PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 23, 1999)
$210,460,231
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-2
CENDANT MORTGAGE CORPORATION
ORIGINATOR AND MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
<TABLE>
<CAPTION>
Class Initial Certificate Balance(1) Pass-Through Rate
- ------------------------------ ------------------------------------ -------------------------------------
<S> <C> <C>
A-1 $ 102,000,000 6.50%
A-2 $ 13,806,808 6.50%
A-3 $ 20,227,768 6.50%
A-4 $ 54,786,000 6.50%
A-5 $ 11,457,000 6.50%
A-IO $ (2) (3)
A-PO $ 965,563 (4)
R $ 100 6.50%
M $ 4,457,554 6.50%
B-1 $ 1,910,380 6.50%
B-2 $ 849,058 6.50%
Total $ 210,460,231
</TABLE>
(1) Plus or minus 5%.
(2) Notional Amount. No principal will be paid on the Class A-IO
Certificates.
(3) The Class A-IO will accrue interest at the variable rate described in
this Prospectus Supplement. The rate for the first interest accrual
period will be approximately 0.433609%.
(4) No interest will accrue on the principal balance of the Class A-PO
Certificates.
You should consider carefully the risk factors beginning on page S-6 in this
prospectus supplement and page 13 in the prospectus.
OFFERED CERTIFICATES
o The offered certificates represent ownership interests in a trust
consisting primarily of a pool of first lien residential fixed-rate
mortgage loans.
o The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-IO,
Class A-PO and Class R Certificates will be senior certificates.
o Except for the Class A-PO and Class A-IO Certificates, all certificates
will accrue interest at the fixed rate set forth above, subject to
certain limitations described in this prospectus supplement.
o Only the eleven classes of certificates identified above are being
offered by this prospectus supplement and the accompanying prospectus.
CREDIT ENHANCEMENT
o Subordination--The Class M, Class B-1 and Class B-2 Certificates are
subordinate to and provide credit enhancement for the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-IO and Class A-PO
Certificates.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated will offer to the public the
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-IO, Class A-PO,
Class M, Class B-1, Class B-2 and Class R Certificates at varying prices to be
determined at the time of sale. Merrill Lynch, Pierce, Fenner & Smith
Incorporated's commission will be the difference between the price it pays to
the depositor for such underwritten certificates and the amount it receives from
the sale of such underwritten certificates to the public. The proceeds to the
depositor from the sale of such underwritten
<PAGE>
certificates to Merrill Lynch, Pierce, Fenner & Smith Incorporated will be
approximately 99.90% of the principal balance of such underwritten certificates
plus accrued interest, before deducting expenses.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------------
MERRILL LYNCH & CO.
April 26, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................S-1
RISK FACTORS.................................................................S-6
THE MORTGAGE POOL...........................................................S-10
THE ORIGINATOR AND MASTER SERVICER..........................................S-17
THE POOLING AND SERVICING AGREEMENT.........................................S-19
DESCRIPTION OF THE CERTIFICATES.............................................S-24
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS...............................S-36
USE OF PROCEEDS.............................................................S-46
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................S-46
STATE TAXES.................................................................S-48
ERISA CONSIDERATIONS........................................................S-48
LEGAL INVESTMENT CONSIDERATIONS.............................................S-50
METHOD OF DISTRIBUTION......................................................S-50
LEGAL MATTERS...............................................................S-51
RATINGS ...................................................................S-51
INDEX OF PRINCIPAL DEFINITIONS..............................................S-53
i
<PAGE>
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-53 in this Prospectus Supplement and under the
caption "Index of Principal Definitions" beginning on page 103 in the
accompanying Prospectus.
---------------------
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that may be
important to you. You should read the entire Prospectus and Prospectus
Supplement carefully before you decide to purchase a Certificate. If capitalized
terms are not defined in this Summary, they are defined elsewhere in the
Prospectus Supplement or in the Prospectus.
Title of Series................Merrill Lynch Mortgage Investors, Inc., Mortgage
Pass-Through Certificates, Series 1999-2.
The Certificates...............The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-IO, Class A-PO, Class M, Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5
and Class R Certificates are the entire ownership
interest in a trust fund which is composed of
first lien mortgage loans. The trust will issue
the certificates pursuant to a Pooling and
Servicing Agreement among Merrill Lynch Mortgage
Investors, Inc., as depositor, Cendant Mortgage
Corporation, as Master Servicer and Norwest Bank
Minnesota, National Association, as trustee.
Merrill Lynch Mortgage Investors, Inc. is
offering to sell all of the Certificates except
for the Class B-3, Class B-4 and Class B-5,
Certificates. The trust is offering the Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class M, Class B-1 and Class B-2 as book-entry
securities clearing through DTC (in the United
States) or Cedelbank or Euroclear (in Europe).
See "Description of the Certificates - Book-Entry
Registration and Definitive Certificates" in this
Prospectus Supplement.
Depositor of Mortgage Loans....Merrill Lynch Mortgage Investors, Inc. will
deposit the mortgage loans in the trust fund. The
Depositor is a Delaware corporation and a
wholly-owned, limited purpose subsidiary of
Merrill Lynch Mortgage Capital Inc., which is a
wholly owned indirect subsidiary of Merrill Lynch
& Co., Inc. The Depositor is an affiliate of the
Underwriter.
Originator and Master
Servicer.....................The Mortgage Loans were sold either directly or
indirectly to the Depositor by Cendant Mortgage
Corporation. The Mortgage Loans were originated
or acquired generally in accordance with the
underwriting standards described in "The Mortgage
Pool - Underwriting Standards" herein. Cendant
Mortgage Corporation in its capacity as Master
Servicer will service the mortgage loans. The
Master 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.
Trustee........................Norwest Bank Minnesota, National Association, a
national banking association.
Cut-off Date...................April 1, 1999.
Closing Date...................On or about April 29, 1999.
S-1
<PAGE>
Final Scheduled Distribution
Dates........................The Final Scheduled Distribution Date for each
Class of offered Certificates is set forth below:
Final Scheduled
Class Distribution-Date
----- -----------------
Class A-1 May 1, 2030
Class A-2 May 1, 2030
Class A-3 May 1, 2030
Class A-4 May 1, 2030
Class A-5 May 1, 2030
Class A-IO May 1, 2030
Class A-PO May 1, 2030
Class R May 1, 2030
Class M May 1, 2030
Class B-1 May 1, 2030
Class B-2 May 1, 2030
--------------------------------------
Each such Final Scheduled Distribution Date has
been calculated as described under "Yield
Prepayment and Maturity Considerations -- Final
Scheduled Distribution Date" in this Prospectus
Supplement. It is expected that the actual final
distribution date for each class of offered
Certificates will occur earlier than set forth
above.
The Mortgage Pool..............The Mortgage Pool will consist of fixed-rate
mortgage loans with the following characteristics
(percentages are based on the aggregate principal
balance as of April 1, 1999):
Loan count 656
Aggregate Current Principal Balance $212,264,480
Average Current Principal Balance $323,574
$39,522.74 to
Range of Current Principal Balances 1,000,000.00
Average Original Principal Balance $323,772
Range of Original Principal $40,000.00 to
Balances $1,000,000.00
Weighted Average Interest Rate 7.046%
Minimum Interest Rate 6.000%
Maximum Interest Rate 8.250%
Weighted Average Original Term 357 months
Weighted Average Remaining Term 357 months
S-2
<PAGE>
Weighted Average Loan-to-Value Ratio 78.07%
Max ZIP Code Concentration (%) 1.17%
Max ZIP Code Concentration (ZIP) 92677
Geographic concentration in excess
of 5%:
California 39.10%
New Jersey 9.83%
New York 6.03%
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 May 25, 1999.
Distributions will generally include payments
made on the mortgage loans during the related
collection period. The collection period for each
distribution date will be from the second day of
the month prior to the month of such distribution
date to the first day of the month of 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 were entitled
to previously but which you did not receive. The
accrual period for all Certificates is the month
immediately preceding the calendar month in which
such distribution date occurs. Interest will be
calculated for all certificates on the basis of a
360-day year consisting of twelve 30-day months.
There are certain circumstances which could
reduce the amount of interest paid to you. See
"Description of the Certificates - Interest
Distributions on the Certificates" in this
Prospectus Supplement.
Pass-Through Rates.............The pass-through rate with respect to the offered
certificates, other than the Class A-IO
Certificates and Class A-PO Certificates, will be
6.50% per annum, subject to the limitations
described under "Description of the Certificates
- Pass-Through Rates" in this Prospectus
Supplement. The pass-through rate with respect to
the Class A-IO Certificates will be equal to the
excess of the (a) the weighted average of the net
mortgage interest rates of each mortgage loan
with a net mortgage interest rate greater than
6.50% over (b) 6.50%. The pass- through rate for
the Class A-IO Certificates' first interest
accrual period will be approximately 0.433609%
per annum. The Class A-PO Certificates are not
entitled to distributions of interest.
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 enhancement reduces the harm caused to
holders of Certificates by shortfalls in payments
received on the mortgage loans. Credit
enhancement can reduce the effect of losses and
shortfalls on all classes, or, can allocate
losses and shortfalls so they affect some classes
before others. This transaction employs the
following two forms of credit enhancement. See
"Description of the Certificates" in this
Prospectus Supplement.
S-3
<PAGE>
SUBORDINATION. On each distribution date, classes
that are lower in order of payment priority will
not receive payments until the classes that are
higher in order of payment priority have been
paid. If there is not enough money on a
distribution date to pay all classes, the
subordinate classes are the first to forego
payment.
APPLICATION OF REALIZED LOSSES. If, on any
distribution date after the balances of the
certificates have been reduced by the amount of
cash paid on that date, the total principal
balance of the certificates is greater than the
total principal balance of the mortgage loans,
the principal balance of the Certificates then
outstanding with the lowest payment priority will
be reduced by the amount of such excess.
Optional Termination...........The Master Servicer has the option to purchase
all the mortgage loans and any properties that
the trustee acquired in satisfaction of any of
the mortgage loans. This option can be exercised
when the total principal balance of the mortgage
loans, including the mortgage loans related to
the properties which the trustee has acquired, is
10% or less than the total principal balance of
the mortgage loans on the cut-off date. If the
option is exercised, your Certificate will be
retired early and you will be entitled to the
following amounts:
o the outstanding principal balance of your
Certificate; and
o one month's interest on such balance at the
Pass-through Rate for your class of
Certificates;
You will receive the last item only to the extent
that there is enough cash to make such payments.
