principal Balance of greater
than $816,004.63 or less than $481.90. The Group 2 Mortgage Loans are expected
to have the following characteristics as of the Cut-off Date (the sum in any
column may not equal the total indicated due to rounding):
S-33
<PAGE>
Cut-off Date Principal Balances of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Loan Group Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
------------------------------------- --------------- -------------------- ------------------------------------
<S> <C> <C> <C>
482 - 50,000 73 $ 2,793,122 5.13%
50,001 - 100,000 246 18,138,081 33.32
100,001 - 150,000 125 15,074,813 27.69
150,001 - 200,000 27 4,725,734 8.68
200,001 - 250,000 14 3,163,427 5.81
250,001 - 300,000 13 3,566,198 6.55
300,001 - 350,000 5 1,602,733 2.94
350,001 - 400,000 4 1,493,165 2.74
400,001 - 450,000 2 869,823 1.60
450,001 - 500,000 2 994,763 1.83
500,001 - 550,000 1 506,997 0.93
650,001 - 700,000 1 695,756 1.28
800,001 - 816,005 1 816,005 1.50
-------------- ------------------- ------------------------------------
Total........................... 514 $54,440,615 100.00%
=============== ==================== ====================================
</TABLE>
- --------------------
(1) The average Cut-off Date Principal Balance of the Group 2A Mortgage Loans
was approximately $105,916.
Original Terms to Maturity of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance
of Mortgage Outstanding as of of Loan Group Outstanding as of
Original Term (months) Loans the Cut-off Date the Cut-off Date
- ------------------------------- --------------- -------------------------- ------------------------------------
<S> <C> <C> <C>
180 - 180 6 $ 467,044 0.86%
181 - 240 1 25,765 0.05
241 - 300 3 133,047 0.24
301 - 360 504 53,814,759 98.85
--------------- -------------------------- ------------------------------------
Total..................... 514 $54,440,615 100.00%
=============== ========================== ====================================
</TABLE>
- --------------------
(1) The weighted average original term of the Group 2A Mortgage Loans was
approximately 358 months.
S-34
<PAGE>
Property Types of the Group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Property Type Loans the Cut-off Date Cut-off Date
- ------------------------------- --------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Single Family Detached 433 $45,706,210 83.96%
Two Family 21 2,507,234 4.61
PUD(1) 19 2,429,848 4.46
Condominium 23 1,875,657 3.45
Townhouse 3 692,375 1.27
Manufactured Home 8 509,183 0.94
Three Family 3 477,319 0.88
Four Family 3 195,001 0.36
Cooperative 1 47,787 0.09
--------------- ------------------------- -------------------------------------
Total..................... 514 $54,440,615 100.00%
=============== ========================= =====================================
</TABLE>
- --------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Occupancy Status Loans the Cut-off Date Cut-off Date
- ------------------------------- ----------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Primary 490 $52,329,335 96.12%
Investment 22 1,992,903 3.66
Second Home 2 118,377 0.22
----------------- ------------------------- -------------------------------------
Total..................... 514 $54,440,615 100.00%
================= ========================= =====================================
</TABLE>
- --------------------
(1) Based on representations of the borrowers at the times of origination.
Purpose of the Group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- ------------------------------- --------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
Purchase 277 $28,490,379 52.33%
Cashout 132 14,622,518 26.86
Rate/Term Refinance 105 11,327,719 20.81
--------------- ------------------------ -------------------------------------
Total..................... 514 $54,440,615 100.00%
=============== ========================= =====================================
</TABLE>
S-35
<PAGE>
Current Loan Rates of the Group 2A Mortgage Loans (1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Current Loan Rate (%) Loans the Cut-off Date Cut-off Date
- ------------------------------- --------------- ------------------------- -------------------------------------
<S> <C> <C> <C>
5.38 - 5.50 6 $ 658,938 1.21%
5.51 - 6.00 9 911,121 1.67
6.01 - 6.50 14 1,630,658 3.00
6.51 - 7.00 25 2,141,014 3.93
7.01 - 7.50 31 2,796,038 5.14
7.51 - 8.00 34 2,916,045 5.36
8.01 - 8.50 51 6,947,251 12.76
8.51 - 9.00 26 3,532,832 6.49
9.01 - 9.50 32 4,191,687 7.70
9.51 - 10.00 55 7,561,488 13.89
10.01 - 10.50 77 7,978,067 14.65
10.51 - 11.00 56 5,877,772 10.80
11.01 - 11.50 33 3,160,011 5.80
11.51 - 12.00 22 1,488,487 2.73
12.01 - 12.50 16 985,357 1.81
12.51 - 13.00 14 908,749 1.67
13.01 - 13.50 8 476,818 0.88
13.51 - 14.00 2 107,393 0.20
14.01 - 14.30 3 170,890 0.31
--------------- ------------------------ -------------------------------------
Total..................... 514 $54,440,615 100.00%
=============== ========================= =====================================
</TABLE>
- ------------------
(1) The weighted average Loan Rate of the Group 2A Mortgage Loans as of the
Cut-off Date was approximately 9.42% per annum.
S-36
<PAGE>
Original Loan-to-Value Ratios of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Original Loan-to-Value Ratio (%) Loans the Cut-off Date Cut-off Date
--------------- --------------------- -------------------------------------
<S> <C> <C> <C>
0.00 - 10.00 18 $ 1,710,877 3.14%
10.01 - 20.00 1 25,765 0.05
20.01 - 30.00 1 107,889 0.20
30.01 - 40.00 2 106,137 0.19
40.01 - 50.00 9 532,091 0.98
50.01 - 60.00 11 1,471,904 2.70
60.01 - 70.00 66 6,135,255 11.27
70.01 - 80.00 156 17,526,234 32.19
80.01 - 90.00 136 15,966,202 29.33
90.01 - 100.00 87 8,719,144 16.02
100.01 - 104.75 27 2,139,117 3.93
--------------- -------------------- -------------------------------------
Total.............................. 514 $54,440,615 100.00%
=============== ===================== =====================================
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Group 2A Mortgage
Loans as of the Cut-off Date was approximately 80.10%.
S-37
<PAGE>
Geographic Distribution of the Group 2A Mortgaged Properties(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Location Loans the Cut-off Date Cut-off Date
- --------------------------------- --------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
Alabama 10 $ 797,209 1.46%
Arizona 8 585,788 1.08
Arkansas 1 44,986 0.08
California 72 11,509,741 21.14
Colorado 8 1,308,152 2.40
Connecticut 2 304,519 0.56
Delaware 2 158,017 0.29
District of Columbia 1 159,191 0.29
Florida 78 7,044,455 12.94
Georgia 29 2,171,469 3.99
Hawaii 6 1,402,320 2.58
Idaho 1 94,245 0.17
Illinois 55 5,154,148 9.47
Indiana 9 771,235 1.42
Kansas 1 65,430 0.12
Kentucky 5 299,069 0.55
Louisiana 3 251,883 0.46
Maryland 7 790,660 1.45
Massachusetts 15 1,667,679 3.06
Michigan 10 732,443 1.35
Minnesota 5 568,200 1.04
Mississippi 2 167,724 0.31
Missouri 13 855,877 1.57
Nevada 2 311,314 0.57
New Hampshire 2 107,601 0.20
New Jersey 23 3,553,104 6.53
New Mexico 2 170,706 0.31
New York 19 1,876,674 3.45
North Carolina 10 789,859 1.45
Ohio 23 1,564,764 2.87
Oklahoma 1 54,661 0.10
Oregon 12 1,422,643 2.61
Pennsylvania 13 1,469,483 2.70
Rhode Island 3 284,649 0.52
South Carolina 2 121,321 0.22
Tennessee 15 1,310,991 2.41
Texas 14 1,730,959 3.18
Utah 9 845,849 1.55
Vermont 2 172,975 0.32
Virginia 2 275,276 0.51
Washington 9 1,054,003 1.94
West Virginia 1 54,218 0.10
Wisconsin 7 365,126 0.67
--------------- ----------------------- --------------------------------------
Total....................... 514 $54,440,615 100.00%
=============== ======================= ======================================
</TABLE>
- -------------------
(1) The greatest ZIP Code geographic concentration of Group 2A Mortgage Loans,
by Group 2A Loan Balance as of the Cut-off Date, was approximately 1.50% in
the 94506 ZIP Code.
S-38
<PAGE>
Documentation Levels of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number Principal Balance % of Aggregate Principal Balance of
of Mortgage Outstanding as of Loan Group Outstanding as of the
Documentation Level Loans the Cut-off Date Cut-off Date
- ------------------------------------- --------------- --------------------- -------------------------------------
<S> <C> <C> <C>
Alternate Documentation 38 $ 4,054,885 7.45%
Full Documentation 291 30,341,016 55.73
Limited Documentation 88 9,658,387 17.74
No Documentation 96 10,300,821 18.92
Stated Documentation 1 85,507 0.16
--------------- --------------------- -------------------------------------
Total........................... 514 $54,440,615 100.00%
=============== ===================== =====================================
</TABLE>
- --------------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
S-39
<PAGE>
Maximum Loan Rates of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance of
Principal Balance Loan Group
Number of Outstanding as of Outstanding as of
Maximum Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------ ----------------- ------------------------- ----------------------
<S> <C> <C> <C>
N/A(2) - 4 $ 586,449 1.08%
9.51 - 10.00 3 228,364 0.42
10.01 - 10.50 9 897,730 1.65
10.51 - 11.00 20 1,933,136 3.55
11.01 - 11.50 31 2,977,855 5.47
11.51 - 12.00 29 2,998,866 5.51
12.01 - 12.50 22 1,769,160 3.25
12.51 - 13.00 13 1,206,389 2.22
13.01 - 13.50 11 1,006,376 1.85
13.51 - 14.00 6 682,056 1.25
14.01 - 14.50 17 3,398,210 6.24
14.51 - 15.00 13 1,906,879 3.50
15.01 - 15.50 15 2,358,434 4.33
15.51 - 16.00 26 3,818,462 7.01
16.01 - 16.50 43 4,836,085 8.88
16.51 - 17.00 58 6,955,227 12.78
17.01 - 17.50 65 6,583,012 12.09
17.51 - 18.00 64 5,888,482 10.82
18.01 - 18.50 24 2,076,871 3.81
18.51 - 19.00 14 883,596 1.62
19.01 - 19.50 10 501,135 0.92
19.51 - 20.00 11 612,261 1.12
20.01 - 20.50 3 180,323 0.33
20.51 - 21.00 1 43,916 0.08
21.01 - 21.30 2 111,341 0.20
----------------- ------------------------- ----------------------
Total........................... 514 $54,440,615 100.00%
================= ========================= ======================
</TABLE>
- ------------------
(1) The weighted average Maximum Loan Rate of the Group 2A Mortgage Loans as of
the Cut-off Date was approximately 15.52%.
(2) Mortgage Loans that, by the terms of their Notes, have no Maximum Loan Rate
and are subject only to applicable state usury laws.
S-40
<PAGE>
Minimum Loan Rates of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance of
Principal Balance Loan Group
Number of Outstanding as of Outstanding as of
Minimum Loan Rate (%) Mortgage Loans the Cut-off Date the Cut-off Date
------------------------------------ ----------------- ------------------------- ----------------------
<S> <C> <C> <C>
0.00 - 0.50 47 $ 5,085,937 9.34%
0.51 - 1.00 14 1,229,889 2.26
1.01 - 1.50 17 1,371,590 2.52
1.51 - 2.00 19 1,641,174 3.01
2.01 - 2.50 20 1,495,165 2.75
2.51 - 3.00 11 988,568 1.82
3.01 - 3.50 9 880,766 1.62
3.51 - 4.00 2 620,016 1.14
4.01 - 4.50 4 416,208 0.76
5.01 - 5.50 3 342,327 0.63
5.51 - 6.00 8 822,117 1.51
6.01 - 6.50 13 1,467,665 2.70
6.51 - 7.00 11 1,061,508 1.95
7.01 - 7.50 6 682,890 1.25
7.51 - 8.00 10 1,001,430 1.84
8.01 - 8.50 14 3,127,283 5.74
8.51 - 9.00 26 3,406,847 6.26
9.01 - 9.50 31 4,023,276 7.39
9.51 - 10.00 55 7,320,151 13.45
10.01 - 10.50 70 6,929,421 12.73
10.51 - 11.00 46 4,593,809 8.44
11.01 - 11.50 28 2,777,152 5.10
11.51 - 12.00 19 1,344,480 2.47
12.01 - 12.50 9 488,309 0.90
12.51 - 13.00 11 742,001 1.36
13.01 - 13.50 6 302,352 0.56
13.51 - 14.00 2 107,393 0.20
14.01 - 14.30 3 170,890 0.31
----------------- ------------------------- ----------------------
Total.......................... 514 $54,440,615 100.00%
================= ========================= ======================
</TABLE>
------------------
(1) The weighted average Minimum Loan Rate of the Group 2A Mortgage Loans as of
the Cut-off Date was approximately 8.24%.
S-41
<PAGE>
Gross Margins of the Group 2A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance of
Number Principal Balance Loan Group
of Mortgage Outstanding as of Outstanding as of
Gross Margins (%) Loans the Cut-off Date the Cut-off Date
----------------------------- ----------------- ------------------------ ------------------------
<S> <C> <C> <C>
1.50 - 1.50 1 $ 25,765 0.05%
1.51 - 2.00 28 2,158,883 3.97
2.01 - 2.50 11 784,683 1.44
2.51 - 3.00 103 10,146,869 18.64
3.01 - 3.50 10 1,757,360 3.23
3.51 - 4.00 2 116,550 0.21
4.01 - 4.50 1 695,756 1.28
4.51 - 5.00 11 1,109,552 2.04
5.01 - 5.50 41 4,069,199 7.47
5.51 - 6.00 75 9,420,566 17.30
6.01 - 6.50 72 8,480,843 15.58
6.51 - 7.00 75 7,963,702 14.63
7.01 - 7.50 45 4,788,995 8.80
7.51 - 8.00 17 1,345,309 2.47
8.01 - 8.50 14 1,079,953 1.98
8.51 - 9.00 4 259,711 0.48
9.01 - 9.50 3 215,004 0.39
12.51 1 21,913 0.04
----------------- ----------------------- ------------------------
Total.................. 514 $54,440,615 100.00%
================= ======================== ========================
</TABLE>
S-42
<PAGE>
Next Adjustment Date for the Group 2A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number of Outstanding as of Outstanding as of the
Next Adjustment Date Mortgage Loans the Cut-off Date Cut-off Date
- ----------------------------- ----------------- ----------------------- --------------------------------
<S> <C> <C> <C>
May 1999 11 $ 940,183 1.73%
June 1999 16 1,704,122 3.13
July 1999 68 6,947,194 12.76
August 1999 10 1,141,476 2.10
September 1999 13 1,369,999 2.52
October 1999 42 4,523,024 8.31
November 1999 5 403,722 0.74
December 1999 3 961,295 1.77
January 2000 34 2,571,415 4.72
February 2000 4 362,080 0.67
March 2000 1 75,539 0.14
April 2000 28 2,856,984 5.25
May 2000 16 1,931,149 3.55
June 2000 25 3,019,174 5.55
July 2000 36 3,899,964 7.16
August 2000 30 3,519,022 6.46
September 2000 47 5,185,761 9.53
October 2000 38 4,322,763 7.94
November 2000 33 2,866,744 5.27
December 2000 10 1,245,266 2.29
January 2001 18 2,166,890 3.98
February 2001 2 202,069 0.37
April 2001 1 55,803 0.10
May 2001 1 32,799 0.06
June 2001 1 47,830 0.09
July 2001 4 299,309 0.55
August 2001 1 56,107 0.10
September 2001 1 34,816 0.06
October 2001 1 124,412 0.23
November 2001 3 218,193 0.40
March 2002 1 59,656 0.11
January 2003 1 133,369 0.24
May 2003 4 514,408 0.94
June 2003 4 611,774 1.12
July 2003 1 36,302 0.07
----------------- ----------------------- --------------------------------
Total.................. 514 $54,440,615 100.00%
================= ======================= ================================
</TABLE>
S-43
<PAGE>
Indices of the Group 2A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Number of Principal Balance of Loan Group
Mortgage Outstanding as of Outstanding as of
Index(1) Loans the Cut-off Date the Cut-off Date
- -------------------------------------- ------------- ----------------------- ----------------------
<S> <C> <C> <C>
One Year CMT 146 $14,168,696 26.03%
6 month LIBOR(2) 360 39,839,791 73.18
Other(3) 8 432,128 0.79
------------- ----------------------- ----------------------
Total......................... 514 $54,440,615 100.00%
============= ======================= ======================
</TABLE>
- --------------------
(1) Each of these Indices are described under "--The Index."
(2) Of the Group 2A Mortgage Loans with an Index of Six-Month LIBOR,
approximately 26.49%, 55.44%, 1.52%, and 2.38% (in each case by Group 2A
Loan Balance as of the Cut-off Date) have initial fixed Loan Rates for one
year, two years, three years and five years, respectively.
(3) Includes 5 other Indices, each of which represents 0.46% or less of the
Group 2A Loan Balance as of the Cut-off Date.
Initial Periodic Rate Caps of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number of Outstanding as of Outstanding as of
Initial Periodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ ----------------- ----------------------- ------------------------
<S> <C> <C> <C>
0.00 143 $14,446,842 26.54%
1.00 207 22,568,397 41.46
1.50 29 2,664,445 4.89
2.00 30 3,498,375 6.43
3.00 98 10,710,998 19.67
5.00 1 145,917 0.27
6.50 1 124,412 0.23
7.00 5 281,228 0.52
--------------- ---------------------- ------------------------
Total................................ 514 $54,440,615 100.00%
=============== ====================== ========================
</TABLE>
- ------------------
(1) Relates solely to initial rate adjustments.
S-44
<PAGE>
Subsequent Periodic Rate Caps of the Group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number of Outstanding as of Outstanding as of
Subsequent Periodic Rate Cap (%) Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------ --------------- ------------------------- ------------------------
<S> <C> <C> <C>
0.00 5 $ 338,273 0.62%
0.50 1 110,929 0.20
1.00 271 30,254,642 55.57
1.50 211 20,727,772 38.07
1.90 1 92,208 0.17
2.00 16 2,089,429 3.84
3.00 9 827,362 1.52
--------------- ---------------------- -----------------------
Total................................ 514 $54,440,615 100.00%
=============== ====================== ========================
</TABLE>
- ------------------
(1) Relates to all rate adjustments subsequent to initial rate adjustments.
The Index
With respect to approximately 26.03% of the Group 2A 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"); with respect to approximately 73.18% of
the Group 2A 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"); and with respect to
approximately 0.79% of the Group 2A Mortgage Loans, the Index is a variety of
indices, none of which comprise more than 0.46% of the Group 2A 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 5.81% 6.01% 5.64% 6.06% 5.00% 3.44%
June 5.87% 5.94% 5.84% 5.88% 5.25% 3.56%
July 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-45
<PAGE>
One Year CMT
<TABLE>
<CAPTION>
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 5.38% 5.99% 5.54% 6.27% 4.82% 3.24%
May 5.44% 5.87% 5.64% 6.00% 5.31% 3.36%
June 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 Group 1 Mortgage Loans and approximately 21.57%
of the Group 2A 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-46
<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-47
<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. At March 31, 1999, the Seller had approximately $663
million in assets, approximately $516 million in liabilities and approximately
$147 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 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
S-48
<PAGE>
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 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 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."
S-49
<PAGE>
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 $3.270 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 and
Series 1999-CB1 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 March 31, 1999 as compared with the annual periods ending
on December 31, 1998 and December 31, 1997.
S-50
<PAGE>
Delinquency and Foreclosure Experience(1)
<TABLE>
<CAPTION>
As of March 31, 1999 As of December 31, 1998
-------------------- -----------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
----- ---------- ------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 38,189 $2,422,259,028.89 74.86% 39,063 $2,489,678,137.64 78.01%
Period of
Delinquency(3)
30-59 Days 3,757 $ 249,030,022.74 7.70% 3,689 $ 233,734,152.03 7.32%
60-89 1,527 100,814,503.93 3.12% 1,497 87,944,511.34 2.76%
90 Days or more 2,773 $ 158,862,515.05 4.91% 2,578 $ 121,504,523.26 3.81%
------ ------------------ ------ ------ ------------------ ------
Total
Delinquencies 8,057 $ 508,707,041.72 15.72% 7,764 $ 443,183,186.63 13.89%
Foreclosure/
Bankruptcies(4) 3,472 $ 243,164,515.37 7.51% 2,780 $ 197,668,255.15 6.19%
Real Estate
Owned 1,072 $ 61,709,490.76 1.91% 1,009 $ 60,867,154.24 1.91%
------ ------------------ ------ ------ ------------------ ------
Total
Portfolio 50,790 $3,235,840,076.74 100.00% 50,616 $3,191,396,733.66 100.00%
------ ------------------ ------ ------ ------------------ ------
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------
% by
No. of Principal Principal
Loans Balance(2) Balance
----- ---------- -------
<S> <C> <C> <C>
Current Loans 28,982 $1,360,468,859.99 80.48%
Period of
Delinquency(3)
30-59 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
Delinquencies 4,610 $ 191,537,962.00 11.33%
Foreclosure/
Bankruptcies(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.
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 May 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
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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 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 Loan Group 2F 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 Loan Group
2A 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.
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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, prepayment penalties or similar
items), the Servicer will deposit such amounts 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.
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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 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)
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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
Group 1 Mortgage Loan and (ii) 0.50% per annum on the Principal Balance of each
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, prepayment penalties 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 Group
2 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 Group 2 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 Group 2 Mortgage Loan are 90 or more days Delinquent,
unless such Group 2 Mortgage Loan becomes less than 90 days Delinquent.