See "Pooling and Servicing Agreement -
Termination" in this Prospectus Supplement.
Certain Federal Income Tax
Consequences.................An election will be made to treat the assets of
the trust fund as a real estate mortgage
investment conduit, or REMIC, for federal income
tax purposes.
For further information regarding the federal
income tax consequences of investing in the
offered Certificates, see "Certain Federal Income
Tax Consequences" in this Prospectus Supplement
and "Material Federal Income Tax Consequences" in
the Prospectus.
S-4
<PAGE>
Ratings........................The trust fund will not issue the Certificates
unless they receive the respective ratings set
forth below from Standard & Poor's Rating
Services, a division of The McGraw-Hill
Companies, Inc. and Fitch IBCA, Inc.:
Standard Fitch
Class &-Poor's IBCA
----- -------- ----
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
A-IO AAAr AAA
A-PO AAAr AAA
R AAA AAA
M -- AA
B-1 -- A
B-2 -- BBB
The rating on the Certificates indicates the
likelihood that you will receive all funds to
which you are entitled by the terms of the
Certificate. The rating agency that issues the
rating reviews the nature and credit quality of
the mortgage loans and the soundness of the
structure which the Depositor has created to
allow the payments on the mortgage loans to flow
to the holders of the Certificates. A rating is
not a recommendation to buy, sell or hold
securities and the rating agency can revise or
withdraw it at any time. A rating does not
address the frequency of prepayments on the
mortgage loans or the effect of such prepayments
on your yield. See "Yield" and "Ratings" in this
Prospectus Supplement and "Yield Considerations"
in the Prospectus.
Legal Investment...............You should consult with your legal advisor to see
if you are permitted to buy the offered
Certificates since the legal investment rules
vary depending on what kind of entity you are and
who regulates you. The Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-IO,
Class A-PO, Class R and Class M Certificates will
be "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of
1984. The Class B-1 Certificates and Class B-2
Certificates will NOT be "mortgage-related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984. See
"Legal Investment" in this Prospectus Supplement
and in the Prospectus.
ERISA Considerations...........If you are a fiduciary of any employee benefit
plan or other retirement arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended, or Section 4975 of the Internal
Revenue Code you should review carefully with
your lawyer whether you can buy or hold an
offered Certificate. See "ERISA Considerations"
in this Prospectus Supplement and in the
Prospectus.
S-5
<PAGE>
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.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT 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. Conversely, if prevailing interest rates rise significantly, the
prepayments on fixed-rate mortgage loans are likely to decrease.
o The Originator may be required to purchase mortgage loans from the
trust in the event certain breaches of representations and warranties
have not been cured. These purchases will also result in prepayment on
the Certificates.
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.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING OF PREPAYMENTS ON THE MORTGAGE
LOANS.
PARTICULAR RISKS ASSOCIATED WITH THE CLASS A-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 will result in a
corresponding reduction of the Notional Amount of the Class A-IO Certificates,
which will reduce the amount of interest payable on the Class A-IO. In addition,
the amount of interest payable on the Class A-IO Certificates will decrease more
significantly as a result of principal prepayments on Mortgage Loans with net
mortgage rates greater than 6.50%. Investors in the Class A-IO Certificates
should consider carefully the associated risks, including the risk that, under
certain circumstances, the investors in the Class A-IO Certificates will fail to
recover fully their initial investments.
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
Master 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.
S-6
<PAGE>
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses. The only credit
enhancement for the Senior Certificates will be the subordination provided by
the Subordinate Certificates. The only credit enhancement for the Subordinate
Certificates will be the subordination provided by any class of Subordinate
Certificates with a lower payment priority. Therefore, if the aggregate
principal balance of the Class B-5, Class B-4 and Class B-3 Certificates is
reduced to zero, subsequent losses will be allocated to the Class B-2, Class B-1
and Class M Certificates, in that order, in each case until the principal
balance of such class has been reduced to zero.
RISKS OF HOLDING SUBORDINATE CERTIFICATES
The protections afforded the Senior Certificates in this transaction
create risks for the Subordinate Certificates. Prior to any purchase of
Subordinate Certificates, consider the following factors that may adversely
impact your yield:
o Because the Subordinate Certificates receive interest and principal
distributions after the related Senior Certificates receive such
distributions, there is a greater likelihood that the Subordinate
Certificates will not receive the distributions to which they are
entitled on any Distribution Date.
o If the Master Servicer does not advance a delinquent payment because it
determines that 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 Losses resulting from the liquidation of defaulted mortgage loans will
be allocated to the Subordinate Certificates. A loss allocation results
in a reduction in a certificate balance without a corresponding
distribution of cash to the holder. A lower certificate balance will
result in less interest accruing on the certificate.
o The earlier in the transaction that a loss on a mortgage loan occurs,
the greater the impact on yield.
PLEASE REVIEW "DESCRIPTION OF THE CERTIFICATES" AND "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
INTEREST PAYMENTS MAY BE INSUFFICIENT
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 to the certificateholders on the next distribution date. The Master
Servicer is required to cover a portion of the shortfall in interest collections
that is attributable to prepayments in full, but only up to the Master
Servicer's servicing fee for the related accrual period. If the credit
enhancement is insufficient to cover this shortfall in excess of the Master
Servicer's 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 will not
be covered by the Master Servicer.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
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.
GEOGRAPHIC CONCENTRATION
The following chart lists the states with the highest concentrations of
mortgage loans based on the aggregate principal balance of the mortgage loans as
of the Cut-off Date.
S-7
<PAGE>
California 39.10%
New Jersey 9.83%
New York 6.03%
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact on the
mortgage loans in general:
o Economic conditions in states listed above which may or may not affect
real property values may affect the ability of borrowers to repay their
loans on time.
o Declines in the residential real estate markets in the states listed
above may reduce the values of properties located in those states,
which would result in an increase in the loan-to-value ratios.
o Any increase in the market value of properties located in the states
listed above would reduce the loan-to-value ratios and could,
therefore, make alternative sources of financing available to the
borrowers at lower interest rates, which could result in an increased
rate of prepayment of the mortgage loans.
YEAR 2000 SYSTEMS RISK COULD AFFECT THE ABILITY OF THE MASTER SERVICER OR THE
TRUSTEE TO PERFORM ITS RELATED DUTIES
As is the case with most companies using computers in their operations,
the Master Servicer and the Trustee are faced with the task of completing their
compliance goals in connection with the year 2000 issue. The year 2000 issue is
the result of prior computer programs being written using two digits, rather
than four digits, to define the applicable year. Any of the Master Servicer's or
the Trustee's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. Any such
occurrence could result in major computer system failure or miscalculations.
Each of the Master Servicer and the Trustee is presently engaged in various
procedures to ensure that its computer systems and software will be year 2000
compliant. However, in the event that either the Master Servicer or the Trustee,
or any of its related suppliers, customers, brokers or agents do not
successfully and timely achieve year 2000 compliance, the performance of the
obligations of the Master Servicer or the Trustee, as the case may be, under the
pooling and servicing agreement could be materially adversely affected.
RECENT DEVELOPMENTS REGARDING CENDANT CORPORATION, THE INDIRECT PARENT OF THE
MASTER SERVICER, COULD CAUSE A GREATER RISK OF LOSS WITH RESPECT TO THE MORTGAGE
LOANS
As described under "The Originator and Master Servicer" as a result of
certain accounting irregularities, numerous proceedings have been filed against
Cendant Corporation. While it is not feasible to predict or determine the final
outcome of these proceedings or to estimate the amounts or potential range of
loss with respect to these matters, Cendant Corporation's management believes
that an adverse outcome with respect to such proceedings could have a material
adverse impact on the financial condition, results of operations and cash flows
of Cendant Corporation which could have a material adverse impact on the
financial condition or cash flows of PHH Corporation and its subsidiary, the
Master Servicer. Any such adverse outcome with respect to such proceedings could
cause disruption in the servicing of the mortgage loans by the Master Servicer.
Any such disruption that resulted in a transfer of servicing to a new Master
Servicer may result in increased losses and delinquencies on the mortgage loans.
LACK OF LIQUIDITY
Merrill Lynch, Pierce, Fenner & Smith Incorporated intends to make a
secondary market in the classes of certificates actually purchased by it, but it
has 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.
S-8
<PAGE>
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.
CONSEQUENCES OF OWNING BOOK-ENTRY CERTIFICATES
LIMIT ON LIQUIDITY OF CERTIFICATES. Issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such certificates in
the secondary trading market since investors may be unwilling to purchase
certificates for which they cannot obtain physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
Book-Entry Certificates can be effected only though certain depositories,
participating organizations, indirect participants and certain banks, your
ability to transfer or pledge a Book-Entry Certificate to persons or entities
that are not affiliated with these organizations or otherwise to take actions in
respect of such certificates, may be limited due to lack of a physical
certificate representing the Book- Entry Certificates.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt
of distributions on the Book-Entry Certificates since the distributions will be
forwarded by the Trustee to a depository to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
PLEASE REVIEW "DESCRIPTION OF THE CERTIFICATES -- BOOK-ENTRY
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
S-9
<PAGE>
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by the Originator. None of the Depositor, the Underwriter, 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, as of the
Cut-off Date is set forth herein. Prior to the Closing Date, Mortgage Loans may
be removed from the Trust Fund and other Mortgage Loans may be substituted
therefor. The Originator believes that the information set forth herein with
respect to the Mortgage Pool as presently constituted is representative of the
characteristics of the Mortgage Pool as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans may vary.
GENERAL
The Depositor will establish a trust on the Closing Date (the "Trust
Fund") which will consist of a pool of 656 closed-end, fixed-rate mortgage loans
(the "Mortgage Pool") having original terms to maturity ranging from 180 to 360
months (the "Mortgage Loans") and an aggregate Principal Balance as of April 1,
1999 (the "Cut-off Date") of approximately $212,264,480. The Mortgage Loans are
secured by first mortgages or deeds of trust creating first liens on one- to
four-family residential properties consisting of one- to four-family dwelling
units, individual condominium units and individual units in planned unit
developments. 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 as of the
Cut-off Date, as adjusted for the principal payments received or advanced on or
before such date, (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, unless
otherwise specified. The "Pool Balance" is equal to the aggregate Principal
Balances of all of the Mortgage Loans.
The Mortgage Loans were originated or acquired generally in accordance
with the Underwriting Standards described herein under "The Mortgage
Pool--Underwriting Standards." The Depositor will acquire the Mortgage Loans (i)
directly from the Originator pursuant to a Mortgage Loan Purchase Agreement (the
"Cendant Mortgage Loan Purchase Agreement") dated as of the Cut-off Date between
the Originator and the Depositor and (ii) indirectly from the Originator
pursuant to a Mortgage Loan Purchase Agreement (the "Bishop's Gate Mortgage Loan
Purchase Agreement"; together with the Cendant Mortgage Loan Purchase Agreement,
the "Mortgage Loan Purchase Agreements") dated as of the Cut-off Date among the
Originator, the Depositor and Bishop's Gate Residential Mortgage Trust
("Bishop's Gate"), a Delaware Business Trust, administered by the Originator.
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.
The Originator and Bishop's Gate will each make certain representations
and warranties as of the Closing Date with respect to the Mortgage Loans.
Subject to certain limitations, each will be obligated to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which it made
such representation and warranty and 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 Originator and Bishop's Gate are selling the Mortgage Loans
without recourse and each will have no obligation with respect to the
Certificates other than the repurchase or substitution obligations described
above.
All of the Mortgage Loans have scheduled monthly payments due on the
first day of the month (with respect to each Mortgage Loan, a "Due Date"). Each
Mortgage Loan will contain a customary "due-on-sale" clause. None of the
Mortgage Loans were delinquent in their monthly payments as of the Cut-off Date.
All of the Mortgage Loans as of the Cut-off Date with Loan-to-Value Ratios in
excess of 80% have primary mortgage insurance.
S-10
<PAGE>
MORTGAGE LOANS STATISTICS
The Mortgage Pool consists of 656 Mortgage Loans. The aggregate
Principal Balance as of the Cut-off Date is equal to approximately $212,264,480.
The Mortgage Loans have original terms to maturity ranging from 180 to 360
months. The following statistical information, unless otherwise specified, is
based upon the Pool Balance as of the Cutoff Date.
The Mortgage Loans are secured by first 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 26.35% of the Mortgage Loans
had a Loan-to-Value Ratio at origination in excess of 80.00%. Approximately
8.61% of the 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 Mortgage
Loan determined at any time after origination is less than or equal to its
original Loan-to-Value Ratio. All of the Mortgage Loans have scheduled monthly
payments due on the first day of the month (with respect to each Mortgage Loan ,
a "Due Date").
None of the Mortgage Loans provide for payment by the mortgagor of a
prepayment charge.
Approximately 0.75% of the Mortgage Loans are Buydown Mortgage Loans.
Approximately 18.72% of the Mortgage Loans are Relocation Mortgage
Loans.
Each Mortgage Loan accrues interest at a rate (each, a "Loan Rate") of
not less than 6.00% per annum and not more than 8.25% per annum and as of the
Cut-off Date the weighted average Loan Rate of the Mortgage Loans was
approximately 7.046% per annum.
The weighted average remaining term to maturity of the Mortgage Loans
will be approximately 357 months as of the Cut-off Date. None of the Mortgage
Loans had a first Due Date prior to April 1, 1998 or after June 1, 1999 or will
have a remaining term to maturity of less than 180 months or greater than 360
months as of the Cut-off Date. The latest maturity date of any Mortgage Loan is
May 1, 2029.
The average Principal Balance of the Mortgage Loans at origination was
approximately $323,772. The average Cut-off Date Principal Balance of the
Mortgage Loans was approximately $323,574.
No Mortgage Loan had a Cut-off Date Principal Balance of greater than
approximately $1,000,000 or less than approximately $39,522.74. The Mortgage
Loans are expected to have the following characteristics as of the Cut-off Date
(the sum in any column may not equal the total indicated due to rounding):
S-11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
% OF
NUMBER OF AGGREGATE ORIGINAL AGGREGATE ORIGINAL
RANGE ($) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----- ----------------- -----------------
<S> <C> <C> <C>
0.01 -- 50,000.00................. 3 $ 135,886 0.06%
50,000.01 -- 100,000.00................. 13 1,120,045 0.53
100,000.01 -- 150,000.00................. 21 2,592,707 1.22
150,000.01 -- 200,000.00................. 16 2,805,146 1.32
200,000.01 -- 250,000.00................. 24 5,845,906 2.75
250,000.01 -- 300,000.00................. 244 67,253,072 31.68
300,000.01 -- 350,000.00................. 137 44,469,416 20.95
350,000.01 -- 400,000.00................. 89 33,171,806 15.63
400,000.01 -- 450,000.00................. 42 17,959,286 8.46
450,000.01 -- 500,000.00................. 29 13,870,422 6.53
500,000.01 -- 550,000.00................. 15 7,807,760 3.68
550,000.01 -- 600,000.00................. 10 5,769,506 2.72
600,000.01 -- 650,000.00................. 8 5,064,665 2.39
650,000.01 -- 700,000.00................. 1 674,486 0.32
700,000.01 -- 750,000.00................. 1 749,443 0.35
950,000.01 -- 1,000,000.00................. 3 2,974,928 1.40
--- ----------- ------
TOTAL.................................... 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) LOANS THE CUT OFF DATE THE CUT-OFF DATE
- --------- ----- ---------------- ----------------
<S> <C> <C> <C>
25,000.01 -- 50,000.00................. 3 $ 135,886 0.06%
50,000.01 -- 75,000.00................. 4 263,809 0.12
75,000.01 -- 100,000.00................. 9 856,236 0.40
100,000.01 -- 125,000.00................. 11 1,225,314 0.58
125,000.01 -- 150,000.00................. 10 1,367,393 0.64
150,000.01 -- 175,000.00................. 7 1,114,387 0.53
175,000.01 -- 200,000.00................. 9 1,690,759 0.80
200,000.01 -- 225,000.00................. 3 658,600 0.31
225,000.01 -- 250,000.00................. 21 5,187,306 2.44
250,000.01 -- 275,000.00................. 123 32,368,277 15.25
275,000.01 -- 300,000.00................. 121 34,884,796 16.43
300,000.01 -- 325,000.00................. 75 23,525,655 11.08
325,000.01 -- 350,000.00................. 62 20,943,760 9.87
350,000.01 -- 375,000.00................. 51 18,396,360 8.67
375,000.01 -- 400,000.00................. 38 14,775,445 6.96
400,000.01 -- 425,000.00................. 21 8,742,057 4.12
425,000.01 -- 450,000.00................. 21 9,217,229 4.34
450,000.01 -- 475,000.00................. 13 6,020,974 2.84
475,000.01 -- 500,000.00................. 16 7,849,448 3.70
500,000.01 -- 525,000.00................. 10 5,113,028 2.41
525,000.01 -- 550,000.00................. 5 2,694,732 1.27
550,000.01 -- 575,000.00................. 4 2,234,002 1.05
575,000.01 -- 600,000.00................. 6 3,535,504 1.67
600,000.01 -- 625,000.00................. 3 1,844,502 0.87
625,000.01 -- 650,000.00................. 5 3,220,163 1.52
650,000.01 -- 675,000.00................. 1 674,486 0.32
725,000.01 -- 750,000.00................. 1 749,443 0.35
975,000.01 -- 1,000,000.00................. 3 2,974,928 1.40
--- ----------- ------
TOTAL.................................... 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES ON THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- ----- ---------------- ----------------
<S> <C> <C> <C> <C>
5.51 -- 6.00............................. 1 $ 298,968 0.14%
6.01 -- 6.50............................. 52 17,726,636 8.35
6.51 -- 7.00............................. 280 94,884,536 44.70
7.01 -- 7.50............................. 271 85,544,859 40.30
7.51 -- 8.00............................. 49 13,338,689 6.28
8.01 -- 8.50............................. 3 470,791 0.22
--- ----------- ------
Wtd 7.05
Average:
TOTAL..................................... 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
LOAN-TO-VALUE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------- ----- ---------------- ----------------
<S> <C> <C> <C>
0.01 -- 50.00............................ 26 $ 7,889,941 3.72%
50.01 -- 55.00............................ 7 2,362,497 1.11
55.01 -- 60.00............................ 17 5,470,252 2.58
60.01 -- 65.00............................ 24 8,637,817 4.07
65.01 -- 70.00............................ 43 14,011,774 6.60
70.01 -- 75.00............................ 68 21,936,945 10.33
75.01 -- 80.00............................ 295 96,018,832 45.24
80.01 -- 85.00............................ 19 6,914,600 3.26
85.01 -- 90.00............................ 96 30,740,453 14.48
90.01 -- 95.00............................ 61 18,281,368 8.61
--- ----------- ------
Wtd 78.07
Average:
TOTAL................................. 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Single Family Detached.................................. 457 $148,011,305 69.73%
Detached PUD............................................ 140 47,413,420 22.34
Condominium............................................. 33 8,976,307 4.23
Attached PUD............................................ 13 3,904,701 1.84
Two Unit................................................ 9 2,938,033 1.38
Single Family Attached.................................. 3 636,134 0.30
PUD..................................................... 1 384,579 0.18
--- ----------- ------
TOTAL.......................................... 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- ----- ---------------- ----------------
<S> <C> <C> <C>
Owner Occupied............................................. 637 $206,339,869 97.21%
Second..................................................... 14 4,370,668 2.06
Investment................................................. 5 1,553,942 0.73
--- ----------- ------
TOTAL............................................. 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by a
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ ----- ---------------- ----------------
<S> <C> <C> <C>
Purchase............................................ 462 $149,050,146 70.22%
Refinance........................................... 114 37,467,747 17.65
Cashout............................................. 80 25,746,587 12.13
--- ----------- ------
TOTAL...................................... 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ ----- ---------------- ----------------
<S> <C> <C> <C>
Full Documentation Program........................... 590 $201,592,384 94.97%
Limited Documentation Program ....................... 65 10,526,896 4.96
No Documentation Program............................. 1 145,200 0.07
--- ----------- ------
TOTAL................................ 656 $212,264,480 100.00%
=== =========== ======
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- ----- ---------------- ----------------
<S> <C> <C> <C>
Alabama................................................... 4 $ 1,271,450 0.60%
Arizona................................................... 8 2,490,569 1.17
California................................................ 238 82,998,169 39.10
Colorado.................................................. 14 4,291,165 2.02
Connecticut............................................... 23 7,426,519 3.50
Delaware.................................................. 1 328,500 0.15
Florida................................................... 15 4,368,321 2.06
Georgia................................................... 16 4,689,385 2.21
Idaho..................................................... 3 1,140,198 0.54
Illinois.................................................. 27 9,453,530 4.45
Indiana................................................... 5 1,552,369 0.73
Kansas.................................................... 1 319,853 0.15
Louisiana................................................. 5 1,376,213 0.65
Massachusetts............................................. 8 2,608,335 1.23
Maryland.................................................. 8 2,411,202 1.14
Maine..................................................... 2 408,000 0.19
Michigan.................................................. 12 2,876,567 1.36
Minnesota................................................. 19 6,245,220 2.94
Missouri.................................................. 2 555,796 0.26
Montana................................................... 3 983,768 0.46
North Carolina............................................ 10 2,877,708 1.36
North Dakota.............................................. 1 414,187 0.20
Nebraska ................................................. 4 1,551,410 0.73
New Hampshire............................................. 2 727,284 0.34
New Jersey................................................ 69 20,875,534 9.83
New Mexico................................................ 1 625,737 0.29
Nevada.................................................... 1 267,000 0.13
New York.................................................. 42 12,799,710 6.03
Ohio...................................................... 4 1,384,915 0.65
Oklahoma.................................................. 1 299,748 0.14
Oregon.................................................... 14 3,791,175 1.79
Pennsylvania ............................................ 15 4,451,710 2.10
South Carolina............................................ 4 1,408,803 0.66
Tennessee................................................. 7 1,978,702 0.93
Texas..................................................... 20 6,171,324 2.91
Utah...................................................... 3 977,454 0.46
Virginia.................................................. 10 2,944,354 1.39
Vermont................................................... 1 269,000 0.13
Washington................................................ 29 9,659,179 4.55
Wisconsin................................................. 4 994,418 0.47
--- ------------ ------
TOTAL..................................... 656 $212,264,480 100.00%
=== ============ ======
</TABLE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the
S-15
<PAGE>
Mortgage Pool prior to the issuance of the Certificates unless including such
mortgage loans would materially alter the characteristics of the Mortgage Pool
as described herein. The Depositor believes that the information set forth
herein will be representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Certificates are issued, although the range
of Loan Rates and maturities and certain other characteristics of the Mortgage
Loans may vary.