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 a Loan Group and thereby effect the early retirement of the
related Certificates, on any Distribution Date on which the aggregate Principal
Balance of such Mortgage Loans and REO Properties in (i) Loan Group 1 is less
than 5% of the aggregate Principal Balance of the Mortgage Loans in such Loan
Group as of the Cut-off Date or (ii) Loan Group 2 is less than 10% of the
aggregate Principal Balance of the Mortgage Loan in such Loan Group 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
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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 related 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.
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 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. 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
51% 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 1A-IO
and the Class R Certificates) shall be 99% 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. The percentage of all the Voting Rights allocated among holders of
the Class 1A-IO Certificates shall be 1%. 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
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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
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 Class 1A, Class 1A-IO and Class 1A-PO Certificates
(the "Group 1 Senior Certificates"), the Class 1M-1, Class 1M-2, Class 1M-3,
Class 1B-1, Class 1B-2 and Class 1B-3 Certificates (the "Group 1 Subordinated
Certificates", and together with the Group 1 Senior Certificates, the "Group 1
Certificates"), the Class 2A-1 and Class 2A-2 Certificates (the "Group 2 Senior
Certificates"), the Class 2M-1, Class 2M-2, Class 2B-1, Class 2B-2, Class 2B-3
and Class X Certificates (the "Group 2 Subordinated Certificates" and, together
with the Group 2 Senior Certificates, the "Group 2 Certificates") and the Class
R Certificates (the "Residual Certificates"). The Group 1 Certificates, Group 2
Certificates and the Residual Certificates are collectively referred to herein
as the "Certificates." Only the Class 1A, Class 1A-IO, Class 1A-PO, Class 1M-1,
Class 1M-2, Class 1M-3, Class 2A-1, Class 2A-2, Class 2M-1, Class 2M-2 and Class
2B-1 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 June 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 all of the Certificates except for
the Group 2 Senior Certificates, the "Record Date" is the last Business Day of
the month immediately preceding the month in which the related Distribution Date
occurs or, in the case of the first Distribution Date, the Closing Date. With
respect to the Group 2 Senior Certificates, the "Record Date" is the Business
Day immediately preceding such Distribution Date; provided, however, that if any
Group 2 Senior 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
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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).
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
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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.
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
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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 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.
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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 51% 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
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
determined for each Loan Group (the "Group 1 Available Funds" and the "Group 2
Available Funds", respectively) and in each case will be equal to the sum of the
following amounts with respect to the related Mortgage Loans, net of amounts
reimbursable therefrom to the Servicer, of (i) the aggregate amount of Monthly
Payments on the related Mortgage Loans due on the related Due Date and received
by the Trustee three business days 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
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Mortgage Loans, including prepayments, 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, excluding prepayment penalties, (iii) and payments from the Servicer in
connection with Advances and Prepayment Interest Shortfalls for such
Distribution Date, and (iv) in the case of Loan Group 1 only, funds from Loan
Group 2 to the extent available after distribution has been made on Loan Group
2. "Available Funds" for any Distribution Date will equal the sum of the Group 1
Available Funds and the Group 2 Available Funds.
The "Prepayment Period" is the prior calendar month.
Interest Distributions
Group 1 Certificates
On each Distribution Date, based upon the information provided to it in the
Remittance Report, the Trustee will distribute the Interest Remittance Amount
for Loan Group 1 in the following order of priority:
First, to the Trustee, the Trustee Fee for such Loan Group;
Second, to the Holders of the Class 1A and Class 1A-IO Certificates, the
related Accrued Certificate Interest plus the related Interest Carry Forward
Amount;
Third, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 1M-1 Certificates, the related Accrued Certificate
Interest;
Fourth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 1M-2 Certificates, the related Accrued Certificate
Interest;
Fifth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 1M-3 Certificates, the related Accrued Certificate
Interest; and
Sixth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 1B-1, Class 1B-2 and Class 1B-3 Certificates, in that
order, the related Accrued Certificate Interest for each such Class.
Group 2 Certificates
On each Distribution Date, based upon the information provided to it in the
Remittance Report, the Trustee will distribute the Interest Remittance Amount
for Loan Group 2 in the following order of priority:
First, to the Trustee, the Trustee Fee for such Loan Group;
Second, to the Holders of the Class 2A-1 and Class 2A-2 Certificates, the
related Accrued Certificate Interest, plus the Class 2A Interest Carry Forward
Amount allocable to the Class 2A-1 Certificates and the Class 2A-2 Certificates,
respectively;
Third, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 2M-1 Certificates, the related Accrued Certificate
Interest;
Fourth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 2M-2 Certificates, the related Accrued Certificate
Interest;
Fifth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 2B-1 Certificates, the related Accrued Certificate
Interest;
Sixth, to the extent of the Interest Remittance Amount then remaining, to
the Holders of the Class 2B-2 and Class 2B-3 Certificates, in that order the
related Accrued Certificate Interest for each such Class; and
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Seventh, 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 Class Certificate
Balance of such Class of Offered 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 for the actual number of days elapsed since the prior
Distribution Date. The "Class 2A Interest Carry Forward Amount" for any
Distribution Date is the sum of the Interest Carry Forward Amounts for the Class
2A-1 and Class 2A-2 Certificates for such Distribution Date.
"Interest Remittance Amount" with respect to a Loan Group means, as of any
Determination Date, the sum, without duplication, of (i) all interest due and
collected or advanced during the related Collection Period on the related
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 related 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 related 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 all
of the Certificates, except for the Group 2 Senior Certificates, will be the
calendar month immediately preceding the month in which such Distribution Date
occurs. Except with respect to the Group 2 Senior 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 Group 2 Senior 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
Group 1 Certificates
General. All payments and other amounts received in respect of principal of
the Group 1 Mortgage Loans will be allocated between (i) the Group 1 Senior
Certificates (other than the Class 1A-IO and Class 1A-PO Certificates) and the
Group 1 Subordinated Certificates and (ii) the Class 1A-PO Certificates, in each
case based on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The Non-PO Percentage with respect to any Group 1 Mortgage Loan with a Net
Mortgage Rate less than 7.00% (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Mortgage Rate divided by 7.00%. The Non-PO
Percentage with respect to any Group 1 Mortgage Loan with a Net Mortgage Rate
equal to or greater than 7.00% (each such Mortgage Loan, a "Non-Discount
Mortgage Loan") will be 100%. The PO Percentage with respect to any Discount
Mortgage Loan will be equal to (i) 7.00% minus the Net Mortgage Rate divided by
(ii) 7.00%. The PO Percentage with respect to any Non-Discount Mortgage Loan
will be 0%. The "Net Mortgage Rate" for any Mortgage Loan is the mortgage
interest rate borne by such Mortgage Loan minus the sum of the rates at which
the Servicing Fee and the Trustee Fee are calculated.
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Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Class 1A-IO Certificates and the Class 1A-PO
Certificates) in an amount up to the Group 1 Senior Principal Distribution
Amount and as principal of the Subordinated Certificates, in an amount up to the
Subordinated Principal Distribution Amount.
The "Non-PO Formula Principal Amount" for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all Monthly Payments of
principal due on each Group 1 Mortgage Loan on the related Due Date, (b) the
principal portion of the purchase price of each Group 1 Mortgage Loan that was
repurchased by the Seller pursuant to the Pooling and Servicing Agreement as of
such Distribution Date, (c) the Substitution Adjustment Amount in connection
with any Deleted Group 1 Mortgage Loan received with respect to such
Distribution Date, (d) any insurance proceeds allocable to recoveries of
principal of Group 1 Mortgage Loans that are not yet Liquidated Mortgage Loans
received during the calendar month preceding the month of such Distribution
Date, (e) with respect to each Group 1 Mortgage Loan that became a Liquidated
Mortgage Loan during the calendar month preceding the month of such Distribution
Date, the amount of liquidation proceeds (net of certain expenses) allocable to
principal received with respect to such Group 1 Mortgage Loan during such
calendar month and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period.
Group 1 Senior Principal Distribution Amount. On each Distribution Date
prior to the Group 1 Senior Credit Support Depletion Date, the Non-PO Formula
Principal Amount, up to the amount of the Group 1 Senior Principal Distribution
Amount for such Distribution Date, will be distributed as principal to the Class
1A Certificates, until the Class Certificate Balance thereof has been reduced to
zero.
The capitalized terms used herein shall have the following meanings:
The "Group 1 Scheduled Principal Distribution Amounts" for any Distribution
Date will equal the applicable Non-PO Percentage of all amounts described in
clauses (a) through (d) of the definition of "Non-PO Formula Principal Amount"
for such Distribution Date.
The "Group 1 Senior Credit Support Depletion Date" is the date on which the
Class Certificate Balance of each Class of Group 1 Subordinated Certificates has
been reduced to zero.
The "Group 1 Senior Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) the Senior Percentage of the Group 1 Scheduled
Principal Distribution Amount for such Distribution Date, (ii) with respect to
each Group 1 Mortgage Loan that became a Liquidated Mortgage Loan during the
calendar month preceding the month of such Distribution Date, the lesser of (x)
the Senior Percentage of the applicable Non-PO Percentage of the Principal
Balance of such Group 1 Mortgage Loan as of the Due Date in the month preceding
the month in which a Monthly Payment was last made by the related borrower or
advanced by the Servicer and (y) either (A) the Senior Prepayment Percentage or
(B) if an Excess Loss was sustained with respect to such Liquidated Mortgage
Loan during such preceding calendar month, the Senior Percentage of the
applicable Non-PO Percentage of the amount of the liquidation proceeds (net of
certain expenses) allocable to principal received with respect to such Group 1
Mortgage Loan, and (iii) the Senior Prepayment Percentage of the applicable
Non-PO Percentage of all partial and full principal prepayments by borrowers
received during the related Prepayment Period; provided, however, that if a
Bankruptcy Loss that is an Excess Loss is sustained with respect to a Group 1
Mortgage Loan that is not a Liquidated Mortgage Loan, the Senior Principal
Distribution Amount will be reduced on the related Distribution Date by the
Senior Percentage of the applicable Non-PO Percentage of the principal portion
of such Bankruptcy Loss.
The "Group 1 Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each Class of Group 1 Senior Certificates (other than
the Class 1A-IO and Class 1A-PO Certificates) immediately prior to such date and
the denominator of which is the aggregate of the Class Certificate Balances of
all Classes of Group 1 Certificates, other than the Class 1A-IO and Class 1A-PO
Certificates, immediately prior to such date. The Group 1 Subordinated
Percentage for any Distribution Date will be calculated as the difference
between 100% and the Group 1 Senior Percentage for such date.
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The "Group 1 Senior Prepayment Percentage" for any Distribution Date
occurring during the five years beginning on the first Distribution Date will
equal 100%. Thereafter, the Group 1 Senior Prepayment Percentage will, except as
described below, be subject to gradual reduction as described in the following
paragraph. This disproportionate allocation of certain unscheduled payments in
respect of principal will have the effect of accelerating the amortization of
the Group 1 Senior Certificates (other than Class 1A-IO and Class 1A-PO
Certificates) which receive these unscheduled payments of principal while, in
the absence of Realized Losses, increasing the interest in the Loan Group 1
evidenced by the Group 1 Subordinated Certificates. Increasing the respective
interest of the Group 1 Subordinated Certificates relative to that of the Group
1 Senior Certificates is intended to preserve the availability of the
subordination provided by the Group 1 Subordinated Certificates. The Group 1
Subordinated Prepayment Percentage as of any Distribution Date will be
calculated as the difference between 100% and the Group 1 Senior Prepayment
Percentage.
The Group 1 Senior Prepayment Percentage for any Distribution Date
occurring on or after the fifth anniversary of the first Distribution Date will
be as follows: for any Distribution Date in the first year thereafter, the Group
1 Senior Percentage plus 70% of the Group 1 Subordinated Percentage for such
Distribution Date; for any Distribution Date in the second year thereafter, the
Group 1 Senior Percentage plus 60% of the Group 1 Subordinated Percentage for
such, Distribution Date; for any Distribution Date in the third year thereafter,
the Group 1 Senior Percentage plus 40% of the Group 1 Subordinated Percentage
for such Distribution Date; for any Distribution Date in the fourth year
thereafter, the Group 1 Senior Percentage plus 20% of the Group 1 Subordinated
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Group 1 Senior Percentage for such Distribution Date (unless on any
Distribution Date the Group 1 Senior Percentage exceeds the initial Group 1
Senior Percentage, in which case the Group 1 Senior Prepayment Percentage for
Such Distribution Date will once again equal 100%). Notwithstanding the
foregoing, no decrease in the Group 1 Senior Prepayment Percentage will occur
unless both of the following conditions (the "Step Down Conditions") are
satisfied: (i) the outstanding principal balance of all Group 1 Mortgage Loans
Delinquent 60 days or more (averaged over the preceding six month period), as a
percentage of the aggregate principal balance of the Group 1 Subordinated
Certificates on such Distribution Date, does not equal or exceed 50%, and (ii)
cumulative Realized Losses with respect to the Group 1 Mortgage Loans do not
exceed (a) with respect to the Distribution Date on the fifth anniversary of the
first Distribution Date, 30% of the aggregate of the principal balances of the
Group 1 Subordinated Certificates as of the Cut-off Date (the "Original
Subordinated Principal Balance"), (b) with respect to the Distribution Date on
the sixth anniversary of the first Distribution Date, 35% of the Original
Subordinated Principal Balance, (c) with respect to the Distribution Date on the
seventh anniversary of the first Distribution Date, 40% of the Original
Subordinated Principal Balance, (d) with respect to the Distribution Date on the
eighth anniversary of the first Distribution Date, 45% of the Original
Subordinated Principal Balance, and (e) with respect to the Distribution Date on
the ninth anniversary of the first Distribution Date, 50% of the Original
Subordinated Principal Balance.
If on any Distribution Date the allocation to the Class or Classes of Group
1 Senior Certificates (other than the Class 1A-PO Certificates) then entitled to
distributions of principal of full and partial principal prepayments and other
amounts in the percentage required above would reduce the outstanding Class
Certificate Balance of such Class or Classes below zero, the distribution to
such Class or Classes of Certificates of the Group 1 Senior Prepayment
Percentage of such amounts for such Distribution Date will be limited to the
percentage necessary to reduce the related Class Certificate Balance(s) to zero.
Group 1 Subordinated Principal Distribution Amount. On each Distribution
Date, to the extent of Group 1 Available Funds therefor, the Non-PO Formula
Principal Amount, up to the amount of the Group 1 Subordinated Principal
Distribution Amount for such Distribution Date, will be distributed as principal
of the Group 1 Subordinated Certificates. Except as provided in the next
paragraph, each Class of Group 1 Subordinated Certificates will be entitled to
receive its pro rata share of the Group 1 Subordinated Principal Distribution
Amount (based on its respective Class Certificate Balance), in each case to the
extent of the amount available from Group 1 Available Funds for distribution of
principal. Distributions of principal of the Group 1 Subordinated Certificates
will be made sequentially to the Classes of Group 1 Subordinated Certificates in
the following order of priority of payment: (i) to the Class 1M-1, (ii) to the
Class 1M-2, (iii) to Class 1M-3, (iv) to Class 1B-1, (v) to Class 1B-2 and (vi)
to Class 1B-3 Certificates, until the respective Class Certificate Balances
thereof are reduced to zero.
With respect to each Class of Group 1 Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Group 1 Subordinated Certificates which
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have a lower relative priority of payment than such Class (the "Applicable
Credit Support Percentage") is less than the Applicable Credit Support
Percentage for such Class on the date of issuance of the Certificates (the
"Original Applicable Credit Support Percentage"), no distribution of partial
principal prepayments and principal prepayments in full will be made to any such
Classes with a lower relative priority of payment (the "Restricted Classes") and
the amount of partial principal prepayments and principal prepayments in full
otherwise distributable to the Restricted Classes will be allocated, pro rata,
among the remaining Classes of Group 1 Subordinated Certificates in the
sequential order described above.
The Class Subordination Percentage with respect to any Distribution Date
and each Class of Group 1 Subordinated Certificates, will equal the fraction
(expressed as a percentage) the numerator of which is the Class Certificate
Balance of such Class of Group 1 Subordinated Certificates immediately prior to
such Distribution Date and the denominator of which is the aggregate of the
Class Certificate Balances of all Classes of Group 1 Certificates immediately
prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Group 1 Certificates on the date of issuance of the Certificates are expected to
be as follows:
Class 1A 4.00%
Class 1M-1 3.25%
Class 1M-2 2.75%
Class 1M-3 2.25%
The "Group 1 Subordinated Principal Distribution Amount" for any
Distribution Date will equal (A) the sum of (i) the Group 1 Subordinated
Percentage of the applicable Non-PO Percentage of all amounts described in
clauses (a) through (d) of the definition of "Non-PO Formula Principal Amount"
for such Distribution Date, (ii) with respect to each Group 1 Mortgage Loan that
became a Liquidated Mortgage Loan during the calendar month preceding the month
of such Distribution Date, the applicable Non-PO Percentage of the liquidation
proceeds (net of certain expenses) allocable to principal received with respect
to such Group 1 Mortgage Loan, after application of such amounts pursuant to
clause (ii) of the definition of Group 1 Senior Principal Distribution Amount up
to the Group 1 Subordinated Percentage of the applicable Non-PO Percentage of
the Principal Balance of such Group 1 Mortgage Loan and (iii) the Group 1
Subordinated Prepayment Percentage of the applicable Non-PO Percentage of all
partial and full principal prepayments by borrowers received during the related
Prepayment Period reduced by (B) the amount of any payments in respect of Class
1A-PO Deferred Amounts on the related Distribution Date.
Class 1A-PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class 1A-PO Certificates will be made in an
amount (the "Class 1A-PO Principal Distribution Amount") equal to the lesser of
(x) the PO Formula Principal Amount for such Distribution Date and (y) the
product of (i) Group 1 Available Funds remaining after distribution of interest
on the Group 1 Senior Certificates and (ii) a fraction, the numerator of which
is the PO Formula Principal Amount and the denominator of which is the sum of
the PO Formula Principal Amount and the Group 1 Senior Principal Distribution
Amount.
If the Class 1A-PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (y) above, principal distributions to holders
of the Group 1 Senior Certificates (other than the Class 1A-PO Certificates)
will be in an amount equal to the product of (i) Group 1 Available Funds
remaining after distribution of interest on the Group 1 Senior Certificates and
(ii) a fraction, the numerator of which is the Group 1 Senior Principal
Distribution Amount and the denominator of which is the sum of the Group 1
Senior Principal Distribution Amount and the PO Formula Principal Amount.
The "PO Formula Principal Amount" for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all Monthly Payments of principal due
on each Group 1 Mortgage Loan on the related Due Date, (b) the principal portion
of the purchase price of each Group 1 Mortgage Loan that was repurchased by the
Seller pursuant to the Pooling and Servicing Agreement as of such Distribution
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Group 1 Mortgage Loan received with respect to such Distribution Date, (d) any
insurance proceeds or liquidation proceeds (net of certain expenses) allocable
to recoveries of principal of Group 1 Mortgage Loans that are not yet Liquidated
Mortgage Loans received during the calendar month preceding the month of such
Distribution Date, (e) with respect to each Group 1 Mortgage Loan that became a
Liquidated
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Mortgage Loan during the calendar month preceding the month of such
Distribution Date, the amount of liquidation proceeds (net of certain expenses)
allocable to principal received with respect to such Group 1 Mortgage Loan and
(f) all partial and full principal prepayments by borrowers received during the
related Prepayment Period; provided, however, that if a Bankruptcy Loss that is
an Excess Loss is sustained with respect to a Discount Mortgage Loan that is not
a Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on
the related Distribution Date by the applicable PO Percentage of the principal
portion of such Bankruptcy Loss.
Allocation of Losses. On each Distribution Date, the applicable PO
Percentage of any Realized Loss, including any Excess Loss, on a Discount
Mortgage Loan in Loan Group 1 will be allocated to the Class 1A-PO Certificates
until the Class Certificate Balance thereof is reduced to zero. The amount of
any such Realized Loss, other than an Excess Loss, allocated on or prior to the
Group 1 Senior Credit Support Depletion Date will be treated as a "Class 1A-PO
Deferred Amount". To the extent funds are available on such Distribution Date or
on any future Distribution Date from amounts that would otherwise be allocable
to the Group 1 Subordinated Principal Distribution Amount, Class 1A-PO Deferred
Amounts will be paid on the Class 1A-PO Certificates prior to distributions of
principal on the Group 1 Subordinated Certificates. Any distribution of Group 1
Available Funds in respect of unpaid Class 1A-PO Deferred Amounts will not
further reduce the Class Certificate Balance of the Class 1A-PO Certificates.
The Class 1A-PO Deferred Amounts will not bear interest. The Class Certificate
Balance of the Class of Group 1 Subordinated Certificates then outstanding with
the lowest relative priority of payment will be reduced by the amount of any
payments in respect of Class 1A-PO Deferred Amounts. After the Group 1 Senior
Credit Support Depletion Date, no new Class 1A-PO Deferred Amounts will be
created.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Group 1
Subordinated Certificates, in the reverse order of their relative priority of
payment beginning with the Class of Group 1 Subordinated Certificates then
outstanding with the lowest relative priority of payment, in each case until the
Class Certificate Balance of the respective Class of Certificates has been
reduced to zero, and then to the Group 1 Senior Certificates (other than the
Class 1A-PO Certificates) pro rata, based upon their respective Class
Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Group 1 Senior
Certificates (other than the Class 1A-PO Certificates) and the Group 1
Subordinated Certificates based upon their respective Class Certificate
Balances.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of liquidation proceeds (net of certain expenses)
applied to the principal balance of the related Mortgage Loan. "Excess Losses"
are (i) Special Hazard Losses in excess of the Special Hazard Loss Coverage
Amount, (ii) Bankruptcy Losses, in excess of the Bankruptcy Loss Coverage Amount
and (iii) Fraud Losses in excess of the Fraud Loss Coverage Amount. "Bankruptcy
Losses" are losses that are incurred as a result of Debt Service Reductions and
Deficient Valuations. "Special Hazard Losses" are Realized Losses in respect of
Special Hazard Mortgage Loans. "Fraud Losses" are losses sustained on a
Liquidated Mortgage Loan by reason of a default arising from fraud, dishonesty
or misrepresentation.