UNDERWRITING STANDARDS; REPRESENTATIONS
The information set forth below with regard to the Originator's
underwriting standards has been provided to the Depositor by the Originator. The
Mortgage Loans were originated or accepted generally in accordance with the
underwriting standards described below. None of the Depositor, the Trustee, the
Underwriter or any of their respective affiliates has made any independent
investigation of such information or has made or will make any representation as
to the accuracy or completeness of such information.
The underwriting standards of the Originator under the "Full
Documentation Program" generally allow loan-to-value ratios at origination of up
to 95% for mortgage loans with original principal balances of up to $400,000, up
to 80% for mortgage loans with original principal balances of up to $650,000, up
to 75% for mortgage loans with original principal balances of up to $750,000 and
up to 60% for mortgage loans with principal balances of up to $1,000,000. Any
mortgage loans originated with a loan-to-value ratio at origination in excess of
80% are required to have primary mortgage insurance. In determining whether a
prospective borrower has sufficient monthly income available (i) to meet the
borrower's monthly obligation on the proposed mortgage loan and (ii) to meet
monthly housing expenses and other financial obligations including the
borrower's monthly obligations on the proposed mortgage loan, the Originator
generally applies ratios of up to 33% and 38%, respectively, of the proposed
borrower's acceptable stable monthly gross income. From time to time, the
Originator makes loans where these ratios are exceeded. In those instances, the
Originator's underwriters typically look at mitigating factors such as the
liquidity of the mortgagor, the stability of the real estate market where the
mortgaged property is located, and local economic conditions. In addition, with
respect to mortgage loans secured by owner-occupied condominium units, the
Originator generally will fund up to the lesser of 10 units or 50% of the total
units in a project.
The Originator also originates mortgage loans pursuant to alternative
sets of underwriting criteria under its reduced documentation program ("Reduced
Documentation Program"), no asset, no income program ("No Asset, No Income
Program"), and rate term refinance limited documentation program ("Streamlined
Documentation Program", collectively with the Reduced Documentation Program and
the No Asset, No Income Program, the "Limited Documentation Programs"). Each of
these programs is designed to facilitate the loan approval process. Under the
Reduced Documentation Program and the No Asset, No Income Program, certain
documentation concerning income/employment and asset verification is reduced or
excluded. Loans underwritten under the Reduced Documentation Program and the No
Asset, No Income Program are generally limited to borrowers who have
demonstrated an established ability and willingness to repay the mortgage loans
in a timely fashion. Permitted maximum loan-to-value ratios under the Reduced
Documentation Program and the No Asset, No Income Program are generally more
restrictive than those under the standard underwriting criteria of the
Originator.
Under the Streamlined Documentation Program, which is generally
available only to the Originator's portfolio refinances having an original
loan-to-value ratio of 80% or less and no mortgage delinquencies in the past 12
months, rate and term refinance loans are underwritten based solely on the
original appraisal and limited credit verification, if any. Although no current
appraisal of the property is obtained with respect to the origination of these
mortgage loans, a "drive-by" appraisal may be obtained in certain cases.
From time to time, exceptions to the Originator's underwriting policies
may be made. Such exceptions may be made on a loan-by-loan basis at the
discretion of the Originator's underwriter. Exceptions may be made only after
consideration of certain mitigating factors such as borrower capacity,
liquidity, employment and residential stability and local economic conditions.
In addition, the Originator originates certain mortgage loans
("Relocation Mortgage Loans") made to employees of corporations who have a
substantial portion of the costs related to the mortgage loan reimbursed by
their employer.
S-16
<PAGE>
Some of the expenses eligible for consideration include closing costs and
discount points or real estate commissions. Relocation Mortgage Loans are
otherwise originated pursuant to Originator's underwriting policies set forth
herein.
THE ORIGINATOR AND MASTER SERVICER
The information set forth in the following paragraphs has been provided
by Cendant Mortgage Corporation. None of the Depositor, the Trustee or any of
their respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
On April 30, 1997, the parent of PHH Mortgage Services Corporation, PHH
Corporation, announced that it had merged with HFS Incorporated pursuant to
which PHH Corporation became a subsidiary of HFS Incorporated. On December 18,
1997, HFS Incorporated announced it had merged with CUC International, Inc.
("CUC"). The new company name is Cendant Corporation ("Cendant"). Cendant's
primary business segments include "travel" (hotels, rental cars, and vacation
time shares), "real estate" (real estate brokerage offices including Century 21,
Coldwell Banker and ERA, and mortgage services), and "membership" (access to
travel, shopping, auto, dining, financial, and other services to over 73 million
members worldwide). PHH Mortgage Services Corporation has since changed its name
to Cendant Mortgage Corporation to show its affiliation with the new parent
company.
On April 15, 1998, Cendant publicly announced that in the course of
transferring responsibility for Cendant's accounting functions from the former
CUC personnel to HFS Incorporated accounting personnel and preparing for the
reporting of first quarter 1998 financial results, it had discovered accounting
irregularities in certain CUC
business units.
As a result, upon discovering such accounting irregularities in certain former
CUC business units, Cendant together with its counsel and assisted by auditors
immediately began an intensive investigation (the "Cendant Investigation"). In
addition, the Audit Committee of the Board of Directors engaged Willkie Farr &
Gallagher ("Willkie Farr") as special legal counsel and Willkie Farr engaged
Arthur Andersen LLP to perform an independent investigation into these
accounting irregularities (the "Audit Committee Investigation", together with
the Cendant Investigation, the "Investigations"). On July 14, 1998, Cendant
publicly announced that the accounting irregularities were greater than those
initially discovered in April and that the irregularities affected the
accounting records of the majority of the CUC business units. On August 27,
1998, Cendant publicly announced that the Audit Committee of the Board of
Directors had submitted its report (the "Report") to the Board of Directors on
the Audit Committee Investigation into the accounting irregularities and its
conclusions regarding responsibility for those actions. A copy of the Report has
been filed with the SEC as an exhibit to Cendant's Current Report on Form 8-K,
dated August 28, 1998. As a result of the findings of the Investigations,
Cendant has restated its previously reported financial results for 1997, 1996
and 1995 on Cendant's annual report on Form 10K/A, each filed on September 28,
1998.
As a result of the aforementioned accounting irregularities, numerous
class action lawsuits, two shareholder derivative lawsuits and an individual
lawsuit have been filed against Cendant, and among others, its predecessor, HFS
Incorporated, and certain current and former officers and directors of Cendant
and HFS Incorporated, asserting various claims under the Federal securities laws
and certain state statutory and common laws.
In addition, the staff of the Securities and Exchange Commission (the
"SEC") and the United States Attorney for the District of New Jersey are
conducting investigations (the "Government Investigations") relating to the
accounting irregularities. The SEC staff has advised Cendant that its inquiry
should not be construed as an indication by the SEC or its staff that any
violations of law have occurred. While management has made all adjustments
considered necessary as a result of the findings of the Investigations and
restated Cendant's financial statements for 1997, 1996 and 1995, there can be no
assurances that additional restatements will not be required as a result of the
Government Investigations.
While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, management believes that an adverse outcome with
respect to such proceedings could have a material adverse impact on the
financial condition, results of operations and cash flows of Cendant which could
have a material adverse impact on the financial condition or cash flows of PHH
Corporation and its subsidiary Cendant Mortgage Corporation.
S-17
<PAGE>
The accounting irregularities described above did not include PHH
Corporation or any of its subsidiaries, including Cendant Mortgage Corporation.
Copies of PHH Corporation's Annual Report on Form 10K/A for the year
ended December 31, 1998 may be inspected at the public reference facilities
maintained by the SEC at 450 5th Street, N.W., Washington, D.C. 20549 and copies
of such material may be obtained at the Public Reference Section of the SEC at
the same address at prescribed rates. In addition, the SEC maintains a public
access site on the Internet through the World Wide Web at which site reports,
information statements and other information, including all electronic filings,
regarding PHH Corporation may be viewed. The Internet address of such World Wide
Web site is http:\\www.sec.gov.
The Master Servicer's executive offices are located at 6000 Atrium Way,
Mt. Laurel, New Jersey 08054, and its telephone number is (609) 439-6000.
The Master Servicer will service the Mortgage Loans in accordance with
the terms of the Pooling and Servicing Agreement. The Master Servicer may
perform any of its obligations under the Pooling and Servicing Agreement through
one or more subservicers. Notwithstanding any such subservicing arrangement the
Master Servicer will remain primarily liable for its servicing duties and
obligations under the Pooling and Servicing Agreement as if the Master Servicer
alone were servicing the Mortgage Loans.
Certain of the Mortgage Loans in the Mortgage Pool will be transferred
indirectly to the Depositor pursuant to the Bishop's Gate Mortgage Loan Purchase
Agreement on the Closing Date. Bishop's Gate Residential Mortgage Trust
(formerly Cendant Residential Mortgage Trust) ("Bishop's Gate") is a special
purpose, bankruptcy-remote Delaware business trust originally formed as of April
13, 1998. Bishop's Gate was formed for the sole purpose of purchasing mortgage
loans from time to time from Cendant Mortgage Corporation, and selling and
securitizing such mortgage loans to third parties, subject to certain aging
limitations, including the requirement that no mortgage loan may be held by
Bishop's Gate for more than one year. Bishop's Gate has obtained, and will
obtain, funding for the purchase of mortgage loans by, from time to time,
issuing commercial paper, borrowing, and issuing one or more series of notes
and/or certificates.
Merrill Lynch & Co., on an ongoing basis, provides services to Cendant
Corporation, its subsidiaries and affiliates, including, but not limited to,
financial and advisory services. None of Merrill Lynch & Co. or any of its
employees, affiliates or representatives (collectively "Merrill Lynch"), nor any
of their respective directors, officers, employees, agents or representatives,
makes any representation or warranty, express or implied, as to the accuracy or
completeness of any of the information contained herein under the heading "The
Originator and the Master Servicer" and Merrill Lynch expressly disclaims any
and all liability based in whole or in part on such information, including any
errors or omissions herein.
DELINQUENCY AND FORECLOSURE EXPERIENCE. The following table sets forth
the delinquency and foreclosure experience of mortgage loans serviced by the
Master Servicer as of the dates indicated. The Master 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 borrowers to
make required payments.
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<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE IN THE MASTER SERVICER'S PORTFOLIO
OF ONE- TO FOUR-FAMILY, RESIDENTIAL MORTGAGE LOANS(1)
As of December 31,
------------------
1996 1997 1998
---- ---- ----
No. of Principal No. of Principal No. of Principal
Loans Balance Loans Balance Loans Balance
------------------------------------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio 224,622 $24,825 262,754 $ 29,702 370,937 $43,041
Period of Delinquency(2)
30-59 Days 3,334 $344 5,082 $526 8,509 $898
Percent Delinquent 1.5% 1.4% 1.9% 1.8% 2.3% 2.1%
60-89 Days 576 $71 961 $96 1,572 $157
Percent Delinquent 0.3% 0.3% 0.4% 0.3% 0.4% 0.4%
90 Days or more(3) 0 $0 324 $28 932 $92
Percent Delinquent 0.0% 0.0% 0.1% 0.1% 0.3% 0.2%
Total Delinquencies(4) 3,910 $415 6,367 $650 11,013 $1,147
Percent Total Delinquencies 1.7% 1.7% 2.4% 2.2% 3.0% 2.7%
Foreclosure/Bankruptcies/
Real Estate Owned 1,340 $149 2,105 $217 2,881 $272
Percent Foreclosure/
Bankruptcy/REO 0.6% 0.6% 0.8% 0.7% 0.8% 0.6%
</TABLE>
- ------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
All dollar amounts are in millions and have been rounded to the nearest
whole number.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3) The 90 days or more period of delinquency is net of the
Foreclosures/Bankruptcies/Real Estate Owned category. On some
occasions, such loans may fall into the current through 89 days late
categories as well, however, such occurrences are rare. The "Total
Delinquencies" category includes the Foreclosures/Bankruptcies/Real
Estate Owned category.
(4) Entries may not add up to total due to rounding.
In reviewing the foregoing table, it should be noted that the increase
in delinquencies, foreclosures, bankruptcies and real estate owned from December
31, 1996 to December 31, 1997 is due to an increase in FHA and VA loans in the
portfolio as well as increased foreclosures on adjustable rate loans in 1997. In
addition, the increases in delinquencies from December 31, 1996 to December 31,
1997 are also due to an increase in the number of FHA and VA loans in the
portfolio. Bankruptcy loans amounted to 0.40% of the 1997 loan count as compared
to 0.31% of the 1996 loan count. Foreclosure loans amounted to 0.35% of the 1997
loan count as compared to 0.24% of the 1996 loan count. REO loans amounted to
0.05% of the 1997 loan count as compared to 0.06% of the 1996 loan count.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of April 1, 1999 (the "Pooling and Servicing Agreement"),
among the Depositor, the Master 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
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Properties acquired on behalf of Certificateholders by foreclosure or by deed in
lieu of foreclosure, and any revenues received thereon, (iv) the rights of the
Trustee under all insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and (v) the rights of the Depositor under the
Mortgage Loan Purchase Agreements (other than certain rights of the Depositor to
indemnification by the Originator). The Offered Certificates will be
transferable and exchangeable at the corporate trust offices of the Trustee.
Pursuant to the Pooling and Servicing Agreement, transfers of Residual
Certificates are prohibited to any non-United States person. Transfers of
certain of the Certificates, including the Residual Certificates, are also
subject to additional transfer restrictions as set forth in the Pooling and
Servicing Agreement. See "Certain Federal Income Tax Consequences" herein and
"Material Federal Income Tax Consequences--REMICs," and "Tax-Related
Restrictions on Transfers of REMIC Residual Certificates--Noneconomic REMIC
Residual Certificates" in the Prospectus.
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. 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. The Mortgage Loan 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 Originator, or Bishop's Gate, as applicable, will
deliver or cause to be delivered to the Trustee 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 Originator 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 Originator, or Bishop's Gate, as applicable.
Within 60 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 60 days following
notification thereof to the Depositor, Originator, Bishop's Gate and the
Trustee, the Originator will be obligated to either (i) substitute for such
Mortgage Loan an eligible substitute Mortgage Loan; however, such substitution
is permitted only within three 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 Master 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
Originator 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.
The Originator will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to the
Depositor with respect to each Mortgage Loan. In addition, the Originator and
Bishop's Gate will represent and warrant, on the Closing Date, that, among other
things: (i) at the time of transfer to the Depositor, the Originator and
Bishop's Gate has each transferred or assigned all of its right, title and
interest in each related 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 Originator will have a period of 60 days after discovery
or notice of the breach to effect a cure. If the breach cannot be cured within
the 60-day period, the Originator, or Bishop's Gate, as applicable, 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
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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 Originator, or
Bishop's Gate, as applicable, as described in the preceding paragraphs are
referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Master 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 Master 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 Master Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Servicing Fee,
reimbursement for Advances and Servicing Advances, insurance proceeds to be
applied to the restoration or repair of a Mortgaged Property, or similar items),
the Master 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 in accordance with the terms of the Pooling and Servicing
Agreement, 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 F-1 by Fitch IBCA and A-1 by Standard & Poor's
(or comparable ratings if Fitch IBCA and Standard & Poor's are not the Rating
Agencies) at the time any amounts are held on deposit therein, (ii) an account
or accounts the deposits in which are fully insured by the Federal Deposit
Insurance Corporation (to the limits established by such corporation), the
uninsured deposits in which account are otherwise secured such that, as
evidenced by an opinion of counsel delivered to the Trustee and to each Rating
Agency, the Certificateholders will have a claim with respect to the funds in
such account or a perfected first priority security interest against such
collateral (which shall be limited to Eligible Investments) securing such funds
that is superior to claims of any other depositors or creditors of the
depository institution with which such account is maintained, (iii) a trust
account or accounts maintained with the trust department of a federal or state
chartered depository institution, national banking association or trust company
acting in its fiduciary capacity or (iv) otherwise acceptable to each Rating
Agency without reduction or withdrawal of their then current ratings of the
Certificates as evidenced by a letter from each Rating Agency to the Trustee.
Eligible Investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies from
time to time as being consistent with their then current ratings of the
Certificates.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced at least one Business Day 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 was due during the related Prepayment Period on the Mortgage
Loans, and that were delinquent on the related Determination Date, plus certain
amounts representing assumed payments not covered by any current net income on
the Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure
(any such advance, an "Advance").
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<PAGE>
Advances are required to be made only to the extent they are deemed by
the Master 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 Master 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 Relief Act. Subject to the recoverability standard above, the Master
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; provided, however that such obligation will cease if title to
the Mortgaged Property is acquired by the Trust Fund in foreclosure or by deed
in lieu of foreclosure ("REO Property").
All Advances will be reimbursable to the Master 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 subsequently deemed by
the Master Servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to the Master
Servicer out of any funds in the Collection Account prior to the distributions
on the Certificates. In the event the Master Servicer fails in its obligation to
make any such advance, the Master Servicer will be terminated and the Trustee,
in its capacity as successor Master Servicer (or any other successor Master
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 Master
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 Master 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 Master 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 Master Servicer, in which event reimbursement will be made
to the Master Servicer from general funds in the Collection Account.