The "Bankruptcy Loss Coverage Amount" will be, on the Closing Date,
$75,000, and on any date of determination thereafter, the initial amount as
reduced by all Bankruptcy Losses realized to such date. The "Fraud Loss Coverage
Amount" will be, with respect to any Distribution Date through the first
anniversary of the initial Distribution Date, an amount equal to 3% of the Group
1 Loan Balance; with respect to any Distribution Date after the first
anniversary of the initial Distribution Date through the second anniversary of
the initial Distribution Date, an amount equal to 2% of the Group 1 Loan
Balance; with respect to any Distribution Date after the second anniversary of
the initial Distribution Date through the fifth anniversary of the initial
Distribution Date, an amount equal to 1% of the Group 1 Loan Balance; and after
the fifth anniversary of the initial Distribution Date, zero. The "Special
Hazard Loss Coverage Amount" will be, on the Closing Date, $1,479,134, and on
any date of determination thereafter, the initial amount as reduced by all
Special Hazard Losses realized to such date.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable liquidation and insurance proceeds
have been received. A "Special Hazard Mortgage Loan" is a Liquidated Mortgage
Loan as to which the ability to recover the full amount due thereunder was
substantially
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impaired by a hazard not insured against under a standard hazard insurance
policy of the type described in the Prospectus under "Description of the
Certificates--Hazard Insurance Policies."
Group 2 Certificates
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 Group 2
Senior Certificates will be entitled to receive 100% of the Group 2 Principal
Distribution Amount, based on the Class 2A-1 Principal Percentage and the Class
2A-2 Principal Percentage, respectively, for such Distribution Date, until the
Class Certificate Balances thereof have been reduced to zero. Once the Class
Certificate Balances of the Class 2A-1 and Class 2A-2 Certificates have been
reduced to zero, the Holders of the Class 2M-1 Certificates will be entitled to
receive 100% of the Group 2 Principal Distribution Amount for such Distribution
Date until the Class Certificate Balance of the Class 2M-1 Certificates has been
reduced to zero. Similarly if the Class Certificate Balance of the Class 2M-1
Certificates has been reduced to zero, the Holders of the Class 2M-2
Certificates will be entitled to receive 100% of the Group 2 Principal
Distribution Amount until the Class Certificate Balance of the Class 2M-2
Certificates has been reduced to zero. Finally, if the Class Certificate Balance
of the Class 2M-2 Certificates has been reduced to zero, the Holders of the
Class 2B-1 Certificates will be entitled to receive 100% of the Group 2
Principal Distribution Amount until the Class Certificate Balance of the Class
2B-1 Certificates has been reduced to zero.
The "Class 2A-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 2F 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 2 for the related Collection Period. The
"Class 2A-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 2A 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 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 Group 2 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 Group 2 Principal Distribution Amount:
First, the lesser of (x) the Group 2 Principal Distribution Amount and (y)
the Class 2A-1 Principal Percentage and the Class 2A-2 Principal Percentage of
the Class 2A Principal Distribution Amount will be distributed to the Class 2A-1
and Class 2A-2 Certificates, respectively, until the Class Certificate Balances
thereof have been reduced to zero;
Second, the lesser of (x) the excess of (i) the Group 2 Principal
Distribution Amount over (ii) the amount distributed to the Group 2 Senior
Certificates in clause First above and (y) the Class 2M-1 Principal Distribution
Amount will be distributed to the Class 2M-1 Certificates, until the Class
Certificate Balance thereof has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Group 2 Principal
Distribution Amount over (ii) the sum of the amount distributed to the Group 2
Senior Certificates in clause First above and the amount distributed to the
Class 2M-1 Certificates in clause Second above and (y) the Class 2M-2 Principal
Distribution Amount will be distributed to the Class 2M-2 Certificates, until
the Class Certificate Balance thereof has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Group 2 Principal
Distribution Amount over (ii) the sum of the amount distributed to the Group 2
Senior Certificates pursuant to clause First above, the amount distributed to
the Class 2M-1 Certificates pursuant to clause Second above and the amount
distributed to the Class 2M-2 Certificates pursuant to clause Third above and
(y) the Class 2B-1 Principal Distribution Amount will be distributed to the
Class 2B-1 Certificates, until the Class Certificate Balance thereof has been
reduced to zero;
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Fifth, the lesser of (x) the excess of (i) the Group 2 Principal
Distribution Amount over (ii) the sum of the amount distributed to the Group 2
Senior Certificates pursuant to clause First above, the amount distributed to
the Class 2M-1 Certificates pursuant to clause Second above, the amount
distributed to the Class 2M-2 Certificates pursuant to clause Third above and
the amount distributed to the Class 2B-1 Certificates pursuant to clause Fourth
above and (y) the Class 2B-2 Principal Distribution Amount will be distributed
to the Class 2B-2 Certificates, until the Class Certificate Balance thereof has
been reduced to zero;
Sixth, the lesser of (x) the excess of (i) the Group 2 Principal
Distribution Amount over (ii) the sum of the amount distributed to the Group 2
Senior Certificates pursuant to clause First above, the amount distributed to
the Class 2M-1 Certificates pursuant to clause Second above, the amount
distributed to the Class 2M-2 Certificates pursuant to clause Third above, the
amount distributed to the Class 2B-1 Certificates pursuant to clause Fourth
above and the amount distributed to the Class 2B-2 Certificates pursuant to
clause Fifth above and (y) the Class 2B-3 Principal Distribution Amount will be
distributed to the Class 2B-3 Certificates, until the Class Certificate Balance
thereof has been reduced to zero; and
Seventh, any amount of the Group 2 Principal Remittance Amount remaining
after making all of the distributions in Clauses First, Second, Third, Fourth,
Fifth and Sixth 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 2A 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 Group 2 Principal Distribution Amount and
(ii) the sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates and (b) on or after the Stepdown Date and as long as a Trigger
Event is not in effect, the positive difference, if any, of the excess of (x)
the sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 55% and (ii) the Group 2 Loan Balance as of the last day
of the related Collection Period and (B) the Group 2 Loan Balance as of the last
day of the related Collection Period minus the product of 0.50% and the Group 2
Loan Balance on the Closing Date.
"Class 2M-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates (after taking into account the payment of the Class 2A Principal
Distribution Amount on such Distribution Date) and (ii) the Class Certificate
Balance of the Class 2M-1 Certificates immediately prior to such Distribution
Date over (y) the lesser of (A) the product of (i) 68% and (ii) the Group 2 Loan
Balance as of the last day of the related Collection Period and (B) the Group 2
Loan Balance as of the last day of the related Collection Period minus the
product of 0.50% and the Group 2 Loan Balance on the Closing Date.
"Class 2M-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates (after taking into account the payment of the Class 2A Principal
Distribution Amount on such Distribution Date), (ii) the Class Certificate
Balance of the Class 2M-1 Certificates (after taking into account the payment of
the Class 2M-1 Principal Distribution Amount on such Distribution Date) and
(iii) the Class Certificate Balance of the Class 2M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
79% and (ii) the Group 2 Loan Balance as of the last day of the related
Collection Period and (B) the Group 2 Loan Balance as of the last day of the
related Collection Period minus the product of 0.50% and the Group 2 Loan
Balance on the Closing Date.
"Class 2B-1 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates (after taking into account the payment of the Class 2A Principal
Distribution Amount on such Distribution Date), (ii) the Class Certificate
Balance of the Class 2M-1 Certificates (after taking into account the payment of
the Class 2M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Class Certificate Balance of the Class 2M-2 Certificates (after taking
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into account the payment of the Class 2M-2 Principal Distribution Amount on such
Distribution Date), and (iv) the Class Certificate Balance of the Class 2B-1
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 88.5% and (ii) the Group 2 Loan Balance as of the last
day of the related Collection Period and (B) the Group 2 Loan Balance as of the
last day of the related Collection Period minus the product of 0.50% and the
Group 2 Loan Balance on the Closing Date.
"Class 2B-2 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates (after taking into account the payment of the Class 2A Principal
Distribution Amount on such Distribution Date), (ii) the Class Certificate
Balance of the Class 2M-1 Certificates (after taking into account the payment of
the Class 2M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Class Certificate Balance of the Class 2M-2 Certificates (after taking into
account the payment of the Class 2M-2 Principal Distribution Amount on such
Distribution Date), (iv) the Class Certificate Balance of the Class 2B-1
Certificates (after taking into account the payment of the Class 2B-1 Principal
Distribution Amount on such Distribution Date), and (v) the Class Certificate
Balance of the Class 2B-2 Certificates immediately prior to such Distribution
Date over (y) the lesser of (A) the product of (i) 93% and (ii) the Group 2 Loan
Balance as of the last day of the related Collection Period and (B) the Group 2
Loan Balance as of the last day of the related Collection Period minus the
product of 0.50% and the Group 2 Loan Balance on the Closing Date.
"Class 2B-3 Principal Distribution Amount" means as of any Distribution
Date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of (x) the sum of (i) the
sum of the Class Certificate Balances of the Class 2A-1 and Class 2A-2
Certificates (after taking into account the payment of the Class 2A Principal
Distribution Amount on such Distribution Date), (ii) the Class Certificate
Balance of the Class 2M-1 Certificates (after taking into account the payment of
the Class 2M-1 Principal Distribution Amount on such Distribution Date), (iii)
the Class Certificate Balance of the Class 2M-2 Certificates (after taking into
account the payment of the Class 2M-2 Principal Distribution Amount on such
Distribution Date), (iv) the Class Certificate Balance of the Class 2B-1
Certificates (after taking into account the payment of the Class 2B-1 Principal
Distribution Amount on such Distribution Date), (v) the Class Certificate
Balance of the Class 2B-2 Certificates (after taking into account the payment of
the Class 2B-2 Principal Distribution Amount on such Distribution Date), and
(vi) the Class Certificate Balance of the Class 2B-3 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
97% and (ii) the Group 2 Loan Balance as of the last day of the related
Collection Period and (B) the Group 2 Loan Balance as of the last day of the
related Collection Period minus the product of 0.50% and the Group 2 Loan
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 Group 2 Loan Balance as of the last day of the
immediately preceding Collection Period over (y) the aggregate Class Certificate
Balance of all Classes of Group 2 Certificates (after taking into account all
distributions of principal on such Distribution Date).
"Overcollateralization Deficiency" means, as of any Distribution Date, the
excess, if any, of (x) the Targeted Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Balances of all
Classes of the Group 2 Certificates resulting from the distribution of the Group
2 Principal Remittance Amount (but not the Extra Principal Distribution Amount)
on such Distribution Date, but prior to taking into account any Applied Realized
Loss Amounts on such Distribution Date.
"Overcollateralization Release Amount" means, with respect to any
Distribution Date after the Stepdown Date on which a Trigger Event is not in
effect, the lesser of (x) the Group 2 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 Group 2 Principal
Remittance Amount is applied as a principal payment on the Group 2 Certificates
on such Distribution Date, over (ii) the Targeted Overcollateralization Amount
for such Distribution Date.
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"Group 2 Principal Distribution Amount" means as of any Distribution Date,
the sum of (i) the Group 2 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.
"Group 2 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 Group 2 Mortgage Loans and the
immediately preceding Collection Period: (i) each payment of principal on a
Mortgage Loan received by the Servicer during such Collection Period, including
all full and partial principal prepayments and any Advances with respect
thereto, (ii) the 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.
"Group 2 Senior Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Class
Certificate Balance of the Group 2 Subordinated Certificates and (ii) the
Overcollateralization Amount, in each case before taking into account the
distribution of the Group 2 Principal Distribution Amount on such Distribution
Date by (y) the Group 2 Loan Balance as of the last day of the related
Collection Period.
"Group 2 Senior Specified Enhancement Percentage" on any date of
determination thereof means 45%.
"60+ Day Delinquent Loan" means each Group 2 Mortgagee Loan with respect to
which any portion of a Monthly Payment is, as of the last day of the prior
Collection Period, two months or more past due (without giving effect to any
grace period), each Mortgage Loan in foreclosure, all REO Property and each
Mortgage Loan for which the Mortgagor has filed for bankruptcy after the Closing
Date.
"Stepdown Date" means the later to occur of (x) the Distribution Date in
June 2002 and (y) the first Distribution Date on which the Group 2 Senior
Enhancement Percentage is greater than or equal to the Group 2 Senior Specified
Enhancement Percentage.
"Targeted Overcollateralization Amount" means as of any Distribution Date,
(x) prior to the Stepdown Date, 1.50% of the initial Group 2 Loan Balance and
(y) on and after the Stepdown Date and assuming a Trigger Event is not in
effect, the greater of (i) 3.00% of the Group 2 Loan Balance as of the last day
of the related Collection Period and (ii) 0.50% of the initial Group 2 Loan
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 47% of the Group 2
Senior Enhancement Percentage; provided, that if the Class Certificate Balance
of the Group 2 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 21.15%.
Allocation of Losses. Realized Losses will, in effect, be absorbed first by
the Class R Certificates (through the application of the Monthly Excess Interest
Amount to fund such deficiency, as well as through a reduction in the
Overcollateralization Amount).
If, after giving effect to the distribution of the Group 2 Principal
Distribution Amount on any Distribution Date the aggregate Class Certificate
Balance of the Group 2 Certificates exceeds the Group 2 Loan Balance as of the
end of the related Collection Period, such excess will be allocated against the
Class 2B-3, Class 2B-2, Class 2B-1, Class 2M-2 and Class 2M-1 Certificates, and
the Class 2A-1 and Class 2A-2 Certificates pro rata, in that order and until the
respective Class Certificate Balances thereof are reduced to zero. Any
allocation of such excess in reduction of a Class Certificate Balance is
referred to as an "Applied Realized Loss Amount." Any such reduction of a Class
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Certificate Balance will not be reversed or reinstated. However, on future
Distribution Dates, Certificateholders of the related Class may receive amounts
in respect of prior reductions in the related Class Certificate Balances as
described below. Such subsequent payments will be applied in the reverse of the
order set forth above.
Application of Monthly Excess Cashflow Amounts. The weighted average Net
Mortgage Rate for the Group 2 Mortgage Loans is generally expected to be higher
than the weighted average of the Pass-Through Rates on the Group 2 Certificates,
thus generating certain excess interest collections which, in the absence of
losses, will not be necessary to fund interest distributions on the Group 2
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) $2,429,742.
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 Group 2 Loan Balance
without giving rise to a corresponding reduction of the aggregate Class
Certificate Balance of the Group 2 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 Group 2 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 Group 2
Certificates relative to the Group 2 Loan Balance, thereby reducing the actual
level of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Group 2 Principal Remittance
Amount not distributed as principal on the Group 2 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 2A Interest Carry Forward Amount, if any,
pro rata, between the Class 2A-1 and Class 2A-2 Certificates;
(ii) to fund the Extra Principal Distribution Amount for such Distribution
Date;
(iii) to fund the Class 2M-1 Interest Carry Forward Amount, if any;
(iv) to fund the Class 2M-1 Realized Loss Amortization Amount for such
Distribution Date;
(v) to fund the Class 2M-2 Interest Carry Forward Amount, if any;
(vi) to fund the Class 2M-2 Realized Loss Amortization Amount for such
Distribution Date;
(vii) to fund the Class 2B-1 Interest Carry Forward Amount, if any;
(viii) to fund the Class 2B-1 Realized Loss Amortization Amount for such
Distribution Date;
(ix) to fund the Class 2B-2 and Class 2B-3 Interest Carry Forward Amount,
if any;
(x) to fund the Class 2B-2 and Class 2B-3 Realized Loss Amortization
Amounts for such Distribution Date;
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(xi) to cover shortfalls in distributions on the Group 1 Certificates;
(xii) to fund the aggregate amount of any LIBOR Carryover Amount;
(xiii) to pay the Special Servicing Fee; and
(xiv) to fund a distribution to the Holders of the Class X Certificates.
For purposes of the foregoing, the following terms will have the respective
meanings set forth below.
"Class 2M-1 Applied Realized Loss Amount" means, as to the Class 2M-1
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Group 2 Principal Distribution Amount on such Distribution Date, but prior to
the application of the Class 2M-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 2M-2 Applied Realized
Loss Amount, the Class 2B-1 Applied Realized Loss Amount, the Class 2B-2 Applied
Realized Loss Amount and the Class 2B-3 Applied Realized Loss Amount, in each
case as of such Distribution Date.
"Class 2M-1 Realized Loss Amortization Amount" means, as to the Class 2M-1
Certificates and as of any Distribution Date, the lesser of (x) the Class 2M-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 2A
Interest Carry Forward Amount, the Extra Principal Distribution Amount and the
Class 2M-1 Interest Carry Forward Amount, in each case for such Distribution
Date.
"Class 2M-2 Applied Realized Loss Amount" means, as to the Class 2M-2
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Group 2 Principal Distribution Amount on such Distribution Date, but prior to
the application of the Class 2M-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 sum of the Class 2B-1 Applied
Realized Loss Amount, the Class 2B-2 Applied Realized Loss Amount and the Class
2B-3 Applied Realized Loss Amount, in each case as of such Distribution Date.
"Class 2M-2 Realized Loss Amortization Amount" means, as to the Class 2M-2
Certificates and as of any Distribution Date, the lesser of (x) the Class 2M-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 2A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class 2M-1 Interest Carry Forward Amount, the Class 2M-1 Realized Loss
Amortization Amount and the related Class 2M-2 Interest Carry Forward Amount, in
each case for such Distribution Date.
"Class 2B-1 Applied Realized Loss Amount" means, as to the Class 2B-1
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Group 2 Principal Distribution Amount on such Distribution Date, but prior to
the application of the Class 2B-1 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 sum of the Class 2B-2 Applied
Realized Loss Amount and the Class 2B-3 Applied Realized Loss Amount, in each
case as of such Distribution Date.
"Class 2B-1 Realized Loss Amortization Amount" means, as to the Class 2B-1
Certificates and as of any Distribution Date, the lesser of (x) the Class 2B-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 2A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class 2M-1 Realized Loss Amortization Amount, the Class 2M-2 Realized Loss
Amortization Amount, the Class 2M-1 Interest Carry Forward Amount, the Class
2M-2 Interest Carry Forward Amount and the Class 2B-1 Interest Carry Forward
Amount, in each case for such Distribution Date.
"Class 2B-2 Applied Realized Loss Amount" means, as to the Class 2B-2
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Group 2 Principal Distribution Amount on such Distribution Date, but prior to
the application of the Class 2B-2 Applied
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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 2B-3 Applied Realized Loss Amount as of such Distribution Date.
"Class 2B-2 Realized Loss Amortization Amount" means, as to the Class 2B-2
Certificates and as of any Distribution Date, the lesser of (x) the Class 2B-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 2A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class 2M-1 Realized Loss Amortization Amount, the Class 2M-2 Realized Loss
Amortization Amount, the Class 2B-1 Realized Amortization Amount, the Class 2M-1
Interest Carry Forward Amount, the Class 2M-2 Interest Carry Forward Amount, the
Class 2B-1 Interest Carry Forward Amount and the Class 2B-2 Interest Carry
Forward Amount, in each case for such Distribution Date.
"Class 2B-3 Applied Realized Loss Amount" means, as to the Class 2B-3
Certificates and as of any Distribution Date, the lesser of (x) the Class
Certificate Balance thereof (after taking into account the distribution of the
Group 2 Principal Distribution Amount on such Distribution Date, but prior to
the application of the Class 2B-3 Applied Realized Loss Amount, if any, on such
Distribution Date) and (y) the related Applied Realized Loss Amount as of such
Distribution Date.
"Class 2B-3 Realized Loss Amortization Amount" means, as to the Class 2B-3
Certificates and as of any Distribution Date, the lesser of (x) the Class 2B-3
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 2A
Interest Carry Forward Amount, the Extra Principal Distribution Amount, the
Class 2M-1 Realized Loss Amortization Amount, the Class 2M-2 Realized Loss
Amortization Amount, the Class 2B-1 Realized Loss Amortization Amount, the Class
2B-2 Realized Loss Amortization Amount, the Class 2M-1 Interest Carry Forward
Amount, the Class 2M-2 Interest Carry Forward Amount, the Class 2B-1 Interest
Carry Forward Amount, the Class 2B-2 Interest Carry Forward Amount and the Class
2B-3 Interest Carry Forward Amount, in each case for such Distribution Date.
"Unpaid Realized Loss Amount" means for any Class of Group 2 Subordinated
Certificates and as to any Distribution Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Distribution Dates over (y) the aggregate, cumulative amount
of related Realized Loss Amortization Amounts with respect to such Class for all
prior Distribution Dates.
Pass-Through Rates
The "Pass-Through Rate" on any Distribution Date with respect to the Group
1 Certificates, other than the Class 1A-IO and Class 1A-PO Certificates, will
equal 7.00% per annum. The Pass-Through Rate with respect to the Class 1A-IO
Certificates will be equal to the excess of the (a) the weighted average of the
Net Mortgage Rates of each Non-Discount Mortgage Loan over (b) 7.00%. The Class
1A-PO Certificates will not bear interest. Interest in respect of any
Distribution Date will accrue on the Group 1 Certificates during the related
Accrual Period on the basis of a 360-day year consisting of twelve 30-day
months.
The Pass-Through Rate on any Distribution Date with respect to the Group 2
Certificates, other than the Class 2A-1 or Class 2A-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 Group 2 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
2A-1 Certificates will equal the lesser of (a) the Class 2A-1 Formula Rate and
(b) the Group 2F Available Funds Cap for such Distribution Date. The
"Pass-Through Rate" on any Distribution Date with respect to the Class 2A-2
Certificates will equal the lesser of (a) the Class 2A-2 Formula Rate and (b)
the Group 2A Available Funds Cap for such Distribution Date. With respect to the
Group 2 Certificates, except for the Group 2 Senior 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 Group 2 Senior 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.
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The "Class 2A-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
2A-1 Certificate Margin"). The Class 2A-1 Certificate Margin on each
Distribution Date on or prior to the Optional Termination Date will equal 0.50%
and on each Distribution Date after the Optional Termination Date, the Class
2A-1 Certificate Margin will equal 1.00%.
The "Class 2A-2 Formula Rate" will be the sum of One-Month LIBOR as of the
related LIBOR Determination Date plus a margin (the "Class 2A-2 Certificate
Margin"). The Class 2A-2 Certificate Margin on each Distribution Date on or
prior to the Optional Termination Date will equal 0.35% and on each Distribution
Date after the Optional Termination Date, the Class 2A-2 Certificate Margin will
equal 0.70%.
The "Group 2F Available Funds Cap" for any Distribution Date will equal the
lesser of (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 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 2F
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 2A Available Funds Cap" for any Distribution Date will equal the
difference between (i) the average of the Mortgage Interest Rates of the Group
2A 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
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 2A-2
Certificates is based upon the Group 2A Available Funds Cap, the excess of (i)
the amount of interest the Class 2A-2 Certificates would have been entitled to
receive on such Distribution Date had such Pass-Through Rate not been subject to
the Group 2A Available Funds Cap, up to the Maximum Cap, over (ii) the amount of
interest the Class 2A-2 Certificates received on such Distribution Date based on
the Group 2A 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 2A-2 Certificates, without giving
effect to the Group 2A Available Funds Cap) will be the "LIBOR Carryover
Amount". Any LIBOR Carryover Amount on the Class 2A-2 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 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
Maximum Loan Rates on the Group 2A Mortgage Loans, excluding those Mortgage
Loans that have no fixed Maximum Loan Rate.
Calculation of One-Month LIBOR
The Pass-Through Rate on the Group 2 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
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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
Class Certificate Balance of the Group 2 Senior 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 Class
Certificate Balance of the Group 2 Senior 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 Group 2 Senior Certificates for the related Interest Accrual Period shall
(in the absence of manifest error) be final and binding.
Cross-collateralization
Certain Available Funds with respect to Loan Group 2 will be available to
make certain distributions with respect to the Certificates relating to Loan
Group 1, as described above under "--Principal Distributions". Funds generated
by Loan Group 1 are not, however, available to pay any LIBOR Carryover Amount
due on the Class 2A-2 Certificates.
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 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. In addition, investors in the Group 1 Senior Certificates should
consider that any Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the respective amounts of coverage therefor will be allocated on a pro
rata basis among the Group 1 Certificates, including the Group 1 Senior
Certificates.
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 in the related Loan
Group. 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
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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 in the related Loan Group. 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 in the related Loan Group 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 in the related Loan Group 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 Group 2F Mortgage
Loans, the Group 2A 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 Group 2A
Mortgage Loans may differ from that on the Group 1 Mortgage Loans and Group 2F
Mortgage Loans because the amount of the Monthly Payments on the Group 2A
Mortgage Loans are subject to adjustment on each Adjustment Date. In addition, a
majority of the Group 2A 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 Group 2A 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.
The weighted average life and yield to maturity of each Class of Group 2
Certificates will also be influenced by the amount of Excess Cashflow Amount
generated by the Group 2 Mortgage Loans and applied in reduction of the
Certificate Principal Balances of such Certificates. The level of Excess
Cashflow Amounts available on any Distribution Date to be applied in reduction
of the Certificate Principal Balance of the Class 2 Certificates will be
influenced by, among other factors, (i) the overcollateralization level of the
Mortgage Loans in Loan Group 2 at such time (i.e., the extent to which interest
on the Group 2 Mortgage Loans is accruing on a higher Principal Balance than the
Certificate Principal Balance of the Group 2 Certificates); (ii) the delinquency
and default experience of the Group 2 Mortgage Loans, and (iii) the level of the
various indices for the Group 2A Mortgage Loans. To the extent that greater
amounts of Excess Cashflow Amounts are distributed in reduction of the
Certificate Principal Balance of a Class of Group 2 Certificates, the weighted
average life thereof can be expected to shorten. No assurance can be given as to
the amount of Excess Cashflow Amounts distributed at any time or in the
aggregate.
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Except in the limited circumstances described herein, principal
distributions on the Group 1 Certificates relate to principal payments on the
Group 1 Mortgage Loans and principal distributions on the Group 2 Certificates
relate to principal payments on the Group 2 Mortgage Loans.
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."
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-88 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-88. 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-88 were determined assuming that (the "Structuring Assumptions"): (i)
the Mortgage Loans consist of 3 sub-pools of loans with the characteristics set
forth in the table below, (ii) the closing date for the Offered Certificates
occurs on June 8, 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 June 1999, in accordance with the allocation of Available Funds
set forth above under "Description of the Certificates", (iv) the Mortgage Loans
prepay at the percentages of CPR 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
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in the definition thereof, (viii) scheduled payments for all Mortgage Loans are
received on the first day of each month commencing in June 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 the month prior to the Closing Date,
(xi) the aggregate of the rates at which the Servicing Fee and the Trustee Fee
are calculated is 0.385% for Group 1 and 0.510% for Group 2F and Group 2A, (xii)
One-Month LIBOR is at all times equal to 4.93%, (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 4.92%; and 6 Month LIBOR is equal to
5.19%. 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.
Prepayment Scenarios (% CPR)
<TABLE>
<CAPTION>
Loan Group Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ---------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Group 1 (FHA/VA) 3.75 7.50 11.25 15.00 18.75 22.50 26.25
Group 2F 6.25 12.50 18.75 25.00 31.25 37.50 43.75
Group 2A 7.50 15.00 22.50 30.00 37.50 45.00 52.50
</TABLE>
S-79
<PAGE>
Assumed Mortgage Loan Characteristics
<TABLE>
<CAPTION>
Description Principal Balance Loan Rate (%) Amortized Amortized Original Remaining Gross Lifetime
($) Remaining Original Balloon Term Balloon Term Margin (%) Cap (%)
Term Term (months) (months)
(months) (months)
Group 1
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHA/VA 3,752,518.46 7.083 331 354 N/A N/A N/A N/A
FHA/VA 144,160,899.36 8.606 311 357 N/A N/A N/A N/A
Group 2A
6 month LIBOR 2,576,304.32 10.390 348 360 N/A N/A 6.699 16.219
6 month LIBOR 2,188,864.92 9.975 321 331 N/A N/A 6.257 15.780
6 month LIBOR 1,702,644.84 10.596 332 349 N/A N/A 6.634 16.749
6 month LIBOR 1,787,927.63 10.384 347 360 N/A N/A 5.746 16.617
6 month LIBOR 1,979,394.43 9.702 343 358 N/A N/A 6.228 16.077
6 month LIBOR 1,518,983.28 9.936 349 360 N/A N/A 6.591 16.757
6 month LIBOR 2,920,983.75 9.868 350 360 N/A N/A 6.566 16.336
6 month LIBOR 3,482,987.18 10.206 350 359 N/A N/A 6.548 16.837
6 month LIBOR 3,444,394.49 10.294 352 360 N/A N/A 6.425 16.925
6 month LIBOR 5,046,199.64 10.434 353 360 N/A N/A 6.694 17.191
6 month LIBOR 4,939,047.66 10.339 354 360 N/A N/A 6.454 17.074
6 month LIBOR 2,772,474.69 10.124 355 360 N/A N/A 6.395 17.119
6 month LIBOR 1,245,265.81 10.001 356 360 N/A N/A 5.909 17.001
6 month LIBOR 3,119,422.76 10.122 355 360 N/A N/A 5.758 17.123
6 month LIBOR 1,295,854.08 8.939 349 360 N/A N/A 5.614 16.135
1 Year Treasury 5,493,956.00 6.999 329 360 N/A N/A 2.804 11.767
1 Year Treasury 3,180,497.07 7.629 313 360 N/A N/A 2.608 12.026
1 Year Treasury 2,556,553.30 7.315 296 358 N/A N/A 2.484 12.230
1 Year Treasury 3,188,859.37 7.700 305 360 N/A N/A 2.940 12.703
Group 2F
Fixed Rate 1,543,632.14 9.066 89 123 N/A N/A N/A N/A
Fixed Rate 11,035,853.85 9.743 167 182 N/A N/A N/A N/A
Fixed Rate 4,922,718.13 11.149 225 265 N/A N/A N/A N/A
Fixed Rate 6,395,297.93 9.926 272 298 N/A N/A N/A N/A
Fixed Rate 72,619,076.30 8.982 352 360 N/A N/A N/A N/A
Fixed Rate 11,025,596.28 10.104 346 360 181 167 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Description Lifetime Months to Next Periodic
Floor (%) Adjustment Date Rate Cap
(%)
Group 1
<S> <C> <C> <C>
FHA/VA N/A N/A N/A
FHA/VA N/A N/A N/A
Group 2A
6 month LIBOR 9.603 1 1.134
6 month LIBOR 8.999 2 1.338
6 month LIBOR 10.079 4 1.442
6 month LIBOR 10.194 5 1.466
6 month LIBOR 9.700 8 2.500
6 month LIBOR 8.440 12 2.791
6 month LIBOR 9.789 13 2.635
6 month LIBOR 9.760 14 1.944
6 month LIBOR 10.094 15 2.253
6 month LIBOR 10.386 16 2.392
6 month LIBOR 10.338 17 2.983
6 month LIBOR 10.164 18 3.722
6 month LIBOR 10.001 19 1.460
6 month LIBOR 9.871 22 1.471
6 month LIBOR 8.836 48 2.403
1 Year Treasury 4.716 2 1.121
1 Year Treasury 2.012 5 1.063
1 Year Treasury 2.230 8 1.102
1 Year Treasury 3.406 12 1.456
Group 2F
Fixed Rate N/A N/A N/A
Fixed Rate N/A N/A N/A
Fixed Rate N/A N/A N/A
Fixed Rate N/A N/A N/A
Fixed Rate N/A N/A N/A
Fixed Rate N/A N/A N/A
</TABLE>
S-80
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class 1A
-----------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
----------- ------------ ------------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage .. 100% 100% 100% 100% 100% 100% 100%
May 25, 2000 ........ 95 91 87 83 80 76 72
May 25, 2001 ........ 90 83 76 69 63 57 51
May 25, 2002 ........ 86 75 66 58 50 43 36
May 25, 2003 ........ 81 68 57 48 39 32 25
May 25, 2004 ........ 77 62 50 39 31 23 17
May 25, 2005 ........ 72 56 43 32 24 17 12
May 25, 2006 ........ 68 51 37 27 19 13 8
May 25, 2007 ........ 64 46 32 22 15 9 6
May 25, 2008 ........ 60 41 28 18 11 7 4
May 25, 2009 ........ 56 37 24 15 9 5 3
May 25, 2010 ........ 52 33 21 12 7 4 2
May 25, 2011 ........ 49 30 18 10 6 3 1
May 25, 2012 ........ 45 26 15 8 4 2 1
May 25, 2013 ........ 42 23 13 7 3 2 1
May 25, 2014 ........ 38 21 11 5 3 1 0
May 25, 2015 ........ 34 18 9 4 2 1 0
May 25, 2016 ........ 31 15 7 3 2 1 0
May 25, 2017 ........ 27 13 6 3 1 0 0
May 25, 2018 ........ 24 11 5 2 1 0 0
May 25, 2019 ........ 21 9 4 2 1 0 0
May 25, 2020 ........ 17 7 3 1 0 0 0
May 25, 2021 ........ 14 6 2 1 0 0 0
May 25, 2022 ........ 10 4 2 1 0 0 0
May 25, 2023 ........ 7 3 1 0 0 0 0
May 25, 2024 ........ 3 1 0 0 0 0 0
May 25, 2025 ........ 0 0 0 0 0 0 0
May 25, 2026 ........ 0 0 0 0 0 0 0
May 25, 2027 ........ 0 0 0 0 0 0 0
May 25, 2028 ........ 0 0 0 0 0 0 0
May 25, 2029 ........ 0 0 0 0 0 0 0
Weighted Average 12.14 8.82 6.67 5.21 4.19 3.45 2.89
Life (yrs) to
maturity(1)..........
Weighted Average Life 12.10 8.74 6.53 5.05 4.04 3.32 2.79
(yrs) to optional
termination(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-81
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class 1A-PO
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100%
May 25, 2000.................. 95 91 88 84 80 77 73
May 25, 2001.................. 90 83 77 70 64 59 53
May 25, 2002.................. 86 76 67 59 52 45 39
May 25, 2003.................. 81 69 59 49 41 34 28
May 25, 2004.................. 77 63 51 41 33 26 20
May 25, 2005.................. 73 57 45 34 26 20 15
May 25, 2006.................. 68 52 39 29 21 15 11
May 25, 2007.................. 64 47 34 24 17 11 8
May 25, 2008.................. 60 42 29 20 13 9 6
May 25, 2009.................. 57 38 25 16 10 6 4
May 25, 2010.................. 53 34 22 13 8 5 3
May 25, 2011.................. 49 31 19 11 6 4 2
May 25, 2012.................. 46 27 16 9 5 3 1
May 25, 2013.................. 42 24 14 7 4 2 1
May 25, 2014.................. 39 21 11 6 3 2 1
May 25, 2015.................. 35 19 10 5 2 1 0
May 25, 2016.................. 32 16 8 4 2 1 0
May 25, 2017.................. 29 14 7 3 1 1 0
May 25, 2018.................. 26 12 5 2 1 0 0
May 25, 2019.................. 23 10 4 2 1 0 0
May 25, 2020.................. 19 8 4 1 1 0 0
May 25, 2021.................. 16 7 3 1 0 0 0
May 25, 2022.................. 13 5 2 1 0 0 0
May 25, 2023.................. 10 4 1 1 0 0 0
May 25, 2024.................. 7 3 1 0 0 0 0
May 25, 2025.................. 5 2 1 0 0 0 0
May 25, 2026.................. 2 1 0 0 0 0 0
May 25, 2027.................. 0 0 0 0 0 0 0
May 25, 2028.................. 0 0 0 0 0 0 0
May 25, 2029.................. 0 0 0 0 0 0 0
Weighted Average Life (yrs)
to maturity(1)................ 12.48 9.07 6.89 5.43 4.42 3.68 3.13
Weighted Average Life (yrs)
to optional termination(1).... 12.34 8.93 6.72 5.25 4.24 3.52 2.98
</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-82
<PAGE>
Principal Percent of Original Balance Outstanding*
<TABLE>
<CAPTION>
Class 1M-1, 1M-2, 1M-3
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage ........ 100% 100% 100% 100% 100% 100% 100%
May 25, 2000 .............. 99 99 99 99 99 99 99
May 25, 2001 .............. 98 98 98 98 98 98 98
May 25, 2002 .............. 96 96 96 96 96 96 96
May 25, 2003 .............. 95 95 95 95 95 95 95
May 25, 2004............... 93 93 93 93 93 93 93
May 25, 2005 .............. 91 90 89 87 86 85 84
May 25, 2006 .............. 88 85 83 80 78 75 73
May 25, 2007 .............. 84 80 75 71 67 63 59
May 25, 2008 .............. 79 73 67 61 56 50 45
May 25, 2009 .............. 74 66 58 50 44 38 33
May 25, 2010 .............. 69 59 50 42 35 29 23
May 25, 2011 .............. 64 53 43 34 27 21 17
May 25, 2001 .............. 59 47 36 28 21 16 12
May 25, 2013 .............. 55 41 31 23 16 12 8
May 25, 2014 .............. 50 36 26 18 13 9 6
May 25, 2015 .............. 45 32 22 15 10 6 4
May 25, 2016 .............. 41 27 18 12 7 5 3
May 25, 2017 .............. 36 23 15 9 6 3 2
May 25, 2018 .............. 32 20 12 7 4 2 1
May 25, 2019 .............. 27 16 9 5 3 2 1
May 25, 2020 .............. 23 13 7 4 2 1 1
May 25, 2021 .............. 18 10 5 3 1 1 0
May 25, 2022 .............. 14 7 4 2 1 0 0
May 25, 2023 .............. 9 5 2 1 0 0 0
May 25, 2024 .............. 4 2 1 0 0 0 0
May 25, 2025 .............. 0 0 0 0 0 0 0
May 25, 2026 .............. 0 0 0 0 0 0 0
May 25, 2027 .............. 0 0 0 0 0 0 0
May 25, 2028 .............. 0 0 0 0 0 0 0
May 25, 2029 .............. 0 0 0 0 0 0 0
Weighted Average Life (yrs)
to maturity(1) ............ 14.94 13.15 11.83 10.84 10.09 9.49 9.02
Weighted Average Life (yrs)
optional termination(1) ... 14.89 13.00 11.51 10.31 9.35 8.56 7.83
</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 2A-1
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage .. 100% 100% 100% 100% 100% 100% 100%
May 25, 2000 ........ 89 81 73 65 58 50 42
May 25, 2001 ........ 80 66 53 41 30 20 10
May 25, 2002 ........ 72 53 37 23 11 0 0
May 25, 2003......... 64 42 30 22 11 0 0
May 25, 2004 ........ 56 34 24 17 11 0 0
May 25, 2005 ........ 49 29 19 13 9 0 0
May 25, 2006 ........ 43 25 16 10 6 0 0
May 25, 2007 ........ 37 22 13 8 4 0 0
May 25, 2008 ........ 33 19 10 6 2 0 0
May 25, 2009 ........ 30 16 8 4 2 0 0
May 25, 2010 ........ 27 14 7 3 1 0 0
May 25, 2011 ........ 25 12 6 2 0 0 0
May 25, 2012......... 22 10 4 1 0 0 0
May 25, 2013 ........ 17 8 3 1 0 0 0
May 25, 2014 ........ 16 6 2 0 0 0 0
May 25, 2015 ........ 14 6 2 0 0 0 0
May 25, 2016......... 13 5 1 0 0 0 0
May 25, 2017 ........ 11 4 1 0 0 0 0
May 25, 2018 ........ 10 4 1 0 0 0 0
May 25, 2019 ........ 9 3 0 0 0 0 0
May 25, 2020......... 8 2 0 0 0 0 0
May 25, 2021......... 6 2 0 0 0 0 0
May 25, 2022......... 5 1 0 0 0 0 0
May 25, 2023 ........ 5 1 0 0 0 0 0
May 25, 2024 ........ 4 0 0 0 0 0 0
May 25, 2025 ........ 3 0 0 0 0 0 0
May 25, 2026 ........ 2 0 0 0 0 0 0
May 25, 2027 ........ 1 0 0 0 0 0 0
May 25, 2028 ........ 0 0 0 0 0 0 0
May 25, 2029 ........ 0 0 0 0 0 0 0
Weighted Average Life
(yrs) to maturity(1) 8.02 5.13 3.59 2.64 1.92 1.16 0.95
Weighted Average Life
(yrs) optional
termination(1) ...... 7.73 4.74 3.25 2.35 1.69 1.16 0.95
</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-84
<PAGE>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class 2A-2
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100%
May 25, 2000.................. 88 78 69 59 50 40 31
May 25, 2001.................. 78 61 46 32 20 9 0
May 25, 2002.................. 69 47 29 14 1 0 0
May 25, 2003.................. 61 35 22 13 1 0 0
May 25, 2004.................. 54 28 16 8 1 0 0
May 25, 2005.................. 47 23 12 5 0 0 0
May 25, 2006.................. 40 19 8 2 0 0 0
May 25, 2007.................. 34 15 6 1 0 0 0
May 25, 2008.................. 30 13 4 0 0 0 0
May 25, 2009.................. 28 10 2 0 0 0 0
May 25, 2010.................. 25 8 1 0 0 0 0
May 25, 2011.................. 22 6 0 0 0 0 0
May 25, 2012.................. 20 5 0 0 0 0 0
May 25, 2013.................. 18 4 0 0 0 0 0
May 25, 2014................. 16 3 0 0 0 0 0
May 25, 2015.................. 14 2 0 0 0 0 0
May 25, 2016.................. 12 1 0 0 0 0 0
May 25, 2017.................. 11 1 0 0 0 0 0
May 25, 2018.................. 9 0 0 0 0 0 0
May 25, 2019.................. 8 0 0 0 0 0 0
May 25, 2020.................. 7 0 0 0 0 0 0
May 25, 2021................. 5 0 0 0 0 0 0
May 25, 2022.................. 4 0 0 0 0 0 0
May 25, 2023.................. 3 0 0 0 0 0 0
May 25, 2024.................. 2 0 0 0 0 0 0
May 25, 2025.................. 1 0 0 0 0 0 0
May 25, 2026.................. 0 0 0 0 0 0 0
May 25, 2027.................. 0 0 0 0 0 0 0
May 25, 2028.................. 0 0 0 0 0 0 0
May 25, 2029.................. 0 0 0 0 0 0 0
Weighted Average Life
(yrs) to maturity(1).......... 7.57 4.07 2.64 1.82 1.20 0.92 0.75
Weighted Average Life
(yrs) to optional
termination(1)................ 7.39 3.99 2.60 1.80 1.20 0.92 0.75
</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 2M-1
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage .. 100% 100% 100% 100% 100% 100% 100%
May 25, 2000 ........ 100 100 100 100 100 100 100
May 25, 2001 ........ 100 100 100 100 100 100 100
May 25, 2002 ........ 100 100 100 100 100 77 0
May 25, 2003 ........ 100 100 78 55 100 77 0
May 25, 2004 ........ 100 92 62 40 35 77 0
May 25, 2005 ........ 100 78 48 29 17 47 0
May 25, 2006 ........ 100 66 38 21 11 28 0
May 25, 2007 ........ 100 56 30 15 7 17 0
May 25, 2008 ........ 93 48 23 11 5 7 0
May 25, 2009 ........ 84 40 18 8 3 1 0
May 25, 2010 ........ 76 34 14 6 0 0 0
May 25, 2011 ........ 69 28 11 4 0 0 0
May 25, 2012 ........ 62 24 8 2 0 0 0
May 25, 2013 ........ 51 18 6 0 0 0 0
May 25, 2014 ........ 46 15 5 0 0 0 0
May 25, 2015 ........ 41 12 4 0 0 0 0
May 25, 2016 ........ 36 10 2 0 0 0 0
May 25, 2017 ........ 32 8 0 0 0 0 0
May 25, 2018 ........ 28 7 0 0 0 0 0
May 25, 2019 ........ 24 6 0 0 0 0 0
May 25, 2020 ........ 21 4 0 0 0 0 0
May 25, 2021 ........ 17 3 0 0 0 0 0
May 25, 2022 ........ 14 1 0 0 0 0 0
May 25, 2023 ........ 12 0 0 0 0 0 0
May 25, 2024 ........ 9 0 0 0 0 0 0
May 25, 2025 ........ 7 0 0 0 0 0 0
May 25, 2026 ........ 5 0 0 0 0 0 0
May 25, 2027 ....... 1 0 0 0 0 0 0
May 25, 2028 ........ 0 0 0 0 0 0 0
May 25, 2029 ........ 0 0 0 0 0 0 0
Weighted Average Life
(yrs) to maturity(1) 15.80 10.04 6.95 5.49 5.22 5.88 2.60
Weighted Average Life
(yrs) optional
termination(1) ...... 15.08 9.25 6.30 4.96 4.80 4.12 2.60
</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 2M-2
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100%
May 25, 2000.................. 100 100 100 100 100 100 100
May 25, 2001.................. 100 100 100 100 100 100 100
May 25, 2002.................. 100 100 100 100 100 100 79
May 25, 2003.................. 100 100 78 55 41 89 79
May 25, 2004.................. 100 92 62 40 25 16 61
May 25, 2005................. 100 78 48 29 17 9 32
May 25, 2006.................. 100 66 38 21 11 5 13
May 25, 2007.................. 100 56 30 15 7 0 3
May 25, 2008.................. 93 48 23 11 5 0 0
May 25, 2009.................. 84 40 18 8 0 0 0
May 25, 2010.................. 76 34 14 6 0 0 0
May 25, 2011.................. 69 28 11 2 0 0 0
May 25, 2012.................. 62 24 8 0 0 0 0
May 25, 2013.................. 51 18 6 0 0 0 0
May 25, 2014.................. 46 15 4 0 0 0 0
May 25, 2015.................. 41 12 1 0 0 0 0
May 25, 2016.................. 36 10 0 0 0 0 0
May 25, 2017.................. 32 8 0 0 0 0 0
May 25, 2018.................. 28 7 0 0 0 0 0
May 25, 2019.................. 24 6 0 0 0 0 0
May 25, 2020.................. 21 4 0 0 0 0 0
May 25, 2021.................. 17 1 0 0 0 0 0
May 25, 2022.................. 14 0 0 0 0 0 0
May 25, 2023.................. 12 0 0 0 0 0 0
May 25, 2024.................. 9 0 0 0 0 0 0
May 25, 2025.................. 7 0 0 0 0 0 0
May 25, 2026.................. 4 0 0 0 0 0 0
May 25, 2027.................. 0 0 0 0 0 0 0
May 25, 2028.................. 0 0 0 0 0 0 0
May 25, 2029.................. 0 0 0 0 0 0 0
Weighted Average Life
(yrs) to maturity(1).......... 15.78 9.99 6.91 5.34 4.68 4.71 5.29
Weighted Average Life
(yrs) optional
termination(1)................ 15.08 9.25 6.30 4.85 4.29 4.32 3.49
</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>
Percent of Original Principal Balance Outstanding*
<TABLE>
<CAPTION>
Class 2B-1
---------------------------------------------------------------------------------------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
-------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Distribution Date
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100%
May 25, 2000.................. 100 100 100 100 100 100 100
May 25, 2001.................. 100 100 100 100 100 100 100
May 25, 2002.................. 100 100 100 100 100 100 100
May 25, 2003.................. 100 100 78 55 38 25 56
May 25, 2004.................. 100 92 62 40 25 15 8
May 25, 2005.................. 100 78 48 29 17 9 0
May 25, 2006.................. 100 66 38 21 11 1 0
May 25, 2007.................. 100 56 30 15 5 0 0
May 25, 2008.................. 93 48 23 11 0 0 0
May 25, 2009.................. 84 40 18 7 0 0 0
May 25, 2010.................. 76 34 14 2 0 0 0
May 25, 2011.................. 69 28 11 0 0 0 0
May 25, 2012.................. 62 24 8 0 0 0 0
May 25, 2013.................. 51 18 3 0 0 0 0
May 25, 2014................. 46 15 0 0 0 0 0
May 25, 2015.................. 41 12 0 0 0 0 0
May 25, 2016.................. 36 10 0 0 0 0 0
May 25, 2017.................. 32 8 0 0 0 0 0
May 25, 2018.................. 28 5 0 0 0 0 0
May 25, 2019.................. 24 2 0 0 0 0 0
May 25, 2020.................. 21 0 0 0 0 0 0
May 25, 2021.................. 17 0 0 0 0 0 0
May 25, 2022.................. 14 0 0 0 0 0 0
May 25, 2023................. 12 0 0 0 0 0 0
May 25, 2024.................. 9 0 0 0 0 0 0
May 25, 2025................. 4 0 0 0 0 0 0
May 25, 2026................. 0 0 0 0 0 0 0
May 25, 2027................. 0 0 0 0 0 0 0
May 25, 2028.................. 0 0 0 0 0 0 0
May 25, 2029.................. 0 0 0 0 0 0 0
Weighted Average Life
(yrs) to maturity(1)....... 15.72 9.88 6.82 5.21 4.41 4.09 4.17
Weighted Average Life
(yrs) optional
termination(1).............