THE TRUSTEE
The Norwest Bank Minnesota, National Association will act as trustee
(the "Trustee") for the Certificates pursuant to the Pooling and Servicing
Agreement. The Trustee's offices for notices under the Pooling and Servicing
Agreement are located at Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479-0113, Attention: Merrill Lynch Mortgage Investors, Inc., Series
1999-2 and its telephone number is (612) 667-9764. The principal compensation to
be paid to the Trustee will be equal to any interest or other income earned on
funds held in the Distribution Account as provided in the Pooling and Servicing
Agreement (the "Trustee Fee"). The Pooling and Servicing 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 Pooling and Servicing
Agreement) incurred by the Trustee arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling and
Servicing Agreement, other than any loss, liability or expense (i) that
constitutes a specific liability of the Trustee under the Pooling and Servicing
Agreement or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Pooling and
Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities for the Certificates will be equal to accrued
interest at the "Servicing Fee Rate" of between 0.200% per annum and 1.075% per
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annum with respect to each Mortgage Loan for each calendar month on the same
principal balance on which interest on such Mortgage Loan accrues for such
calendar month (the "Servicing Fee"). The portion of the Servicing Fee which
accrued at a rate in excess of 0.200% per annum will be set aside by the Master
Servicer to pay for lender funded mortgage insurance and will not be treated as
servicing compensation and will not be available to make payments of
Compensating Interest. As additional servicing compensation, the Master Servicer
is entitled to retain all service-related fees, including assumption fees,
modification fees, extension fees, and late payment charges, to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the Collection Account and any escrow accounts. The Master
Servicer is obligated to offset any Prepayment Interest Shortfall on any
Distribution Date (payments made by the Master Servicer in satisfaction of such
obligation, "Compensating Interest") by an amount not in excess of its Servicing
Fee for such Distribution Date. The Master Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Pool and incurred by the Master 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 "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 applicable 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.
TERMINATION
The Master Servicer will have the right, but not the obligation, to
repurchase all of the Mortgage Loans and REO Properties and thereby effect the
early retirement of the Certificates, on any Distribution Date on which the
aggregate Principal Balance of such Mortgage Loans and REO Properties is less
than 10% of the aggregate Principal Balance of the Mortgage Loans 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 Master Servicer.
Proceeds from such repurchase will be included in Available Funds and will be
distributed to the holders of the Certificates in accordance with the Pooling
and Servicing Agreement. Any such repurchase of Mortgage Loans and REO
Properties will result in the early retirement of the related Certificates.
EVENTS OF SERVICING TERMINATION
Events of Servicing Termination will consist, among other things, of:
(i) (a) any failure by the Master Servicer to make an Advance and (b) any other
failure by the Master 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
Master Servicer; (ii) any failure of the Master 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 Master
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 Master Servicer has
knowledge of such failure or (y) written notice of such failure is given to the
Master Servicer; or (iv) 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.
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 Master Servicer
in its capacity as servicer with respect to the Mortgage Loans, as provided in
the Pooling and Servicing Agreement, whereupon the Trustee will choose a
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successor Master Servicer or succeed to all of the responsibilities and duties
of the Master 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 Master 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 Offered Certificates (the
"Percentage Interest") shall be the fraction, expressed as a percentage, the
numerator of which is the aggregate Certificate Principal Balance of all the
Certificates of such Class then outstanding and the denominator of which is the
aggregate Certificate Principal Balance of all the Certificates then outstanding
(except with respect to the Class A-IO Certificates and Residual Certificates).
98% of all Voting Rights will be allocated among all holders of the Certificates
(other than the Class A-IO Certificates and Residual Certificates) in proportion
to their then outstanding Certificate Principal Balances, 1.00% of all Voting
Rights will be allocated among the holders of the Class A-IO Certificates, and
1.00% of all Voting Rights will be allocated among the holders of the Class R
Certificates, in proportion to the Percentage Interests evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject to
amendment without the consent of the holders of the Residual Certificates in
certain circumstances.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor,
the Master 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 Depositor, the Master Servicer and the Trustee
and the holders of a majority in interest of any Class of Offered Certificates
affected thereby for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the holders of any Class
of Offered Certificates; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, distributions
required to be made on any Class of Offered Certificates without the consent of
all of the holders of such class of offered 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 all of the
holders of all such class of offered 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 Fund will issue the (i) Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-IO, Class A-PO and Class R Certificates (the
"Senior Certificates") and (ii) Class M, Class B-1, Class B-2, Class B-3, Class
B-4, Class B-5 Certificates (the "Subordinate Certificates"). The Class R
Certificates are also referred to herein as the "Residual Certificates". The
Senior Certificates and the Subordinate Certificates are collectively referred
to herein as
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the "Certificates." Only the Senior, Class M, Class B-1 and Class B-2
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 Senior Certificates will evidence in
the aggregate an initial beneficial ownership interest of approximately 95.75%
in the Trust Fund. The Class M, Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 Certificates will each evidence in the aggregate an initial beneficial
ownership interest of approximately 2.10%, 0.90%, 0.40%, 0.35%, 0.20%, and
0.30%, respectively, in the Trust Fund.
The Offered Certificates (other than the Class A-IO, Class A-PO and
Class R Certificates) will be issued in book-entry form as described below. The
Offered Certificates (other than the Class A-IO, Class A-PO and Class R
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). The Class A-PO Certificates will be issued in registered, certificated
form in minimum denominations of $25,000 and integral multiples of $1,000 in
excess thereof, except for one Class A-PO Certificate evidencing the sum of an
authorized denomination thereof and the remainder of the aggregate initial Class
Certificate Balance of such class of Certificates. The Class A-IO Certificates
and Residual Certificates will be issued in registered, certificated form in
minimum denominations of a 25% Percentage Interest, except, in the case of one
of the Residual Certificates, as otherwise set forth herein under "Certain
Federal Income Tax Consequences."
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 May 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,
the "Record Date" is the last Business Day of the month immediately preceding
the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates (other than the Class A-IO, Class A-PO, and
Class R Certificates) will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold such Certificates through DTC in
the United States, or Cedelbank or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedelbank and Norwest Bank Minnesota, National Association 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 (other
than the Class A-IO, Class A-PO and Class R Certificates as described in the
second preceding paragraph) 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).
S-25
<PAGE>
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"Material Federal Income Tax Consequences--Tax Characterization of a Trust Fund
as a Partnership - Tax Consequences to Holder of the Certificates - Tax
Consequences to Foreign Certificateholders", "--Backup Withholding" and "New
Withholding Regulations" in the Prospectus and "Global Clearance, Settlement and
Tax Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
S-26
<PAGE>
Cedelbank ("Cedelbank"), 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg law.
Cedelbank is owned by banks, securities dealers and financial institutions, and
currently has about 100 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of
Cedelbank's stock.
Cedelbank is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedelbank holds securities for its customers ("Cedelbank Participants")
and facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedelbank provides
various services, including safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedelbank also deals with domestic securities markets in several
countries through established depository and custodial relationships. Cedelbank
has established an electronic bridge with Morgan Guaranty Trust as the Euroclear
Operator in Brussels to facilitate settlement of trades between systems.
Cedelbank currently accepts over 70,000 securities issues on its books.
Cedelbank's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedelbank's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedelbank has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedelbank is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedelbank.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 29
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made by the
Trustee to DTC in accordance with the terms of the Pooling and Servicing
Agreement. 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.
S-27
<PAGE>
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 Pooling and Servicing 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 Pooling and Servicing Agreement on behalf of a Cedelbank Participant
or Euroclear Participant only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect such
actions on its behalf through DTC. DTC may take actions, at the direction of the
related Participants, with respect to some Book-Entry Certificates which
conflict with actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default,
beneficial owners having Percentage Interests aggregating not less than 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 Pooling and Servicing 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 Master 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.
S-28
<PAGE>
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 ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information 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.
AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be
made on each Distribution Date from Available Funds. "Available Funds" will be
equal to the sum of the following amounts with respect to the Mortgage Loans,
net of amounts reimbursable therefrom to the Master Servicer, (i) the aggregate
amount of monthly payments on the Mortgage Loans due on the related Due Date and
received by the Trustee, after deduction of the Servicing Fee, the Trustee's Fee
and certain amounts, if any, reimbursable to the Master Servicer and the
Trustee, as provided in the Pooling and Servicing Agreement,(ii) certain
unscheduled payments in respect of the Mortgage Loans, including prepayments,
insurance proceeds, Net Liquidation Proceeds and proceeds from repurchases of
and substitutions for such Mortgage Loans occurring during the related
Prepayment Period, excluding, (iii) payments from the Master Servicer in
connection with Advances and Compensating Interest for such Distribution Date.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates (other than the Class A-PO
Certificates) will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest on such Class on each Distribution
Date, to the extent of Available Funds for such Distribution Date commencing on
the first Distribution Date in the case of all classes of Senior Certificates
entitled to interest distributions. Holders of the Class M, Class B-1 and Class
B-2 Certificates will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest on such class on each Distribution
Date, to the extent of the Available Funds for such Distribution Date after
distributions of interest and principal to the Senior Certificates,
reimbursements for certain Advances to the Master Servicer and distributions of
interest and principal to any class of Subordinate Certificates having a higher
payment priority.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Class A-IO Certificates and Class A-PO Certificates), interest accrued
during the related Interest Accrual Period on the Class Certificate Balance of
the Certificates of such class immediately prior to such Distribution Date at
the related Pass-Through Rate and (b) in the case of the Class A-IO
Certificates, interest accrued during the related Interest Accrual Period on the
Notional Amount immediately prior to such Distribution Date at the
then-applicable Pass-Through Rate on such class for such Distribution Date; in
each case less interest shortfalls, if any, allocated thereto for such
Distribution Date to the extent not covered with respect to the Senior
Certificates by the Subordination provided by the Subordinated Certificates and,
with respect to the Class M, Class B-1 and Class B-2 Certificates to the extent
not covered by the Subordination provided by any class or classes of
Subordinated Certificates having a lower payment priority, including in each
case:
S-29
<PAGE>
(i) any Prepayment Interest Shortfall (as defined above) to the
extent not covered by the Master Servicer as described below;
(ii) the interest portions of Realized Losses, and Excess Losses
and losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks
("Extraordinary Losses") not allocated through Subordination;
(iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be
Excess Losses or Extraordinary Losses; and
(iv) any other interest shortfalls not covered by Subordination,
including interest shortfalls relating to the Relief Act or
similar legislation or regulations, all allocated as described
below.