........................... 15.08 9.25 6.30 4.79 4.09 3.83 3.63
</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.
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<PAGE>
Sensitivity of the Class 1A-IO Certificates
As indicated in the table below, the yield to investors on the Class 1A-IO
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Non-Discount Mortgage Loans in Loan Group 1 (particularly
those with high Net Mortgage Rates), which generally can be prepaid at any time.
On the basis of the assumptions described below, the yield to maturity on the
Class 1A-IO Certificates would be approximately 0% if prepayments were to occur
at a constant rate of approximately 26.2% CPR. If the actual prepayment rate of
the related Mortgage Loans were to exceed the foregoing level for as little as
one month while equaling such level for the remaining months, the investors in
the Class 1A-IO Certificates would not fully recoup their initial investments.
As described above under "Description of the Certificates" the Pass-Through
Rate of the Class 1A-IO Certificates in effect from time to time is calculated
by reference to the Net Mortgage Rates of the Non-Discount Mortgage Loans. The
Non-Discount Mortgage Loans in Loan Group 1 will have higher Net Mortgage Rates
(and higher Mortgage Rates) than the other Group 1 Mortgage Loans. In general,
mortgage loans with higher mortgage rates tend to prepay at higher rates than
mortgage loans with relatively lower mortgage rates in response to a given
change in market interest rates. As a result, the Non-Discount Mortgage Loans
may prepay at higher rates, thereby reducing the Pass-Through Rate and Notional
Amount of the Class 1A-IO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class 1A-IO Certificates (expressed as a percentage of the initial
Notional Amount) is as follows:
Class Price*
----- ------
1A-IO 3.76068%
- ------------
* The price does not include accrued interest. Accrued interest has been added
to such price in calculating the yields set forth in the table below.
Sensitivity of the Class 1A-IO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
Class Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ----- -------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1A-IO 27.870% 23.454% 18.946% 14.341% 9.632% 4.811% (0.130)%
</TABLE>
It is unlikely that the Non-Discount Mortgage Loans will all prepay at the
same rate until maturity or that all of the Non-Discount Mortgage Loans will
prepay at the same rate or time. As a result of these factors, the pre-tax
yields on the Class 1A-IO Notional Amount Certificates are likely to differ from
those shown in the table above, even if all of the Non-Discount Mortgage Loans
prepay at the indicated percentages of CPR. No representation is made as to the
actual rate of principal payments on the Non-Discount Mortgage Loans for any
period or over the life of the Class 1A-IO Certificates or as to the yield on
the Class 1A-IO Certificates. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
the Class 1A-IO Certificates.
Sensitivity of the Class 1A-PO Certificates
The significance of the effects of prepayments on the Class 1A-PO
Certificates is illustrated in the following table entitled "Sensitivity of the
Class 1A-PO Certificates to Prepayments," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of such Certificates under
different constant percentages of CPR. In addition, the aggregate distributions
in respect of, and the yield to maturity of, the Class 1A-PO Certificates will
be related to the rate and timing of the payment of principal and interest on
the Mortgage Loans.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class 1A-PO Certificates (expressed as a percentage of the Initial
Certificate Balance) is as follows:
Class Price
----- -----
1A-PO 60.00000%
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<PAGE>
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments of
principal may affect significantly the yield realized by a holder of a Class
1A-PO Certificate and there can be no assurance that the pre-tax yield to an
investor in the Class 1A-PO Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class 1A-PO Certificate.
Sensitivity of the Class 1A-PO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
Class Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ----- -------------- ------------ ------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1A-PO 4.674% 6.846% 9.413% 12.279% 15.393% 18.739% 22.326%
</TABLE>
The yields set forth in the preceding table were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flows to be paid on the Class 1A-PO Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of the Class 1A-PO Certificates indicated above and converting such
monthly rates to corporate bond equivalent rates. Such calculation does not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as payments on the Class 1A-PO
Certificates and consequently does not purport to reflect the return on any
investment in the Class 1A-PO Certificates when such reinvestment rates are
considered.
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 1A, Class 1A-IO, Class 1A-PO, Class 2A-1 and
Class 2A-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 in the related Loan Group.
Since the rate of distributions in reduction of the Class Certificate Balance of
each Class of Offered Certificates will depend on the rate of payment (including
prepayments) of the Mortgage Loans, the Class Certificate Balance of any such
Class could be reduced to zero significantly earlier or later than the Final
Scheduled Distribution Date. The rate of payments on the Mortgage Loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the Mortgage Loans.
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.
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 Group 2 Senior Certificates will represent a beneficial interest
in the right to receive payments under the cap contract from the Basis Risk
Reserve Fund.
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<PAGE>
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance with
the Trust Agreement, for federal income tax purposes, each Lower Tier REMIC and
the Upper Tier REMIC will qualify as a REMIC within the meaning of Section 860D
of the Internal Revenue Code of 1986, as amended (the "Code"). In addition, Tax
Counsel will deliver an opinion to the effect that the Basis Risk Reserve Fund
is an "outside reserve fund" that is beneficially owned by the holders of the
Class X Certificates. Moreover, Tax Counsel will deliver an opinion to the
effect that the rights of the holders of the Group 2 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 Group 2 Senior 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 Group 2 Senior 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 Group 2 Senior 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 Income
Tax Consequences - Taxation of Owners REMIC Regular Certificates - Original
Issue Discount and Premium" in the Prospectus.
For federal income tax reporting purposes, the Class 1A-IO and Class 1A-PO
Certificates will be, and the other 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 will prepay at a constant rate of 25% CPR. 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 Group 2 Senior
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 Group 2 Senior 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
Group 2 Senior 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
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<PAGE>
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 Group 2 Senior
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 Group 2 Senior Certificates
comprise rights in addition to the rights under the Class 2A Regular Interests,
the Group 2 Senior 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 2A 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 2A Regular
Interests. The Group 2 Senior 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.
As indicated above, a portion of the purchase price paid by a holder to
acquire a Group 2 Senior 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
Group 2 Senior 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 Group 2 Senior
Certificate.
Any payments made to a Group 2 Senior Certificateholder 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 2A-2 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 LIBOR Carryover
Amount will require a reduction in payments to the Class 2M-1, 2M-2, 2B-1, 2B-2
and 2B-3 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.
S-92
<PAGE>
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 plans or
arrangements (including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its legal advisors whether the purchase or
holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975 of
the Code.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), on May 24, 1990 to the
Representative which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 502(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this discussion, the term "Underwriter"
shall include (a) 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 certain employee benefit plans subject to Section 4975 of the Code (each, a
"Plan"), must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
rights and interests evidenced by the 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 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 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 Offered
Certificates if the plan fiduciary responsible for the decision to invest in
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 person, unless: (1) in the case of an
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<PAGE>
acquisition in connection with the initial issuance of any Certificates, at
least 50% of each Class of Certificates in which Plans have invested is acquired
by persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of acquisition;
(3) immediately after such acquisition, no more than 25% of the Plan assets with
respect to which the investing fiduciary has discretionary authority or renders
investment advice are invested in Certificates evidencing interest in trusts
sponsored or containing assets sold or serviced by the same entity; and (4) the
Plan is not sponsored by any member of the Restricted Group. Before purchasing
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 1M-1, Class 1M-2, Class 1M-3,
Class 2M-1, Class 2M-2 and Class 2B-1 Certificates may not meet the requirements
of the Exemption or any other issued exemption under ERISA, the purchase and
holding of the Class 1M-1, Class 1M-2, Class 1M-3, Class 2M-1, Class 2M-2 and
Class 2B-1 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 1M-1, Class 1M-2, Class 1M-3, Class 2M-1, Class 2M-2 and Class 2B-1
Certificates will not be registered by the Trustee unless the Trustee receives:
(i) a representation from the transferee of such Certificate, acceptable to and
in form and substance satisfactory to the Trustee, to the effect that such
transferee is not an employee benefit plan subject to Section 406 of ERISA or a
plan or arrangement subject to Section 4975 of the Code, nor a person acting on
behalf of any such plan or arrangement nor using the assets of any such plan or
arrangement to effect such transfer; (ii) if the purchaser is an insurance
company, a representation that the purchaser is an insurance company which is
purchasing such Certificates with funds contained in an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificates are covered under PTCE 95-60; or (iii) an opinion
of counsel satisfactory to the Trustee that the purchase or holding of such
Certificate by a Plan, any person acting on behalf of a Plan or using such
Plan's assets, will not result in the assets of the Trust Fund being deemed to
be "plan assets" and subject to the prohibited transaction requirements of ERISA
and the Code and will not subject the Trustee to any obligation in addition to
those undertaken in the Agreement. Such representation as described above shall
be deemed to have been made to the Trustee by a beneficial owner's acceptance of
a Class 1M-1, Class 1M-2, Class 1M-3, Class 2M-1, Class 2M-2 or Class 2B-1
Certificate in book-entry form. In the event that such representation is
violated, or any attempt to transfer to a Plan or person acting on behalf of a
Plan or using such Plan's assets is attempted without such opinion of counsel,
such attempted transfer or acquisition shall be void and of no effect.
Any Plan fiduciary considering whether to purchase an Offered Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
LEGAL INVESTMENT CONSIDERATIONS
The Class 1A, Class 1A-IO, Class 1A-PO and Class 1M-1 Certificates will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities to
the extent provided for in SMMEA. The Class 2A-1, Class 2A-2, Class 2M-1, Class
2M-2 and Class 2B-1 Certificates will not constitute "mortgage related
securities" for the purposes of SMMEA because Loan Group 2 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. The Class 1M-2 and Class 1M-3
Certificates also will not constitute "mortgage related securities" for purposes
of SMMEA.
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
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<PAGE>
"Representative") of Merrill Lynch and First Union Capital Markets Corp.
(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:
<TABLE>
<CAPTION>
Principal (or Notional) Amount of:
Class 1A Class 1A-IO Class 1A-PO
Underwriter Certificates Certificates Certificates
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................ $113,465,685 $115,328,719 $129,515
First Union Capital Markets........... $28,366,421 $28,832,180 $32,379
<CAPTION>
Principal Amount of:
Class 1M-1 Class 1M-2 Class 1M-3
Underwriter Certificates Certificates Certificates
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................ $888,000 $592,000 $592,000
First Union Capital Markets........... $222,000 $148,000 $148,000
<CAPTION>
Principal Amount of:
Class 2A-1 Class 2A-2 Class 2M-1
Underwriter Certificates Certificates Certificates
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................... $67,966,400 $34,406,400 $8,423,200
First Union Capital Markets.......... $16,991,600 $8,601,600 $2,105,800
<CAPTION>
Principal Amount of:
Class 2M-2 Class 2B-1
Underwriter Certificates Certificates
----------- ------------ ------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................... $7,127,200 $6,155,200
First Union Capital Markets.......... $1,781,800 $1,538,800
</TABLE>
Distribution of the Class 1A-PO and Class 2B-1 Certificates will be made by
the Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriters may effect
such transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriters, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriters and any dealers that participate with the Underwriters in the
distribution of such Offered Certificates may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profits on
resale of the Certificates purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Act").
With respect to the Offered Certificates (other than the Class 1A-PO and
Class 2B-1 Certificates) (the "Fixed Price Offered Certificates"), the
Underwriters have advised the Depositor that they propose initially to offer
such 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 Fixed Price 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 Fixed Price Offered Certificates. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions
S-95
<PAGE>
that stabilize the price of the Fixed Price Offered Certificates. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Fixed Price 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 Fixed Price 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.
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
----- ------- ----- ----
1A Aaa * AAA
1A-IO Aaa * AAA
1A-PO Aaa * AAA
1M-1 Aa2 * AA
1M-2 A2 * A
1M-3 Baa2 * BBB
2A-1 Aaa AAA AAA
2A-2 Aaa AAA AAA
2M-1 Aa2 AA AA+
2M-2 A2 A A+
2B-1 Baa3 BBB BBB+
- ------------------
* Fitch was not asked to rate these certificates.
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 2A-2 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 Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
S-96
<PAGE>
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.
S-97
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
60+ Day Delinquent Loan......................................................73
Accrued Certificate Interest.................................................64
Act..........................................................................97
Adjustment Date..............................................................33
Advance......................................................................55
Alternative Documentation....................................................50
Applied Realized Loss Amount.................................................73
Arrearage....................................................................19
Assignment Program...........................................................47
Available Funds..............................................................63
Balloon Loan.................................................................25
Balloon Payment..............................................................25
Bankruptcy Code..............................................................18
Bankruptcy Loss Coverage Amount..............................................69
Bankruptcy Losses............................................................69
Bankruptcy Plan Mortgage Loan................................................18
Basis Risk Reserve Fund......................................................77
Beneficial Owner.............................................................59
Book-Entry Certificates......................................................59
Cap Contract.................................................................93
Cedelbank....................................................................60
Cedelbank Participants.......................................................60
Certificate Owners...........................................................59
Certificateholder............................................................59
certificates.................................................................96
Certificates.................................................................58
Class 1A-PO Principal Distribution Amount....................................68
Class 2A Certificates........................................................69
Class 2A Principal Distribution Amount.......................................70
Class 2A-1 Formula Rate......................................................76
Class 2A-1 Principal Percentage..............................................69
Class 2A-1Certificate Margin.................................................76
Class 2A-2 Certificate Margin................................................76
Class 2A-2 Formula Rate......................................................76
Class 2A-2 Principal Percentage..............................................69
Class 2B-1 Applied Realized Loss Amount......................................75
Class 2B-1 Principal Distribution Amount.....................................71
Class 2B-1 Realized Loss Amortization Amount.................................75
Class 2B-2 Applied Realized Loss Amount......................................75
Class 2B-2 Principal Distribution Amount.....................................71
Class 2B-2 Realized Loss Amortization Amount.................................75
Class 2B-3 Applied Realized Loss Amount......................................75
Class 2B-3 Principal Distribution Amount.....................................71
Class 2B-3 Realized Loss Amortization Amount.................................76
Class 2M-1 Applied Realized Loss Amount......................................74
Class 2M-1 Principal Distribution Amount.....................................71
Class 2M-1 Realized Loss Amortization Amount.................................75
Class 2M-2 Applied Realized Loss Amount......................................75
Class 2M-2 Principal Distribution Amount.....................................71
S-98
<PAGE>
Class 2M-2 Realized Loss Amortization Amount.................................75
Code.........................................................................93
Collection Account...........................................................54
Collection Period............................................................64
Compensating Interest........................................................56
Constant Prepayment Rate.....................................................80
Cooperative..................................................................61
CPR..........................................................................80
Custodian....................................................................53
Cut-off Date.................................................................17
Cut-off Date Principal Balance...............................................17
Defective Mortgage Loans.....................................................54
Definitive Certificate.......................................................59
Delayed First Adjustment Mortgage Loan.......................................33
Delinquent...................................................................19
Determination Date...........................................................56
Discount Mortgage Loan.......................................................65
Distribution Account.........................................................54
Distribution Date............................................................58
DTC...........................................................................1
Due Date.....................................................................19
EFSG.........................................................................49
Eligible Account.............................................................54
Eligible Substitute Mortgage Loan............................................53
Euroclear....................................................................61
Euroclear Operator...........................................................61
Euroclear Participants.......................................................61
European Depositaries........................................................59
Excess Losses................................................................69
Extra Principal Distribution Amount..........................................72
FHA..........................................................................47
FHA Mortgage Loans...........................................................47
Financial Intermediary.......................................................59
Fixed Price Offered Certificates.............................................97
Forbearance Plan Mortgage Loan...............................................18
Fraud Loss Coverage Amount...................................................69
Fraud Losses.................................................................69
Full Documentation...........................................................50
Global Securities.............................................................1
Gross Margin.................................................................33
Group 1 Available Funds......................................................63
Group 1 Certificates.........................................................58
Group 1 Loan Balance.........................................................18
Group 1 Mortgage Loans.......................................................18
Group 1 Scheduled Principal Distribution Amounts.............................65
Group 1 Senior Certificates..................................................58
Group 1 Senior Credit Support Depletion Date.................................65
Group 1 Senior Percentage....................................................66
Group 1 Senior Prepayment Percentage.........................................66
Group 1 Senior Principal Distribution Amount.................................65
Group 1 Subordinated Certificates............................................58
Group 1 Subordinated Principal Distribution Amount...........................67
Group 2 Available Funds......................................................63
S-99
<PAGE>
Group 2 Certificates.........................................................58
Group 2 Principal Distribution Amount........................................72
Group 2 Principal Remittance Amount..........................................72
Group 2 Senior Enhancement Percentage........................................72
Group 2 Senior Specified Enhancement Percentage..............................73
Group 2 Subordinated Certificates............................................58
Group 2A Available Funds Cap.................................................77
Group 2A Loan Balance........................................................18
Group 2A Mortgage Loans......................................................18
Group 2F Available Funds Cap.................................................77
Group 2F Loan Balance........................................................18
Group 2F Mortgage Loans......................................................18
HUD..........................................................................47
IML..........................................................................60
Index........................................................................33
Industry.....................................................................62
Initial Periodic Rate Cap....................................................33
Interest Accrual Period......................................................64
Interest Carry Forward Amount................................................64
Interest Determination Date..................................................77
Interest Remittance Amount...................................................64
IRS..........................................................................93
LIBOR Carryover Amount.......................................................77
Limited Documentation........................................................50
Liquidated Mortgage Loan.....................................................69
Litton.......................................................................51
Loan Group...................................................................17
Loan Group 1.................................................................17
Loan Group 2.................................................................17
Loan Group 3.................................................................17
Loan Group Balance...........................................................18
Loan Rate....................................................................20
Maximum Cap..................................................................77
Maximum Loan Rate............................................................33
Merrill Lynch................................................................97
MGIC.........................................................................49
Minimum Loan Rate............................................................33
Modified Scheduled Payments..................................................18
Monthly Excess Cashflow Amount...............................................74
Monthly Excess Interest Amount...............................................73
Mortgage.....................................................................19
Mortgage Interest Rate.......................................................56
Mortgage Loan Purchase Agreement.............................................17
Mortgage Loan Schedule.......................................................53
Mortgage Loans...............................................................17
Mortgage Pool................................................................17
mortgage related securities..................................................96
Mortgaged Property...........................................................19
National Credit Ratings Agencies.............................................95
National Housing Act.........................................................47
Net Mortgage Rate............................................................65
No Documentation.............................................................50
no-bid.......................................................................49
S-100
<PAGE>
Non-Discount Mortgage Loan...................................................65
Non-PO Formula Principal Amount..............................................65
Offered Certificates.........................................................58
OID..........................................................................93
OID Regulations..............................................................93
One Year CMT.................................................................46
One-Month LIBOR..............................................................76
Optional Termination Date....................................................56
Overcollateralization Amount.................................................72
Overcollateralization Deficiency.............................................72
Overcollateralization Release Amount.........................................72
Overcollateralization Release Amounts........................................74
Owner-Financed Mortgage Loan.................................................26
Pass-Through Rate............................................................76
Performing Mortgage Loan.....................................................18
Periodic Rate Cap............................................................33
Plan.........................................................................95
PO Formula Principal Amount..................................................68
Pool Balance.................................................................17
Pooling and Servicing Agreement..............................................52
Prepayment Interest Shortfall................................................56
Prepayment Period............................................................63
Principal Balance............................................................17
PTCE 95-60...................................................................96
Purchase Price...............................................................53
qualified mortgages..........................................................94
real estate assets...........................................................94
Realized Loss................................................................69
Record Date..................................................................58
Regular Scheduled Payments...................................................18
Related Documents............................................................53
Relevant Depositary..........................................................59
Relief Act...................................................................55
Re-Performance Test..........................................................18
Re-Performing Mortgage Loan..................................................18
Representative...............................................................97
Residual Certificates........................................................58
Rules........................................................................59
Seller.......................................................................17
Servicing Advance............................................................55
Servicing Fee................................................................56
Servicing Fee Rate...........................................................56
Six Month LIBOR..............................................................46
SMMEA........................................................................96
Special Hazard Loss Coverage Amount..........................................69
Special Hazard Losses........................................................69
Special Servicing Fee........................................................56
Stated Documentation.........................................................50
step-down....................................................................74
Stepdown Date................................................................73
Structuring Assumptions......................................................80
Sub-Performing Mortgage Loan.................................................18
Substitution Adjustment......................................................53
S-101
<PAGE>
Systems......................................................................62
Targeted Overcollateralization Amount........................................73
Tax Counsel..................................................................93
Termination Price............................................................57
Terms and Conditions.........................................................61
Trigger Event................................................................73
Trust Fund...................................................................17
Trustee......................................................................55
U.S. Person...................................................................4
Underwriter..................................................................95
Underwriters.................................................................97
United States Housing Act....................................................47
Unpaid Realized Loss Amount..................................................76
VA...........................................................................47
VA Mortgage Loans............................................................47
Year 2000 problems...........................................................62
S-102
<PAGE>
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.
A-1
<PAGE>
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 the actual
number of days in such accrual period and a year assumed to consist of 360 days.
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 the actual number of days in such accrual period and a year
assumed to consist of 360 days. 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 Participant the following day, and receipt of
the cash proceeds in
A-2
<PAGE>
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).
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
A-3
<PAGE>
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
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes
(the "Notes" and, together with the Certificates, the "Securities") offered
hereby and by Supplements to this Prospectus (the "Offered Securities") will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the "Trust Fund") consisting of one or
more segregated pools of various types of one- to five-family mortgage loans (or
certain balances thereof) (collectively, the "Mortgage Loans"), mortgage
pass-through certificates or mortgage-backed securities evidencing interests in
Mortgage Loans or secured thereby ("MBS") or certain direct obligations of the
United States, agencies thereof or agencies created thereby (the "Government
Securities") (with respect to any series, collectively, "Assets"). The Mortgage
Loans and MBS are collectively referred to herein as the "Mortgage Assets." If a
series of Securities includes Notes, such Notes will be issued and secured
pursuant to an indenture and will represent indebtedness of the Trust Fund. If
so specified in the related Prospectus Supplement, the Trust Fund for a series
of Securities may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof (with
respect to any series, collectively, "Credit Support"), and currency or interest
rate exchange agreements and other financial assets or derivative instruments,
or any combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Securities" and "Description of Credit Support."
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series;
(vi) provide for distributions of principal as described in the related
Prospectus Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available funds,
in each case as described in the related Prospectus Supplement. Any such classes
may include classes of Offered Securities. See "Description of the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund will
be guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by, among
other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH UNDER THE
CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE PURCHASING
ANY OFFERED SECURITY.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" for federal income tax purposes. See
also "Material Federal Income Tax Consequences" herein.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
RELATED PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of any
series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is March 23, 1999.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the assets included therein, including the Assets
and any Credit Support and Cash Flow Agreements (with respect to the Securities
of any series, the "Trust Assets"); (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) additional information
with respect to the method of distribution of such Certificates; (vi) whether
one or more REMIC elections will be made and designation of the regular
interests and residual interests; (vii) the aggregate original percentage
ownership interest in the Trust Fund to be evidenced by each class of
Securities; (viii) information as to any Master Servicer, any Sub-Servicer and
the Trustee, as applicable; (ix) information as to the nature and extent of
subordination with respect to any class of Securities that is subordinate in
right of payment to any other class; and (x) whether such Securities will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Offered Securities. This Prospectus and the Prospectus Supplement
relating to each series of Securities contain summaries of the material terms of
the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Chicago Regional Office, Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as nominee of
The Depository Trust Company ("DTC") and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the "Securityholders") upon request
to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the
Agreements--Evidence as
2
<PAGE>
to Compliance." The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and
regulations of the Commission thereunder, as interpreted by the staff of the
Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, or by telephone at (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
3
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT..................................................................................... 2
AVAILABLE INFORMATION..................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................................................... 3
SUMMARY OF PROSPECTUS..................................................................................... 5
RISK FACTORS.............................................................................................. 13
DESCRIPTION OF THE TRUST FUNDS............................................................................ 18
USE OF PROCEEDS........................................................................................... 22
YIELD CONSIDERATIONS...................................................................................... 22
THE DEPOSITOR............................................................................................. 26
DESCRIPTION OF THE SECURITIES............................................................................. 26
DESCRIPTION OF THE AGREEMENTS............................................................................. 35
DESCRIPTION OF CREDIT SUPPORT............................................................................. 52
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................................................... 54
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................................................................. 63
STATE TAX CONSIDERATIONS.................................................................................. 97
ERISA CONSIDERATIONS...................................................................................... 97
LEGAL INVESTMENT.......................................................................................... 99
PLAN OF DISTRIBUTION...................................................................................... 101
LEGAL MATTERS............................................................................................. 102
FINANCIAL INFORMATION..................................................................................... 102
RATING.................................................................................................... 102
INDEX OF PRINCIPAL DEFINITIONS............................................................................ 103
</TABLE>
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
<TABLE>
<S> <C>
Title of Securities....................... Asset-Backed Certificates (the "Certificates") and Asset Backed Notes
(the "Notes" and, together with the Certificates, the "Securities"),
issuable in series.
Issuer.................................... With respect to each series, the trust fund (the "Trust Fund") formed
to issue the Securities of that series.
Depositor................................. Merrill Lynch Mortgage Investors, Inc. (the "Depositor"), a wholly
owned subsidiary of Merrill Lynch Mortgage Capital, Inc., which is a
wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch & Co., Inc. nor any of its
affiliates, including the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, will insure or guarantee the Securities or the
Mortgage Loans or be otherwise obligated in respect thereof.
Master Servicer........................... The master servicer or master servicers (each, a "Master Servicer"),
if any, or a servicer for substantially all the Mortgage Loans for
each series of Securities, which servicer or master servicer(s) may
be affiliates of the Depositor, will be named in the related
Prospectus Supplement. See "Description of the Agreements--General"
and "--Collection and Other Servicing Procedures."
Trustee................................... The trustee (the "Trustee") for each series of Certificates will be
named in the related Prospectus Supplement. See "Description of the
Agreements--The Trustee."
The Trust Assets.......................... Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will represent indebtedness of
the Trust Fund and will be secured by a security interest in the
Assets of the Trust Fund. A Trust Fund will consist of any of the
following assets (the Mortgage Assets and Government Securities may
be referred to collectively or individually as "Assets"):
(a) Mortgage Assets..................... The Mortgage Assets with respect to a series of Certificates will
consist of a pool of single family loans (or certain balances
thereof) (collectively, the "Mortgage Loans"), mortgage pass-through
certificates or other mortgage-backed securities (such as debt
obligations and participation interests or certificates) evidencing
interests in or secured by Mortgage Loans (collectively, the "MBS")
or a combination of Mortgage Loans and/or MBS. The Mortgage Loans
will not be guaranteed or insured by the Depositor or any of its
affiliates or, unless otherwise provided in the Prospectus
Supplement, by any governmental agency or instrumentality or other
person. The Mortgage Loans will be secured by first and/or junior
liens on one- to five-family residential properties or security
interests in shares issued by cooperative housing corporations
("Single Family Properties"), including mixed residential and
commercial structures. The Mortgage Loans
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may include (i) closed-end and/or revolving home equity loans or
certain balances thereof ("Home Equity Loans") and/or (ii) home
improvement installment sales contracts and installment loan
agreements ("Home Improvement Contracts"). The Mortgaged Properties
may be located in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any other U.S.
jurisdiction specified in the Prospectus Supplement. The Prospectus
Supplement will indicate additional jurisdictions, if any, in which
the Mortgaged Properties may be located. Unless otherwise provided in
the related Prospectus Supplement, all Mortgage Loans will have
individual principal balances at origination of not less than $25,000
and original terms to maturity of not more than 40 years. All
Mortgage Loans will have been originated by persons other than the
Depositor, and all Mortgage Assets will have been purchased, either
directly or indirectly, by the Depositor on or before the date of
initial issuance of the related series of Certificates. The related
Prospectus Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that
adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the mortgagor's election, in each
case as described in the related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust Fund may be based on
one or more indices. Each Mortgage Loan may provide for scheduled
payments to maturity, payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events, and may provide for negative amortization or
accelerated amortization, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each
case as described in the related Prospectus Supplement. Each Mortgage
Loan may contain prohibitions on prepayment or require payment of a
premium or a yield maintenance penalty in connection with a
prepayment, in each case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly,
semi-annually or at such other interval as is specified in the
related Prospectus Supplement. See "Description of the Trust
Funds--Assets."
(b) Government Securities............... If so provided in the related Prospectus Supplement, the Trust Fund
may include, in addition to Mortgage Assets, certain direct
obligations of the United States, agencies thereof or agencies
created thereby which provide for payment of interest and/or
principal (collectively, "Government Securities").
(c) Collection Accounts................. Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or
persons designated in the related Prospectus Supplement will, to the
extent described herein and in such Prospectus Supplement, deposit
all payments and collections received or advanced with respect to the
Assets and other assets in the Trust Fund. Such an account may
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be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of
the Agreements--Collection Account and Related Accounts."
(d) Credit Support...................... If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more classes of
Securities of the related series in the form of subordination of one
or more other classes of Securities of such series, which other
classes may include one or more classes of Offered Securities, and/or
by one or more of the following types of credit support that has the
effect of covering losses on Assets: a letter of credit, insurance
policy, guarantee, reserve fund or other type of credit support
consistent with the foregoing (any such coverage with respect to the
Securities of any series, "Credit Support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus
Supplement for a series of Securities. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any similar forms of credit support that
are provided by or with respect to, or are included as part of the
trust fund evidenced by or providing security for, such MBS. See
"Risk Factors--Credit Support Limitations" and "Description of Credit
Support."
(e) Cash Flow Agreements................ If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys
held in the funds and accounts established for the related series
will be invested at a specified rate. The Trust Fund may also include
one or more of the following agreements: interest rate exchange
agreements, interest rate cap or floor agreements, currency exchange
agreements, other swaps and derivative instruments or other
agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect
to the obligor under any such Cash Flow Agreement. The Prospectus
Supplement for any series of Securities evidencing an interest in a
Trust Fund that includes MBS will describe any cash flow agreements
that are included as part of the trust fund evidenced by or providing
security for such MBS. See "Description of the Trust Funds--Cash Flow
Agreements."
(f) Pre-Funding Account................. To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the satisfaction
of certain conditions described in the applicable Agreement),
additional Assets (the "Subsequent Assets") from time to time (as
</TABLE>
7
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<S> <C>
frequently as daily) within the number of months specified in the
Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for such series on date of such issuance.
Description of Securities................. Each series of Certificates will evidence an interest in the related
Trust Fund and will be issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and servicing agreements and
trust agreements are referred to herein as the "Agreements." If a
series of Securities includes Notes, such Notes will represent
indebtedness of the related Trust Fund and will be secured by a
security interest in the Assets of the Trust Fund (or a specified
group thereof) pursuant to an indenture.
Each series of Securities will include one or more classes. Each
class of Securities (other than certain Stripped Interest Securities,
as defined below) will have a stated principal amount (a "Security
Balance") and except for certain Stripped Principal Securities, as
defined below, will accrue interest thereon based on a fixed,
variable or adjustable interest rate (in the case of Certificates, a
"Pass-Through Rate"). The related Prospectus Supplement will specify
the Security Balance, if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the case of a variable or
adjustable Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate.
Distributions on Securities............... Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other classes of Securities
in respect of certain distributions on the Securities; (iii) be
entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped
Principal Securities"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Securities"); (v) provide for
distributions of accrued interest thereon commencing only following
the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively,
"Accrual Securities"); (vi) provide for distributions of principal as
described in the related Prospectus Supplement; and/or (vii) provide
for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this
paragraph, including a Stripped Principal Security component and a
Stripped Interest Security component, to the extent of available
funds, in each case as described in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be
limited to collections from a designated portion of the Mortgage
Loans in the related Mortgage Pool (each such portion of Mortgage
Loans, a "Mortgage Loan Group.") See "Description of the
Securities--General." Any such classes may include classes of Offered
Securities. With respect to Securities with two or more components,
references herein to
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<TABLE>
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Security Balance, notional amount and Pass-Through Rate or interest
rate refer to the principal balance, if any, notional amount, if any,
and the Pass-Through Rate or interest rate, if any, for any such
component.
The Securities will not be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency or instrumentality
or by any other person, unless otherwise provided in the related
Prospectus Supplement. See "Risk Factors--Limited Assets" and
"Description of the Securities."
(a) Interest............................ Interest on each class of Offered Securities (other than Stripped
Principal Securities and certain classes of Stripped Interest
Securities) of each series will accrue at the applicable Pass-Through
Rate or interest rate on the outstanding Security Balance thereof and
will be distributed to Securityholders as provided in the related
Prospectus Supplement. The specified date on which distributions are
to be made is a "Distribution Date." Distributions with respect to
interest on Stripped Interest Securities may be made on each
Distribution Date on the basis of a notional amount as described in
the related Prospectus Supplement. Distributions of interest with
respect to one or more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment interest
shortfalls, and other contingencies described herein and in the
related Prospectus Supplement. See "Risk Factors--Average Life of
Securities; Prepayments; Yields," "Yield Considerations" and
"Description of the Securities--Distributions of Interest on the
Securities."
(b) Principal........................... The Securities of each series initially will have an aggregate
Security Balance no greater than the outstanding principal balance of
the Assets as of, unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of the month of
formation of the related Trust Fund (the "Cut-off Date"), after
application of scheduled payments due on or before such date, whether
or not received. The Security Balance of a Security outstanding from
time to time represents the maximum amount that the holder thereof is
then entitled to receive in respect of principal from future cash
flow on the assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or
classes of Securities entitled thereto until the Security Balances of
such Securities have been reduced to zero. Unless otherwise specified
in the related Prospectus Supplement, distributions of principal of
any class of Securities will be made on a pro rata basis among all of
the Securities of such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the
related Trustee. Stripped Interest Securities with no Security
Balance will not receive distributions in respect of principal. See
"Description of the Securities--Distributions of Principal of the
Securities."
Risk Factors.............................. There are material risks to be considered in investing in the
Securities. See "Risk Factors" herein and, if applicable, in the
related Prospectus Supplement.
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Advances.................................. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be obligated as part of its servicing
responsibilities to make certain advances that in its good faith
judgment it deems recoverable with respect to delinquent scheduled
payments on the Whole Loans in such Trust Fund. Neither the Depositor
nor any of its affiliates will have any responsibility to make such
advances. Advances made by a Master Servicer are reimbursable
generally from subsequent recoveries in respect of such Whole Loans
and otherwise to the extent described herein and in the related
Prospectus Supplement. If and to the extent provided in the
Prospectus Supplement for any series, the Master Servicer will be
entitled to receive interest on its outstanding advances, payable
from amounts in the related Trust Fund. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any corresponding advancing obligation of
any person in connection with such MBS. See "Description of the
Securities--Advances in Respect of Delinquencies."
Termination............................... If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in the manner set
forth therein. If so provided in the related Prospectus Supplement,
upon the reduction of the Security Balance of a specified class or
classes of Securities to a specified percentage or amount or on and
after a date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient portion of such Assets
to retire such class or classes, or purchase such Assets at a price
set forth in the related Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement, certain classes of
Securities may be purchased subject to similar conditions. See
"Description of the Securities--Termination."
Registration of Securities................ If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities will initially be represented by
one or more certificates or notes, as applicable, registered in the
name of Cede & Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be entitled to
receive a definitive certificate or note, as applicable, representing
such person's interest except in the event that definitive
certificates or notes, as applicable, are issued under the limited
circumstances described herein. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry
Registration and Definitive Securities."
Tax Status of the Certificates............ The Certificates of each series will constitute, as specified in the
related Prospectus Supplement, either (i) "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual
Certificates") in a Trust Fund treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A through 860G of the
Internal Revenue Code of 1986, as amended (the "Code"),
(ii) interests ("Grantor Trust Certificates") in a Trust Fund treated
as a grantor trust under applicable provisions of the
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Code, (iii) interests in a Trust Fund treated as a partnership for
purposes of federal and state income tax or (iv) indebtedness of the
Trust Fund for federal income tax purposes.
(a) REMIC............................... REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax purposes.
Certain REMIC Regular Certificates may be issued with original issue
discount for federal income tax purposes. See "Material Federal
Income Tax Consequences" herein and in the related Prospectus
Supplement.
The Offered Certificates evidencing an interest in a Trust Fund
containing Mortgage Loans will be treated as (i) assets described in
section 7701(a)(19)(C) of the Code and (ii) "real estate assets"
within the meaning of section 856(c)(5)(A) of the Code, in each case
to the extent described herein and in the Prospectus. See "Material
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
(b) Grantor Trust....................... If the related Prospectus Supplement specifies that the related Trust
Fund will be a grantor trust, the Trust Fund will be classified as a
grantor trust and not as an association taxable as a corporation for
federal income tax purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro rata interests in the
Assets held by the Trust Fund.
(c) Partnership......................... If so specified in a Prospectus Supplement, the related Trust Fund
will be treated as a partnership for purposes of federal and state
income tax, and each Certificateholder, by the acceptance of a
Certificate of such Trust Fund, will agree to treat the Trust Fund as
a partnership in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative characterizations
of such Trust Fund and such Certificates are possible, but would not
result in materially adverse tax consequences to Certificateholders.
(d) Indebtedness........................ If so specified in the related Prospectus Supplement, the
Certificates of a series will be treated as indebtedness for federal
income tax purposes and the Certificateholder, in accepting the
Certificate, will agree to treat such Certificate as indebtedness.
Investors are advised to consult their tax advisors and to review
"Material Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
Tax Status of Notes....................... Unless otherwise specified in the related Prospectus Supplement,
Notes of a series will be treated as indebtedness for federal and
state income tax purposes and the Noteholder, in accepting the Note,
will agree to treat such Note as indebtedness. See "Material Federal
Income Tax Consequences" herein and in such Prospectus Supplement.
Investors are advised to consult their tax advisors and to review
"Material Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other retirement
plans and arrangements, including individual retirement accounts,
annuities, Keogh plans, and collective investment funds and separate
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<TABLE>
<S> <C>
accounts in which such plans, accounts, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase or
holding of Offered Securities could give rise to a transaction that
is prohibited or is not otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA Considerations" herein and in
the related Prospectus Supplement. Certain classes of Securities may
not be transferred unless the Trustee and the Depositor are furnished
with a letter of representations or an opinion of counsel to the
effect that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master Servicer to
additional obligations. See "Description of the Securities--General"
and "ERISA Considerations".