Such reductions will be allocated among the holders of all classes of
Certificates in proportion to the respective amounts of Accrued Certificate
Interest which would have been payable on such Distribution Date absent such
reductions. In the case of the Class M, Class B-1 and Class B-2 Certificates,
Accrued Certificate Interest on such class will be further reduced by the
allocation of the interest portion of certain losses thereto, if any, as
described below under "--Allocation of Losses." Accrued Certificate Interest on
each class of Senior Certificates (other than the Class A-PO Certificates) will
be distributed on a pro rata basis. Accrued Certificate Interest on each class
of Certificates is calculated on the basis of a 360-day year consisting of
twelve 30-day months. The Class A-PO Certificates are not entitled to
distributions of interest.
The "Interest Accrual Period" for all classes of Certificates is the
calendar month preceding the month in which the Distribution Date occurs.
The "Prepayment Period" is the prior calendar month.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates (other than the Class A-PO Certificates, which are not
entitled to any distributions in respect of interest) is based on the Class
Certificate Balance thereof or, in the case of the Class A-IO Certificates, on
the Notional Amount. The "Class Certificate
Balance"
of any Offered Certificate as of any date of determination is equal to the
initial Class Certificate Balance thereof, reduced by the aggregate of (a) all
amounts allocable to principal previously distributed with respect to such
Certificate and (b) any reductions in the Class Certificate Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein, provided that, after the Class Certificate Balances of
the Class B-5, Class B-4 and Class B-3 Certificates have been reduced to zero,
the Class Certificate Balance of any Certificate of the class of Subordinated
Certificates outstanding with the lowest payment priority shall equal the
percentage interest evidenced thereby times the excess, if any, of (a) the then
aggregate Stated Principal Balance of all of the Mortgage Loans over (b) the
then aggregate Class Certificate Balance of all other classes of Certificates
then outstanding.
As of any date of determination the "Notional Amount" of any Class A-IO
Certificate is equal to the aggregate Stated Principal Balance of Mortgage Loans
with Net Mortgage Rates in excess of 6.50%, immediately prior to such date.
Reference to a Notional Amount with respect to the Class A-IO Certificate is
solely for convenience in certain calculations and does not represent the right
to receive any distributions allocable to principal.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the
Certificates, other than the Class A-IO and Class A-PO Certificates, will equal
6.50% per annum. The Pass-Through Rate with respect to the Class A-IO
Certificates will be equal to the excess of the (a) the weighted average of the
Net Mortgage Rates of each Mortgage Loan with a Net Mortgage Rate greater than
6.50% over (b) 6.50%. The Class A-PO Certificates are not entitled to
distributions of interest.
S-30
<PAGE>
PRINCIPAL DISTRIBUTIONS
GENERAL. After the aggregate amount of Accrued Certificate Interest to
be distributed to the holders of the Senior Certificates for such Distribution
Date (the "Senior Interest Distribution Amount") has been distributed all
payments and other amounts received in respect of principal of the Mortgage
Loans will be allocated, in the priority set forth herein, between (i) the
Senior Certificates (other than the Class A-PO Certificates) and the
Subordinated Certificates and (ii) the Class A-PO Certificates, in each case
based on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
SENIOR CERTIFICATES. On each Distribution Date, an amount up to the
amount of the Senior Principal Distribution Amount for such Distribution Date,
will be distributed (after distribution of the Senior Interest Distribution
Amount and the Class A-PO Principal Distribution Amount (as described below)) as
principal as follows:
(a) Prior to the occurrence of the Senior Credit Support Depletion Date
(as defined below):
(i) the Senior Principal Distribution Amount to the Class R
Certificates until the Certificate Principal Balance thereof has been
reduced to zero;
(ii) the balance of the Senior Principal Distribution Amount
remaining after the distributions, if any, described in clause (i)
above shall be distributed to the Class A-3 Certificates in reduction
of the Certificate Principal Balance thereof, in an amount equal to the
sum of the following:
(a) the Class A-3 Certificates' pro
rata share (based on the Class Certificate
Balance thereof relative to the aggregate
Class Certificate Balance of the
Certificates (other than the Class A-PO
Certificates)), of the aggregate of the
collections described in clauses (i) and
(ii) of the definition of "Senior Principal
Distribution Amount" herein without
application of the Senior Percentage and
Senior Prepayment Percentage; and
(b) the Lockout Prepayment
Percentage of the Class A-3 Certificates'
pro rata share (based on the Class
Certificate Balance thereof relative to the
aggregate Class Certificate Balance of the
Certificates (other than the Class A-PO
Certificates)) of the aggregate of the
collections described in clause (iii) of the
definition of "Senior Principal Distribution
Amount" herein without application of the
Senior Prepayment Percentage;
provided that, if the aggregate of the
amounts set forth in clauses (i) through (iii) of the
definition of "Senior Principal Distribution Amount"
herein is more than the balance of the Available
Funds remaining after the Senior Interest
Distribution and the Class A-PO Distribution Amount
have been distributed, the amount paid to the Class
A-3 Certificates pursuant to this clause (a)(ii)
shall be reduced by an amount equal to the Class A-3
Certificates' pro rata share (based on the aggregate
Class Certificate Balance thereof relative to the
aggregate Class Certificate Balance of the Senior
Certificates other than the Class A- PO Certificates)
of such difference;
(iii) the balance of the Senior Principal Distribution Amount
remaining after the distributions described in clauses (i) and (ii)
above, shall be distributed in the following order of priority:
(1) first, concurrently, as follows:
(A) approximately 60.626594% to the
Class A-1 Certificates, until the
Certificate Principal Balance
thereof has been reduced to zero;
and
S-31
<PAGE>
(B) approximately 39.373406% FIRST to
the Class A-4 Certificate, and
SECOND, to the Class A-5
Certificate, in each case until the
Certificate Principal Balance
thereof has been reduced to zero;
(2) second, to the Class A-2 Certificates, until
the Certificate Principal Balance thereof
has been reduced to zero; and
(3) third, to the Class A-3 Certificates, until
the Certificate Principal Balance thereof
has been reduced to zero.
(b) On or after the occurrence of the Senior Credit Support
Depletion Date, all priorities relating to distributions as described
above in respect of principal among the various classes of Senior
Certificates (other than the Class A-PO Certificates) will be
disregarded and the Senior Principal Distribution Amount will be
distributed to the Senior Certificates (other than the Class A-PO
Certificates) remaining pro rata in accordance with their respective
outstanding Certificate Principal Balances and the Senior Interest
Distribution Amount will be distributed as described under "Interest
Distributions."
(c) After reduction of the Certificate Principal Balances of
the Senior Certificates (other than the Class A-IO Certificates and
Class A-PO Certificates) to zero but prior to the Senior Credit Support
Depletion Date, the Senior Certificates (other than the Class A-PO
Certificates) will be entitled to no further distributions of principal
thereon and the Available Funds will be paid solely to the holders of
the Class A-IO Certificate and Class A-PO Certificates and the
Subordinate Certificates in each case as described herein.
The capitalized terms used herein shall have the following meanings:
The "Lockout Prepayment Percentage" for any Distribution Date occurring
prior to the Distribution Date in May 2004 will be equal to 0%. The Lockout
Prepayment Percentage for any Distribution Date occurring after May 2004 will be
as follows: for any Distribution Date during the sixth year after the Closing
Date, 30%; for any Distribution Date during the seventh year after the Closing
Date, 40%; for any Distribution Date during the eighth year after the Closing
Date; 60% for any Distribution Date during the ninth year after the Closing
Date, 80%, and for any Distribution Date thereafter, 100%.
The Non-PO Percentage with respect to any Mortgage Loan with a Net
Mortgage Rate less than 6.50% (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Mortgage Rate divided by 6.50%. The Non-PO
Percentage with respect to any Mortgage Loan with a Net Mortgage Rate equal to
or greater than 6.50% (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) 6.50% minus the Net Mortgage Rate divided by (ii) 6.50%.
The PO Percentage with respect to any Non-Discount Mortgage Loan will be 0%. The
"Net Mortgage Rate" for any Mortgage Loan is the Loan Rate borne by such
Mortgage Loan minus the rate at which the Servicing Fee is calculated.
The "Class A-PO Principal Distribution Amount" for any Distribution
Date will equal the sum of the applicable PO Percentage of (a) all monthly
payments of principal due on each Mortgage Loan on the related Due Date, (b) the
principal portion of the purchase price of each Mortgage Loan that was
repurchased by the Originator pursuant to the Pooling and Servicing Agreement as
of such Distribution Date, (c) the Substitution Adjustment Amount in connection
with any Defective Mortgage Loan received with respect to such Distribution
Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable to recoveries
of principal of 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 Mortgage Loan that became a Liquidated Mortgage
Loan during the calendar month preceding the month of such Distribution Date,
the amount of Liquidation Proceeds allocable to principal received with respect
to such 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 Class A-PO
Principal Distribution Amount will be reduced on the related Distribution Date
by the applicable PO Percentage of the principal portion of such Bankruptcy
Loss.
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<PAGE>
The "Scheduled Principal Distribution Amounts" for any Distribution
Date will equal the sum of all amounts described in clauses (a) through (d) of
the definition of "Class A-PO Principal Distribution Amount" for such
Distribution Date; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Mortgage Loan that is not a
Liquidated Mortgage Loan, the Scheduled Principal Distribution Amounts will be
reduced on the related Distribution Date by the principal portion of such
Bankruptcy Loss.
The "Senior Credit Support Depletion Date" is the date on which the
Class Certificate Balance of each Class of Subordinated Certificates has been
reduced to zero.
The "Senior Principal Distribution Amount" for any Distribution Date
will equal the sum of (i) the Senior Percentage of the applicable Non-PO
Percentage of the Scheduled Principal Distribution Amount for such Distribution
Date, (ii) with respect to each 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 Stated Principal Balance of such 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 Master 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 allocable to principal received with respect to such
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 Collection Period; provided, however, that if a
Bankruptcy Loss that is an Excess Loss is sustained with respect to a 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.
"Stated Principal Balance" means as to any Mortgage Loan and Due Date,
the unpaid principal balance of such Mortgage Loan as of such Due Date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial prepayments
and Liquidation Proceeds received and to the payment of principal due on such
Due Date and irrespective of any delinquency in payment by the related
Mortgagor. The Pool Principal Balance with respect to any Distribution Date
equals the aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the Due Date in the month preceding the month of such
Distribution Date.