Legal Investment.......................... Each Prospectus Supplement will specify which class or classes of
Offered Securities, if any, will constitute "mortgage-related
securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Institutions whose investment activities are
subject to legal investment laws and regulations or review by certain
regulatory authorities may be subject to restrictions on investment
in certain classes of the Offered Securities. See "Legal Investment"
herein and in the related Prospectus Supplement.
Rating.................................... At the date of issuance, as to each series, each class of Offered
Securities will be rated not lower than investment grade by one or
more nationally recognized statistical rating agencies (each, a
"Rating Agency"). See "Rating" herein and in the related Prospectus
Supplement.
</TABLE>
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS AND RISK THAT SUCH ASSETS WILL NOT BE SUFFICIENT TO PAY
SECURITIES IN FULL
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans, the
Master Servicer's and any Sub-Servicer's servicing obligations under the related
Agreement (including the limited obligation to make certain advances in the
event of delinquencies on the Mortgage Loans, but only to the extent deemed
recoverable) and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Master Servicer in
connection with an agreement to purchase or act as remarketing agent with
respect to a convertible ARM Loan (as defined herein) upon conversion to a fixed
rate or a different index. Since certain representations and warranties with
respect to the Mortgage Assets may have been made and/or assigned in connection
with transfers of such Mortgage Assets prior to the Closing Date, the rights of
the Trustee and the Securityholders with respect to such representations or
warranties will be limited to their rights as an assignee thereof. Unless
otherwise specified in the related Prospectus Supplement, none of the Depositor,
the Master Servicer or any affiliate thereof will have any obligation with
respect to representations or warranties made by any other entity. Unless
otherwise specified in the related Prospectus Supplement, neither the Securities
nor the underlying Assets will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Fund for each series of Securities (including the Assets and any
form of credit enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Depositor or any other entity
in the event that such proceeds are insufficient or otherwise unavailable to
make all payments provided for under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
See "Description of the Trust Funds."
RISK THAT PREPAYMENTS WILL ADVERSELY AFFECT AVERAGE LIFE AND YIELDS OF
SECURITIES
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans varies between pools and from
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time to time is influenced by a variety of economic, demographic, geographic,
social, tax, legal and other factors. There can be no assurance as to the rate
of prepayment on the Assets in any Trust Fund or that the rate of payments will
conform to any model described herein or in any Prospectus Supplement. If
prevailing interest rates fall significantly below the applicable mortgage
interest rates, principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by the Mortgage Loans underlying or
comprising the Mortgage Assets in any Trust Fund. As a result, the actual
maturity of any class of Securities evidencing an interest in a Trust Fund
containing Mortgage Assets could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL--RISK THAT DEFAULTS BY
OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED PROPERTIES WILL RESULT IN LOSSES
TO INVESTORS
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the relevant residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the related Mortgage Loans, and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry in
that market. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest, the principal balances of such Mortgage Loans could be increased to an
amount equal to or in excess of the value of the underlying Mortgaged
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Support, if any, holders of
Securities of the series evidencing interests in the related Mortgage Loans will
bear all risk of loss resulting from default by mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of Mortgage Loans may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis of
the initial payment amount. In some instances the Mortgagor's income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase. In addition
to the foregoing, certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will
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increase the risk of loss particularly with respect to any related junior
Mortgage Loans. See "--Junior Mortgage Loans."
In addition, a Prospectus Supplement may specify that the Loan-to-Value
Ratios for the Mortgage Loans in the related Trust will be in excess of 100%.
The related Mortgaged Properties, therefore, will be highly unlikely to provide
adequate security for such Mortgage Loans. To the extent specified in such
Prospectus Supplement, the assessment of the credit history of a borrower and
such borrower's capacity to make payments on the related Mortgage Loan will have
been the primary considerations in underwriting the Mortgage Loans included in
such Trust. The evaluation of the adequacy of the Loan-to-Value Ratio, if so
specified in the related Prospectus Supplement, will have been given less
consideration, and in certain cases no consideration, in underwriting such
Mortgage Loans.
JUNIOR MORTGAGE LOANS--RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE
TO HOLDERS OF JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior lien"),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien and the Mortgage Loan. In the event that a
holder of the senior lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage. See "Certain Legal Aspects of the Mortgage
Loans--Junior Mortgages."
CREDIT SUPPORT LIMITATIONS--RISK THAT CREDIT SUPPORT WILL NOT COVER ALL LOSSES
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a "Covered
Trust"),
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holders of Securities evidencing an interest in a Covered Trust will be subject
to the risk that such Credit Support will be exhausted by the claims of other
Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
SUBORDINATION OF THE SUBORDINATE SECURITIES; EFFECT OF LOSSES ON THE SUBORDINATE
SECURITIES
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See "Description of the Securities--General" and
"--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
BALLOON PAYMENTS--RISK THAT OBLIGOR WILL NOT BE ABLE TO MAKE BALLOON PAYMENT
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
OPTIONAL TERMINATION OF A TRUST FUND--POSSIBILITY, IF PROSPECTUS SUPPLEMENT SO
PROVIDES, THAT AMOUNT RECEIVED MAY BE LESS THAN OUTSTANDING PRINCIPAL AMOUNT
PLUS ACCRUED INTEREST
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities to a specified percentage or amount,
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the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
In either such case, if the related Prospectus Supplement so provides, the
proceeds available for distribution to Securityholders may be less than the
outstanding principal balance of their Securities plus accrued interest thereon,
in which event such Securityholders could incur a loss on their investment.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences--REMICs."
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating. See "Rating."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as "Securityholders" (as that term is to be used in the related
Agreement). Hence, until such time, Securityholders will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Securities--Book-Entry Registration and
Definitive Securities.
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include (i) one-
to five-family mortgage loans (or certain balances thereof) (collectively, the
"Mortgage Loans"), including without limitation, Home Equity Loans and Home
Improvement Contracts, (ii) pass-through certificates or other mortgage-backed
securities (such as debt obligations or participation interests or certificates)
evidencing interests in or secured by one or more Mortgage Loans or other
similar participations, certificates or securities ("MBS") or (iii) direct
obligations of the United States, agencies thereof or agencies created thereby
which are (a) interest-bearing securities, (b) non-interest-bearing securities,
(c) originally interest-bearing securities from which coupons representing the
right to payment of interest have been removed, or (d) interest-bearing
securities from which the right to payment of principal has been removed (the
"Government Securities"). As used herein, "Mortgage Loans" refers to both whole
Mortgage Loans (or certain balances thereof) and Mortgage Loans underlying MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans (or
certain balances thereof) that are not Underlying Mortgage Loans are sometimes
referred to as "Whole Loans." Any pass-through certificates or other
asset-backed certificates in which an MBS evidences an interest or which secure
an MBS are sometimes referred to herein also as MBS or as "Underlying MBS."
Mortgage Loans and MBS are sometimes referred to herein as "Mortgage Assets."
The Mortgage Assets will not be guaranteed or insured by Merrill Lynch Mortgage
Investors, Inc. (the "Depositor") or any of its affiliates or, unless otherwise
provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an "Asset Seller"), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to five-family residential property (a "Single Family Property" and
the related Mortgage Loan a "Single Family Mortgage Loan") or (ii) a security
interests in shares issued by private cooperative housing corporations
("Cooperatives"). If so specified in the related Prospectus Supplement, a
Mortgaged Property may include some commercial use. Mortgaged Properties will be
located, unless otherwise specified in the related Prospectus Supplement, in any
one of the fifty states, the District of Columbia, the Commonwealth of Puerto
Rico or any U.S. possession. To the extent specified in the related Prospectus
Supplement, the Mortgage Loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by Cooperatives and leasehold interests in properties, the
title to which is held by third party lessors. Unless otherwise specified in the
Prospectus Supplement, the term of any such leasehold shall exceed the term of
the related mortgage note by at least five years. Each Mortgage Loan will have
been originated by a person (the "Originator") other than the Depositor. The
related Prospectus Supplement will indicate if any Originator is an affiliate of
the Depositor. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or other security
instruments (the "Mortgages") creating a lien on the Mortgaged Properties. No
more than 20% of the Mortgage Loans (by principal balance) in a Trust Fund will
be, as of the related Cut-off Date, 30 days or more past their most recent
contractually scheduled payment date.
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Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan plus the principal balance of any senior mortgage loan to the
Value of the related Mortgaged Property. The "Value" of a Mortgaged Property,
other than with respect to Refinance Loans, is generally the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such loan and (b) the sales price for such property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise set forth in
the related Prospectus Supplement, the Value of the Mortgaged Property securing
a Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan. The Value of a
Mortgaged Property as of the date of initial issuance of the related series of
Certificates may be less than the value at origination and will fluctuate from
time to time based upon changes in economic conditions and the real estate
market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ("ARM Loans"), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the "Home
Improvement Contracts") originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by borrowers
under the revolving Home Equity Loans will, during a specified period of time,
automatically become part of the Trust Fund for a series. As a result, the
aggregate balance of the revolving Home Equity Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal
collections are applied to purchase such balances. Such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions may
be made to the extent that such additions could be made in connection with a
Trust Fund with respect to which a REMIC election has been made. The related
Prospectus Supplement will set forth the characteristics that such additional
Mortgage Loans will be required to meet. Such characteristics will be specified
in terms of the categories described in the second preceding paragraph.
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Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of not
less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the
"MBS Servicer") of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under "Description
of Credit Support" may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements" above, and the type of information in respect of the Underlying MBS
described in this paragraph, (xii) the characteristics of any cash flow
agreements that are included as part of the trust fund evidenced or secured by
the MBS and (xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company.
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Each MBS will be either (i) a security exempted from the registration
requirements of the Securities Act, (ii) a security that has been previously
registered under the Securities Act or (iii) a security that is eligible for
sale under Rule 144(k) under the Securities Act. In the case of clauses
(ii) and (iii), such security will be acquired in a secondary market transaction
not from the issuer thereof or an affiliate of such issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the "Subsequent Assets") from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such series on
date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreement--Collection
Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a
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number of percentage points higher or lower than certain of the Underlying
Mortgage Loans. The rate of principal payments on some or all of the classes of
Securities of a series will correspond to the rate of principal payments on the
Assets in the related Trust Fund. Mortgage Loans with a prepayment premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical Mortgage Loans
without such provisions or with lower Prepayment Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Securities entitled to payments of interest because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans comprising or underlying the Assets in
a particular Trust Fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans comprising or underlying the Assets is paid to such class, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
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In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans comprising or underlying the Assets
in a Trust Fund. If any Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates and maturities
of the Mortgage Loans comprising or underlying such Assets. See "Description of
the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Mortgage Loans having balloon payments may default at
maturity. In the case of defaults, recovery of proceeds may be delayed by, among
other things, bankruptcy of the mortgagor or adverse conditions in the market
where the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be permitted to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Securities, thereby
lengthening the period of time elapsed from the date of issuance of a Security
until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the mortgagor under each Mortgage Loan generally will be
qualified on the basis of the Mortgage Rate in effect at origination. The
repayment of any such Mortgage Loan may thus be dependent on the ability of the
mortgagor or obligor to make larger level monthly payments following the
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adjustment of the Mortgage Rate. In addition, certain Mortgage Loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which
the monthly payments made by the mortgagor during the early years of the
Mortgage Loan will be less than the scheduled monthly payments thereon (the
"Buydown Period"). The periodic increase in the amount paid by the mortgagor of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the mortgagor, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted average
life of the Mortgage Loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Sub-Servicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, Sub-Servicers may encourage the
refinancing of Mortgage Loans, including defaulted Mortgage Loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans.
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Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale" clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an "Indenture"). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Securities") or
subordinate (collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Securities"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Securities"); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, "Accrual Securities"); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, a Trust Fund may include
(i) additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or (ii) in the case of revolving
Home Equity loans or certain balances thereof, any additional balances advanced
to the borrowers under the revolving Home Equity loans during certain periods.
If so specified in the related Prospectus Supplement, distributions on one or
more classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of
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transfer or exchange, but the Depositor or the Trustee or any agent thereof may
require payment of a sum sufficient to cover any tax or other governmental
charge. One or more classes of Securities of a series may be issued in
definitive form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related Prospectus Supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same class and series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors--Limited Liquidity" and
"--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period" with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period, and will end
on the first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
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(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
"Accrued Security Interest" will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans comprising or underlying the Assets in the Trust Fund for such
series. The particular manner in which such shortfalls are to be allocated among
some or all of the classes of Securities of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Securities may
be reduced as a result of any other contingencies, including delinquencies,
losses and deferred interest on or in respect of the Mortgage Loans comprising
or underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a class of Securities by reason of
the allocation to such class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the Security Balance of such class.
See "Risk Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
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DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interests on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's)
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funds will be reimbursable only out of related recoveries on the Mortgage Loans
(including amounts received under any form of Credit Support) respecting which
such advances were made (as to any Mortgage Loan, "Related Proceeds") and, if so
provided in the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of such series;
provided, however, that any such advance will be reimbursable from any amounts
in the Collection Account prior to any distributions being made on the
Securities to the extent that the Master Servicer (or such other entity) shall
determine in good faith that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds or, if applicable, from collections
on other Assets otherwise distributable on such Subordinate Securities. If
advances have been made by the Master Servicer from excess funds in the
Collection Account, the Master Servicer is required to replace such funds in the
Collection Account on any future Distribution Date to the extent that funds in
the Collection Account on such Distribution Date are less than payments required
to be made to Securityholders on such date. If so specified in the related
Prospectus Supplement, the obligations of the Master Servicer (or another
entity) to make advances may be secured by a cash advance reserve fund, a surety
bond, a letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the loan number of the related Mortgage Loan and (b) the date of
acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related Mortgage Loan
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immediately following such Distribution Date (calculated as if such
Mortgage Loan were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement), (c) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (d) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan and (c) the amount of any
loss to Securityholders in respect of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the Securities--
Registration and Definitive Securities."
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TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ("Security Owners") will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
("Cede"), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only "Securityholder" (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement, Trust
Agreement or Indenture, as applicable, only indirectly through the Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the
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Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Security
Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax
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Consequences" in this Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures" in Annex I to the related Prospectus Supplement. CEDEL
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Security under the Indenture, Trust Agreement or
Pooling and Servicing Agreement, as applicable, on behalf of a CEDEL Participant
or Euroclear Participant only in accordance with its relevant rules and
procedures and subject to its Depositary's ability to effect such actions on its
behalf through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and Euroclear
will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
Transfers between DTC's participating organizations (the "Participants")
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue its
services, the Administrator would seek an alternative depository (if available)
or cause the issuance of Definitive Securities to the owners thereof or their
nominees in the manner described in the Prospectus under "Description of the
Securities--Book Entry Registration and Definitive Securities".
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
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DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance and servicing of the related Assets, the Pooling and Servicing
Agreement may be referred to herein as the "Agreement". Notwithstanding the
foregoing, if the Assets of the Trust Fund for such a series consists only of
Government Securities or MBS, such Assets will be conveyed to the Trust Fund and
administered pursuant to a trust agreement between the Depositor and the Trustee
(a "Trust Agreement"), which may also be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related Trust
Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the "Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
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ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in respect of each Whole Loan included in the related
Trust Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and Loan-to-Value Ratio as of the
date indicated and payment and prepayment provisions, if applicable; and
(ii) in respect of each MBS included in the related Trust Fund, including
without limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the
pass-through or bond rate or formula for determining such rate, the issue date
and original and remaining term to maturity, if applicable, the original and
outstanding principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
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Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans and Home Improvement Contracts will not be delivered to the Trustee (or a
custodian), but will be retained by the Master Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will not be recorded, unless otherwise provided in the related Prospectus
Supplement.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name of
the Trustee for the benefit of the Securityholders. Unless otherwise provided in
the related Prospectus Supplement, the related Agreement will require that
either the Depositor or the Trustee promptly cause any MBS and Government
Securities in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters: (i) the accuracy of the information set forth for
such Whole Loan on the schedule of Assets appearing as an exhibit to the related
Agreement; (ii) the existence of title insurance insuring the lien priority of
the Whole Loan; (iii) the authority of the Warranting Party to sell the Whole
Loan; (iv) the payment status of the Whole Loan; (v) in the case of a Whole
Loan, the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Whole Loan or the interests therein of
the Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Whole
Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor. As
to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Rate from
the date as to which interest was last paid to the due date in the Due Period in
which the relevant
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purchase is to occur, plus certain servicing expenses that are reimbursable to
the Master Servicer. If so provided in the Prospectus Supplement for a series, a
Warranting Party, rather than repurchase a Whole Loan as to which a breach has
occurred, will have the option, within a specified period after initial issuance
of such series of Certificates, to cause the removal of such Whole Loan from the
Trust Fund and substitute in its place one or more other Whole Loans in
accordance with the standards described in the related Prospectus Supplement. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan as to which a breach has
occurred, will have the option to reimburse the Trust Fund or the
Securityholders for any losses caused by such breach. Unless otherwise specified
in the related Prospectus Supplement, this reimbursement, repurchase or
substitution obligation will constitute the sole remedy available to holders of
Securities or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See "Events of Default" and "Rights Upon Event of
Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and, if so
specified in the related Prospectus Supplement, the uninsured deposits in which
are otherwise secured such that the Trustee have a claim with respect to the
funds in the Collection Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Collection Account is maintained or (ii) otherwise maintained with a bank or
trust company, and in a manner, satisfactory to the Rating Agency or Agencies
rating any class of Securities of such series. The collateral eligible to secure
amounts in the Collection Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
("Permitted Investments"). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
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Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust
Fund (to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and Mortgage
Note) (collectively, "Insurance Proceeds") and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans
in the Trust Fund, by foreclosure or otherwise ("Liquidation Proceeds"),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of
Assets; Repurchases" and "Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Whole Loans," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans in the Trust Fund
as described under "Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or prepayment
premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
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Withdrawals
A Master Servicer or the Trustee may, from time to time, unless otherwise
specified in the related Prospectus Supplement or the related Agreement, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Whole Loans and properties, and net
income collected on the particular properties, with respect to which such
fees were earned or such expenses were incurred or out of amounts drawn
under any form of Credit Support with respect to such Whole Loans and
properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause
(iii) above which, in the Master Servicer's good faith judgment, will not
be recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the related Agreement and
described in the related Prospectus Supplement, just from that portion of
amounts collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under "Material Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
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(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "Assignment of Assets; Repurchase" and
"Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans and
held for its own account, provided such procedures are consistent with (i) the
terms of the related Agreement and any related hazard insurance policy or
instrument of Credit Support, if any, included in the related Trust Fund
described herein or under "Description of Credit Support," (ii) applicable law
and (iii) the general servicing standard specified in the related Prospectus
Supplement or, if no such standard is so specified, its normal servicing
practices (in either case, the "Servicing Standard"). In connection therewith,
the Master Servicer will be permitted in its discretion to waive any late
payment charge or penalty interest in respect of a late payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See "Description of Credit Support."
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The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or (ii) in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and (ii)
in its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such Master
Servicer will remain obligated under the related Agreement. Each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must be consistent with the terms of the related Agreement and must
provide that, if for any reason the Master Servicer for the related series of
Securities is no longer acting in such capacity, the Trustee or any successor
Master Servicer may assume the Master Servicer's rights and obligations under
such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under an
Agreement. See "Retained Interest; Servicing Compensation and Payment of
Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Master Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation through foreclosure, repossession or
similar proceedings. The related Agreement will provide that any such offering
be made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
"Representations and Warranties; Repurchases" will in all cases be deemed fair.
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The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within three years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to three
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Master Servicer will
be entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Whole Loan, prior to the
distribution of such Liquidation Proceeds to Securityholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if
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any Mortgage permits the holder thereof to dictate to the mortgagor the
insurance coverage to be maintained on the related Mortgaged Property, then such
coverage as is consistent with the Servicing Standard. Unless otherwise
specified in the related Prospectus Supplement, such coverage will be in general
in an amount equal to the lesser of the principal balance owing on such Whole
Loan and the amount necessary to fully compensate for any damage or loss to the
improvements on the Mortgaged Property on a replacement cost basis, but in
either case not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy. The ability of the
Master Servicer to assure that hazard insurance proceeds are appropriately
applied may be dependent upon its being named as an additional insured under any
hazard insurance policy and under any other insurance policy referred to below,
or upon the extent to which information in this regard is furnished by
mortgagors. All amounts collected by the Master Servicer under any such policy
(except for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the mortgagor in accordance with the Master Servicer's
normal servicing procedures, subject to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the Collection Account. The
Agreement will provide that the Master Servicer may satisfy its obligation to
cause each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
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FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
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EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ("FHLMC") or such other audit or attestation program used
by the Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other audit or attestation program requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC or such other audit or attestation program used by
such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans under each Agreement will be named in the related Prospectus Supplement.
The entity serving as Master Servicer (or as such servicer) may be an affiliate
of the Depositor and may have other normal business relationships with the
Depositor or the Depositor's affiliates. Reference herein to the Master Servicer
shall be deemed to be to the servicer of substantially all of the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or
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otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an enforcement
action in respect of any specific Whole Loan or Whole Loans (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the related
Agreement. In addition, each Agreement will provide that neither any Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement, Events of
Default under the related Agreement will include (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee or Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the Agreement
which continues unremedied for thirty days (or such other period specified in
the related Prospectus Supplement) after written notice of such failure has been
given to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Securities evidencing
not less than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Master Servicer under the Agreement which materially and
adversely affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in the related
Prospectus Supplement) after written notice of such breach has been given to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights; and (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to shorten cure periods or eliminate notice requirements)
will be specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the Trustee shall, not later
than the later of 60 days after the occurrence of any event which constitutes
or, with notice or lapse of time or both, would constitute an Event of Default
and five days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless such
default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
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responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
Unless otherwise specified in the related Prospectus Supplement, in the event
that the Trustee is unwilling or unable so to act, it may or, at the written
request of the holders of Securities entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the Rating Agency
with a net worth at the time of such appointment of at least $15,000,000 (or
such other amount specified in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 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 (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
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result in the imposition of a tax on the related Trust Fund or cause the related
Trust Fund to fail to qualify as a REMIC at any time that the related Securities
are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master
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Servicer, if any. Holders of the Securities of any series entitled to at least
51% (or such other percentage specified in the related Prospectus Supplement) of
the Voting Rights for such series may at any time remove the Trustee without
cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any principal
of or interest on any Note of such series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a majority in aggregate outstanding amount of the Notes of such
series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the holders of 100% (or such
other percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the holders of 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.
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Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with respect
to a series of Notes (except with respect to certain continuing rights specified
in the Indenture) upon the delivery to the Indenture Trustee for cancellation of
all the Notes of such series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series
of Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities the Credit Support will not provide protection against all risks
of loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities,
(ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement. See "Risk Factors--Credit Support
Limitations--Risk That Credit Support Will Not Cover All Losses."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Assets prior to
distributions on Subordinate Securities evidencing interests in a different
group of Assets within the Trust Fund. The Prospectus Supplement for a series
that includes a cross-support provision will describe the manner and conditions
for applying such provisions.
INSURANCE OR GUARANTEES
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans in the related Trust Fund will be covered for various default risks
by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit,
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the L/C Bank will be obligated to honor draws thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, generally equal to a
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Assets on the related Cut-off Date or of the initial
aggregate Security Balance of one or more classes of Securities. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws in
the event of only certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of the
date specified in the related Prospectus Supplement or the termination of the
Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
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FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by
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paying the entire actual amount in arrears (without acceleration) plus the
expenses incurred in enforcing the obligation. In other states, the mortgagor or
the junior lienholder is not provided a period to reinstate the loan, but has
only the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a deed
of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the deed
to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be
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distinguished from the post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
mortgagor and foreclosed junior lienors are given a statutory period in which to
redeem the property from the foreclosure sale. In some states, statutory
redemption may occur only upon payment of the foreclosure sale price. In other
states, redemption may be authorized if the former mortgagor pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser from a foreclosure
sale or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds
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remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based
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on the particular facts of the reorganization case, that effected the curing of
a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
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The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting
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the mortgagor to cancel the recorded mortgage or deed of trust without any
payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Securities applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Securities.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any state thereof or the District of Columbia
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), an estate whose income is subject to U.S.
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision of the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. Persons
as well.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will be
treated as a grantor trust, then Brown & Wood LLP will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two
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percent of its adjusted gross income. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount and (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. A Grantor Trust
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Grantor Trust Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is earlier. If the
servicing fees paid to the Master Servicer are deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as an
ownership interest retained by the Master Servicer (or any person to whom the
Master Servicer assigned for value all or a portion of the servicing fees) in a
portion of the interest payments on the Mortgage Assets. The Mortgage Assets
would then be subject to the "coupon stripping" rules of the Code discussed
below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Code
Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), to the extent that the
Mortgage Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . . which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of Government
Securities which constitute "stripped bonds" or "stripped coupons" as those
terms are defined in section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having OID based on the purchase price
and the stated redemption price at maturity of each Security. As such, Grantor
Trust Certificateholders would be required to include in income their pro rata
share of the OID on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the Grantor
Trust Certificateholder in any taxable year may exceed amounts actually received
during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
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undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Certificates. Absent further guidance from
the IRS, the Trustee intends to account for amortizable bond premium in the
manner described above. Prospective Certificateholders should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
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The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including
de minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is
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created with two classes of Grantor Trust Certificates, one class of Grantor
Trust Certificates may represent the right to principal and interest, or
principal only, on all or a portion of the Mortgage Assets (the "Stripped Bond
Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See "--Non-REMIC Certificates" and "Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID
de minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable servicing
fees) is stripped off of the Trust Fund's Mortgage Assets. Pursuant to Revenue
Procedure 91-49, issued on August 8, 1991, purchasers of Stripped Bond
Certificates using an inconsistent method of accounting must change their method
of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return filed
after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
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residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest income attributable to Grantor Trust
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the underlying Mortgage Assets and interest on such
Mortgage Assets qualify for such treatment. Prospective purchasers to which such
characterization of an investment in Certificates is material should consult
their own tax advisors regarding the characterization of the Grantor Trust
Certificates and the income therefrom. Grantor Trust Certificates will be
"obligation[s] . . . which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans
The OID rules of Code Sections 1271 through 1275 will be applicable to a
Certificateholder's interest in those Mortgage Assets as to which the conditions
for the application of those sections are met. Rules regarding periodic
inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage Assets.
OID on each Grantor Trust Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest, in
advance of receipt of the cash attributable to such income. The amount of OID
required to be included in an owner's income in any taxable year with respect to
a Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to
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prepayment, and, until further guidance is issued, the Master Servicer intends
to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to an appropriate allocation under any reasonable method.
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.
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C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(generally more than one year). Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations.
Prospective investors should consult their own tax advisors concerning the
treatment of capital gains.
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust Certificateholder holding on behalf of an owner that is not a U.S. Person
will be subject to federal income tax, collected by withholding, at a rate of
30% or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust Certificate evidences ownership in Mortgage Assets issued
after July 18, 1984, by natural persons if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder). Additional restrictions apply to Mortgage Assets of where
the mortgagor is not a natural person in order to qualify for the exemption from
withholding.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) such Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c). The
Small Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code Section
593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in "--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates" above. REMIC Certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(4)(A), and REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
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A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code; (ii) "loans secured by
an interest in real property" under Section 7701(a)(19)(C) of the Code; and
(iii) whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a REMIC Regular Certificate and its
"issue price." Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue
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price of a REMIC Regular Certificate is the first price at which a substantial
amount of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the "Closing Date"),
the issue price for such class will be treated as the fair market value of such
class on the Closing Date. The issue price of a REMIC Regular Certificate also
includes the amount paid by an initial Certificateholder for accrued interest
that relates to a period prior to the issue date of the REMIC Regular
Certificate. The stated redemption price at maturity of a REMIC Regular
Certificate includes the original principal amount of the REMIC Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not
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applicable to instruments governed by Code Section 1272(a)(6), they represent
the only guidance regarding the current views of the IRS with respect to
contingent payment instruments. In the alternative, the IRS could assert that
the stated redemption price at maturity of such REMIC Regular Certificates
should be limited to their principal amount (subject to the discussion below
under "--Accrued Interest Certificates"), so that such REMIC Regular
Certificates would be considered for federal income tax purposes to be issued at
a premium. If such a position were to prevail, the rules described below under
"--Taxation of Owners of REMIC Regular Certificates--Premium" would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a Super-Premium
Certificate. It is possible that a holder of a Super-Premium Certificate may
only claim a loss when its remaining basis exceeds the maximum amount of future
payments, assuming no further prepayments or when the final payment is received
with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates--Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the "daily portions," as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period ("an accrual period") that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificates as calculated under
the Prepayment Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments
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included in the stated redemption price at maturity, and the denominator of
which is the sum of the daily portions for that REMIC Regular Certificate for
all days beginning on the date after the purchase date and ending on the
maturity date computed under the Prepayment Assumption. A holder who pays an
acquisition premium instead may elect to accrue OID by treating the purchase as
a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments, and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including
de minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election 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
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corresponding principal payment is made. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. For purposes of calculating market discount
under any of the above methods in the case of instruments (such as the REMIC
Regular Certificates) that provide for payments that may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Certificate purchased with market discount. For these purposes, the
de minimis rule referred to above applies. Any such deferred interest expense
would not exceed the market discount that accrues during such taxable year and
is, in general, allowed as a deduction not later than the year in which such
market discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On 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.
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Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in "--REMIC Regular Certificates--Treatment of Realized
Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "--Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. 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
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information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC may
not have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a "single-class REMIC," a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Taxation of Owners of REMIC Residual
Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled
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foreign corporation (within the meaning of Code Section 957) related to the
Issuer; and (iii) such REMIC Regular Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
REMIC Regular Certificateholder under penalties of perjury, certifying that such
REMIC Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest to
such holder, including distributions in respect of accrued OID, may be subject
to a 30% withholding tax, subject to reduction under any applicable tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income
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and cash distributions (that is, "phantom income"). This mismatching may be
caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Assets and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a REMIC
Residual Certificate to a REMIC Residual Certificateholder. Investors should
consult their own tax advisors concerning the federal income tax treatment of a
REMIC Residual Certificate and the impact of such tax treatment on the after-tax
yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See "--Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized losses
to the REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and original issue discount expense on the REMIC Regular Certificates, servicing
fees on the Mortgage Loans, other administrative expenses of the REMIC and
realized losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC will continue until there are no Certificates of any class of the
related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
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The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See "--Sale or Exchange of REMIC Residual
Certificates" below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see "--Allocation of the Income of
the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. A Residual Certificate acquired after January 3,
1995 cannot be marked to market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a "single class REMIC," however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate
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investment trusts. REMIC Residual Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as "unrelated business taxable income" within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see "--Tax-Exempt Investors" below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below. An
exception to the excess inclusion rules that applied to thrifts holding certain
residuals was repealed by the Small Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the "daily accruals" (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters, and decreased
(but not below zero) by the aggregate amount of payments made on the REMIC
Residual Certificate before the beginning of such quarter. The "federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
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Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the "Contributions Tax"). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Asset Seller,
as the case may be, out of its own funds or (ii) the Asset Seller's obligation
to repurchase a Mortgage Loan, such tax will be borne by the Asset Seller. In
the event that such Master Servicer, Trustee or Asset Seller, as the case may
be, fails to pay or is not required to pay any such tax as provided above, such
tax will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
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E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons"
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as "portfolio interest," subject to the conditions
described in "--Taxation of Owners of REMIC Regular Certificates" above, but
only to the extent that the underlying mortgage loans were originated after
July 18, 1984. Furthermore, the rate of withholding on any income on a REMIC
Residual Certificate that is excess inclusion income will not be subject to
reduction under any applicable tax treaties. See "--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the REMIC Residual
Certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or
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other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be relieved
of liability for the tax if the transferee furnished to such person an affidavit
that the transferee is not a disqualified organization and, at the time of the
transfer, such person does not have actual knowledge that the affidavit is
false. A "disqualified organization" means (A) the United States, any State,
possession or political subdivision thereof, any foreign government, any
international organization or any agency or instrumentality of any of the
foregoing (provided that such term does not include an instrumentality if all
its activities are subject to tax and, except for FHLMC, a majority of its board
of directors is not selected by any such governmental agency), (B) any
organization (other than certain farmers' cooperatives) generally exempt from
federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under the Taxpayer Relief
Act of 1997, large partnerships (generally with 250 or more partners) will be
taxable on excess inclusion income as if all partners were disqualified
organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a "U.S. Person," as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the
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owner of the REMIC Residual Certificate and would continue to be subject to tax
on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess inclusion,
and that such amounts will be distributed at or after the time the excess
inclusion accrues and not later than the end of the calendar year following the
year of accrual. If the non-U.S. Person transfers the REMIC Residual Certificate
to a U.S. Person, the transfer will be disregarded, and the foreign transferor
will continue to be treated as the owner, if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions. The
provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed IRS Form 4224 and the Trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a pass-
through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a
de minimis amount (i.e., 1/4% of their principal amount multiplied by the number
of full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must
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include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations. Prospective investors should consult their own tax advisors
concerning the treatment of capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Asset Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund would likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to
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the Company. Based on the economic arrangement of the parties, this approach for
allocating Trust Fund income should be permissible under applicable treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, even
under the foregoing method of allocation, Certificateholders may be allocated
income equal to the entire Pass-Through Rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Certificates on the accrual basis and
Certificateholders may become liable for taxes on Trust Fund income even if they
have not received cash from the Trust Fund to pay such taxes. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. Pursuant to formal Treasury regulations issued May 8, 1997
under section 708 of the Code, if such a termination occurs, the Trust Fund (the
"old partnership") would be deemed to contribute its assets to a new partnership
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give
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rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders,
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and, under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates will
be treated as indebtedness for federal income tax purposes, then based on the
application of existing law to the facts as set forth in the Trust Agreement and
other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ("Tax Counsel"), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related Trust
Agreement their intent that, for applicable tax purposes, the Certificates will
be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the
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transaction, the Depositor may treat this transaction as a sale of an interest
in the related Assets for financial accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as "unconditionally payable" under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be treated
as indebtedness in the hands of the Certificateholders for U.S. federal income
tax purposes and that the entity constituted by the Trust will not be a publicly
traded partnership treated as a corporation or an association taxable as a
corporation, the Depositor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
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D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
portion of an entity) that is a "taxable mortgage pool" will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that all
of the provisions of the Trust Agreement, as in effect on the date of issuance,
will be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Trust Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United sates and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide,
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under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not to subject to backup withholding. Should a non-exempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
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A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates
- --Variable Rate REMIC Regulation Certificate.
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Material Federal Income Tax Consequences--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" "--Original Issue Discount and Premium" and "--Market
Discount" and "--Premium" above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct the
loss sustained (or alternatively be able to report a lesser amount of income).
See "Material Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Regular Certificates", "--Effects of Default and Delinquencies" and
"--Treatment of Realized Losses."
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FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Material Federal Income Tax Consequences--REMICs." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular Federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "Material Federal Income Tax Consequences--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
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The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans subject to ERISA
("Plans") and on persons who are parties in interest or disqualified persons
("parties in interest") with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under
Section 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to Section 502(i) of ERISA) on parties in interest which
engage in non-exempt prohibited transactions.
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The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master Servicer,
the Trustee, any insurer of the Assets and other persons, in providing services
with respect to the assets of the Trust Fund, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own at
least 25% of the value of any class of equity interest. "Benefit plan investors"
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interest" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Credit Rating Co., Fitch IBCA,
Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
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<PAGE>
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Asset Seller pursuant to the sale
of the Assets to the Trust Fund represents not more than the fair market
value of such Assets; the sum of all payments made to and retained by the
Master Servicer represent not more than reasonable compensation for the
Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ("PTCE 83-1") for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not applicable to
manufactured housing contract pool investment trusts or multifamily mortgage
pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider the exemptive relief granted by Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law,
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<PAGE>
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Maryland, Michigan, Missouri, Nebraska, New
Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and West
Virginia enacted legislation before the October 4, 1991 cutoff established by
SMMEA for such enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in mortgage related
securities, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. Investors affected by such legislation
will be authorized to invest in SMMEA Certificates only to the extent provided
in such legislation. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement") setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions
100
<PAGE>
subject to insurance regulatory authorities may be subject to restrictions on
investment similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch or
any other Underwriter in connection with offers and sales related to market
making transactions.
101
<PAGE>
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood LLP, New York, New York. Certain matters with respect to Delaware law
will be passed upon for the Depositor by Richards, Layton & Finger, P.A.,
Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, securityholders might suffer a lower than anticipated yield, and,
in addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
<S> <C>
1986 Act..................................................................................... 70, 74
Accrual Securities........................................................................... 9, 27
Accrued Security Interest.................................................................... 29
adjusted issue price......................................................................... 71, 83
Agreement.................................................................................... 36
Agreements................................................................................... 9
Amortizable Bond Premium Regulations......................................................... 67
an accrual period............................................................................ 76
Applicable Amount............................................................................ 83
ARM Loans.................................................................................... 20, 70
Asset Seller................................................................................. 19
Assets....................................................................................... 1, 6, 18
Available Distribution Amount................................................................ 28
Balloon Mortgage Loans....................................................................... 17
benefit plan investors....................................................................... 100
Book-Entry Securities........................................................................ 28
Buydown Mortgage Loans....................................................................... 26
Buydown Period............................................................................... 26
capital asset................................................................................ 72, 79
Cash Flow Agreement.......................................................................... 8, 22
Cash Flow Agreements......................................................................... 1
Cede......................................................................................... 3, 33
CEDEL........................................................................................ 34
CEDEL Participants........................................................................... 34
Certificateholder............................................................................ 95
Certificates................................................................................. 1, 6, 101
clearing agency.............................................................................. 33
clearing corporation......................................................................... 33, 38
Closing Date................................................................................. 74
Code......................................................................................... 11
Collection Account........................................................................... 40
Commission................................................................................... 3
Contributions Tax............................................................................ 84
Cooperative.................................................................................. 35, 56
Cooperative Loans............................................................................ 56
Cooperatives................................................................................. 19
Covered Trust................................................................................ 16, 53
CPR.......................................................................................... 25
Credit Support............................................................................... 1, 8, 22
Crime Control Act............................................................................ 64
Cut-off Date................................................................................. 10
daily accruals............................................................................... 83
Daily portions............................................................................... 71, 75
Deferred Interest............................................................................ 71
Definitive Securities........................................................................ 28, 36
Depositor.................................................................................... 6, 19
Determination Date........................................................................... 28
disqualified organization.................................................................... 86
Distribution Date............................................................................ 10
DTC.......................................................................................... 3, 33
Due Period................................................................................... 28
Eligible Corporations........................................................................ 97
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
<S> <C>
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
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
<S> <C>
Notes........................................................................................ 1, 6
Offered Securities........................................................................... 1
OID.......................................................................................... 65, 67
OID Regulations.............................................................................. 67
Old partnership.............................................................................. 91
Originator................................................................................... 19
OTS.......................................................................................... 102
Ownership interests.......................................................................... 96
Participants................................................................................. 33, 35
Parties in interest.......................................................................... 99
pass-through entity.......................................................................... 86
pass-through interest holder................................................................. 83
pass-through interest holders................................................................ 80
Pass-Through Rate............................................................................ 9, 29
passive losses............................................................................... 81
Payment Lag Certificates..................................................................... 79
Permitted Investments........................................................................ 40
phantom income............................................................................... 81
plan assets.................................................................................. 101
Plans........................................................................................ 99
Policy Statement............................................................................. 102
Pooling and Servicing Agreement.............................................................. 36
portfolio income............................................................................. 81
portfolio interest........................................................................... 85, 89, 93
Pre-Funded Amount............................................................................ 8, 22
pre-issuance accrued interest................................................................ 79
prepayment................................................................................... 24
Prepayment Assumption........................................................................ 70
Prohibited Transactions...................................................................... 84, 99
Prohibited Transactions Tax.................................................................. 84
PTCE 83-1.................................................................................... 101
Purchase Price............................................................................... 39
qualified mortgage........................................................................... 73
qualified stated interest.................................................................... 74, 88
Rating Agency................................................................................ 13
real estate assets........................................................................... 11, 69, 73, 74, 98
Record Date.................................................................................. 28
Refinance Loans.............................................................................. 19
Regular interests............................................................................ 11, 96
Related Proceeds............................................................................. 31
Relief Act................................................................................... 64
REMIC........................................................................................ 11
REMIC Certificates........................................................................... 73
REMIC Regular Certificateholders............................................................. 74
REMIC Regular Certificates................................................................... 11, 73
REMIC Regulations............................................................................ 65
REMIC Residual Certificateholder............................................................. 80
REMIC Residual Certificates.................................................................. 11, 73
Restricted Group............................................................................. 101
Retained Interest............................................................................ 47
RICO......................................................................................... 64
Securities................................................................................... 1, 6
Securities Act............................................................................... 3
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- --------------------------------------------------------------------------------------------- ------------------
<S> <C>
Security..................................................................................... 37
Security Balance............................................................................. 9, 30
Security Owners.............................................................................. 34
Securityholder............................................................................... 34
Securityholders.............................................................................. 3, 18
senior lien.................................................................................. 16
Senior Securities............................................................................ 9, 27
Servicing Agreement.......................................................................... 36
Servicing Standard........................................................................... 43
Short-Term Note.............................................................................. 88
Single Family Mortgage Loan.................................................................. 19
Single Family Properties..................................................................... 6
Single Family Property....................................................................... 19
single family residences..................................................................... 73
single-class REMIC........................................................................... 80
SMMEA........................................................................................ 13, 101
SMMEA Securities............................................................................. 101
SPA.......................................................................................... 25
Stripped ARM Obligations..................................................................... 71
Stripped Bond Certificates................................................................... 68
stripped bonds............................................................................... 66, 68
Stripped Coupon Certificates................................................................. 68
stripped coupons............................................................................. 66, 68
Stripped Interest Securities................................................................. 9, 27
Stripped Principal Securities................................................................ 9, 27
Sub-Servicer................................................................................. 43
Sub-Servicing Agreement...................................................................... 43
Subordinate Securities....................................................................... 9, 27
Subsequent Assets............................................................................ 8, 22
Subsidiary REMIC............................................................................. 73
Super-Premium Certificates................................................................... 75
tax avoidance potential...................................................................... 87
Tax Counsel.................................................................................. 93
taxable mortgage pool........................................................................ 84, 94
Terms and Conditions......................................................................... 35
Title V...................................................................................... 63
Title VIII................................................................................... 64
Trust Agreement.............................................................................. 36
Trust Assets................................................................................. 3
Trust Fund................................................................................... 1, 6
Trustee...................................................................................... 6
U.S. Person.................................................................................. 65, 87
UCC.......................................................................................... 33
Underlying MBS............................................................................... 19
Underlying Mortgage Loans.................................................................... 19
Value........................................................................................ 19
Voting Rights................................................................................ 49
Warranting Party............................................................................. 38
Whole Loans.................................................................................. 19
</TABLE>
106
<PAGE>
$299,682,000
(APPROXIMATE)
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES,
SERIES 1999-CB2
CREDIT-BASED ASSET SERVICING AND
SECURITIZATION LLC
SELLER
LITTON LOAN SERVICING LP
SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO. FIRST UNION CAPITAL MARKETS CORP.
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-CB2 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-CB2 and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 1999-CB2 will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
May 27, 1999