The "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 Senior Certificates (other than the Class
A-PO Certificates) immediately prior to such date and the denominator of which
is the aggregate of the Class Certificate Balances of all Classes of
Certificates, other than the Class A-PO Certificates, immediately prior to such
date. The Subordinated Percentage for any Distribution Date will be calculated
as the difference between 100% and the Senior Percentage for such date.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal 100%.
Thereafter, the 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 Senior
Certificates (other than Class A-PO Certificates) which receive these
unscheduled payments of principal while, in the absence of Realized Losses,
increasing the interest in the Pool Principal Balance evidenced by the
Subordinated Certificates. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates. The Subordinated Prepayment Percentage as of any
Distribution Date will be calculated as the difference between 100% and the
Senior Prepayment Percentage.
The 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 Senior
Percentage plus 70% of the Subordinated Percentage for such Distribution Date;
for any Distribution Date in the second year thereafter, the Senior Percentage
plus 60% of the Subordinated Percentage for such, Distribution Date; for any
Distribution Date in the third year thereafter, the Senior Percentage plus 40%
of the Subordinated Percentage for such
S-32
<PAGE>
Distribution Date; for any Distribution Date in the fourth year thereafter, the
Senior Percentage plus 20% of the Subordinated Percentage for such Distribution
Date; and for any Distribution Date thereafter, the Senior Percentage for such
Distribution Date (unless on any Distribution Date the Senior Percentage exceeds
the initial Senior Percentage, in which case the Senior Prepayment Percentage
for Such Distribution Date will once again equal 100%). Notwithstanding the
foregoing, no decrease in the Senior Prepayment Percentage will occur unless
both of the following conditions (the "Step Down Conditions") are satisfied: (i)
the outstanding principal balance of all Mortgage Loans delinquent 60 days or
more (averaged over the preceding six month period), as a percentage of the
aggregate principal balance of the Subordinated Certificates on such
Distribution Date, does not equal or exceed 50%, and (ii) cumulative Realized
Losses with respect to the 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 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
Senior Certificates (other than the Class A-IO Certificates and Class A-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 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.
SUBORDINATED CERTIFICATES. On each Distribution Date, to the extent of
Available Funds therefor, up to the amount of the Subordinated Principal
Distribution Amount for such Distribution Date, will be distributed as principal
to the Subordinated Certificates. Except as provided in the next paragraph, each
Class of Subordinated Certificates will be entitled to receive its pro rata
share of the Subordinated Principal Distribution Amount (based on its respective
Class Certificate Balance), in each case to the extent of the amount available
from Available Funds for distribution of principal. Distributions of principal
to the Class M, Class B-1 and Class B-2 Certificates will be made sequentially
to the Class M, Class B-1, and Class B-2 Certificates, until the respective
Class Certificate Balances thereof are reduced to zero, provided that, (i) the
aggregate amount of Accrued Certificate Interest and principal required to be
distributed to any Class of Class M, Class B-1 or Class B-2 Certificates having
a higher payment priority on such Distribution Date is distributed to holders of
such Class and (ii) the aggregate amount of Accrued Certificate Interest
required to be distributed to such class of Subordinated Certificates on such
Distribution Date is distributed to such Class of Class M, Class B-1 or Class
B-2 Certificate.
With respect to each Class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinated Certificates which 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 Subordinated Certificates in the sequential order described above.
The Class Subordination Percentage with respect to any Distribution
Date and each Class of Subordinated Certificates, will equal the fraction
(expressed as a percentage) the numerator of which is the Class Certificate
Balance of such Class of Subordinated Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate of the Class
Certificate Balances of all Certificates immediately prior to such Distribution
Date.
S-34
<PAGE>
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
Class M 4.25%
Class B-1 2.15%
Class B-2 1.25%
Class B-3 0.85%
Class B-4 0.50%
Class B-5 0.30%
The "Subordinated Principal Distribution Amount" for any Distribution
Date will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of the Scheduled Principal Distribution Amount for such
Distribution Date, (ii) with respect to each 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
allocable to principal received with respect to such Mortgage Loan, after
application of such amounts pursuant to clause (ii) of the definition of Senior
Principal Distribution Amount up to the Subordinated Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Mortgage
Loan and (iii) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of all partial and full principal prepayments by borrowers received
during the related Collection Period reduced by (B) the amount of any payments
in respect of Class A-PO Deferred Amounts on the related Distribution Date.
ALLOCATION OF LOSSES. On each Distribution Date, the applicable PO
Percentage of any Realized Loss, including any Excess Loss and Extraordinary
Losses, on a Discount Mortgage Loan will be allocated to the Class A-PO
Certificates until the Class Certificate Balance thereof is reduced to zero. The
amount of any such Realized Loss, other than an Excess Loss or Extraordinary
Losses, allocated on or prior to the Senior Credit Support Depletion Date will
be treated as a "Class A-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 Subordinated Principal Distribution Amount,
Class A-PO Deferred Amounts will be paid on the Class A-PO Certificates prior to
distributions of principal on the Subordinated Certificates. Any distribution of
Available Funds in respect of unpaid Class A-PO Deferred Amounts will not
further reduce the Class Certificate Balance of the Class A-PO Certificates. The
Class A-PO Deferred Amounts will not bear interest. The Class Certificate
Balance of the Class of Subordinated Certificates then outstanding with the
lowest relative priority of payment will be reduced by the amount of any
payments in respect of Class A-PO Deferred Amounts. After the Senior Credit
Support Depletion Date, no new Class A-PO Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Loss, other than any Excess Loss or Extraordinary Losses, will be
allocated first to the Subordinated Certificates, in the reverse order of their
relative priority of payment beginning with the Class of 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 Senior Certificates
(other than the Class A-PO Certificates) pro rata, based upon their respective
Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses and Extraordinary Losses will be allocated pro rata among the Classes of
Senior Certificates (other than the Class A-PO Certificates) and the
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 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 the reduction in the amount of the
Monthly Payment on the related Mortgage Loan pursuant to a bankruptcy
S-35
<PAGE>
proceeding or the establishment of the value of any Mortgaged Property by a
bankruptcy court at an amount less than the then outstanding principal balance
of the Mortgage Loan. "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 aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Loss Coverage
Amount") through Subordination shall initially be equal to approximately
$2,478,897. As of any date of determination following the Cut-off date, the
Special Hazard Loss Coverage Amount shall equal approximately $2,478,897 less
the sum of (A) any amounts allocated through Subordination in respect of Special
Hazard Loss Coverage Amount Losses and (B) the Adjustment Amount. The
"Adjustment Amount" will be equal to an amount calculated pursuant to the terms
of the Pooling and Servicing Agreement.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Coverage Amount") through
Subordination shall initially be equal to approximately $4,245,289. As of any
date of determination after the Cut-off Date and up to the first anniversary of
the Cut-off Date, the Fraud Loss Coverage Amount shall equal an amount equal to
2.00% of the aggregate principal balance of all of the Mortgage Loans as of the
Cut-off Date minus the aggregate amounts allocated through Subordination with
respect to Fraud Losses up to such date of determination. As of any date of
determination after the first anniversary of the Cut-off Date up to the fifth
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount shall equal an
amount equal to 1.00% of the aggregate principal balance of all of the Mortgage
Loans as of the Cut-off Date minus the aggregate amounts allocated through
Subordination with respect to Fraud Losses up to such date of determination. On
and after the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall
be zero and Fraud Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Loss Coverage Amount")
through Subordination will initially be equal to approximately $100,000. As of
any date of determination on or after the first anniversary of the Cut-off Date,
the Bankruptcy Loss Coverage Amount will equal the excess, if any, of (1) the
lesser of (a) the Bankruptcy Loss Coverage Amount as of the business day next
preceding the most recent anniversary of the Cut-off Date and (b) an amount
calculated pursuant to the terms of the Pooling and Servicing Agreement, which
amount as calculated will provide for a reduction in the Bankruptcy Loss
Coverage Amount, over (2) the aggregate amount of Bankruptcy Losses allocated
solely to the Class M Certificates or Class B Certificates through Subordination
since such anniversary.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which
the Master 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 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."
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of 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. 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.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be related to the
rate and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations
and repurchases by the Originator). The Mortgage Loans are subject to the
"due-on-sale" provisions included therein. See "The Mortgage Pool" herein.
S-36
<PAGE>
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the
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 Certificates is purchased at a discount or premium, and the degree to which
the timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. Further, an investor should consider the risk
that, in the case of any Offered Certificate purchased at a discount, a slower
than anticipated rate of principal payments (including prepayments) on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate purchased
at a premium, a faster than anticipated rate of principal payments on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield.
As described herein under "Description of the Certificates--Allocation
of Losses" amounts otherwise distributable to holders of one or more of the
Class M, Class B-1 and Class B-2 Certificates may be made available to protect
the holders of the Senior Certificates and holders of any of the Class M, Class
B-1 and Class B-2 Certificates with a higher payment priority against
interruptions in distributions due to certain mortgagor delinquencies, to the
extent not covered by Advances. Such delinquencies may affect the yields to
investors on such classes of the Class M, Class B-1 and Class B-2 Certificates,
and, even if subsequently cured, may affect the timing of the receipt of
distributions by the holders of the Class M, Class B-1 and Class B-2
Certificates. Furthermore, the Class A-PO Certificates will share in the
principal portion of Realized Losses on the Mortgage Loans only to the extent
that they are incurred with respect to Discount Mortgage Loans and only to the
extent of the related Discount Fraction; thus, after the Subordinated
Certificates are retired or in the case of Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses, the Senior
Certificates (other than the Class A-PO Certificates) may be affected to a
greater extent by losses on Non-Discount Mortgage Loans than losses on Discount
Mortgage Loans. In addition, a higher than expected rate of delinquencies or
losses will also affect the rate of principal payments on one or more of the
Class M, Class B-1 and Class B-2 Certificates if it delays the scheduled
reduction of the Senior Prepayment Percentage or affects the allocation of
prepayments among the Subordinated Certificates.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the Master Servicer, including Prepayment
Interest Shortfalls and, in the case of each class of the Class M, Class B-1 and
Class B-2 Certificates, the interest portions of Realized Losses allocated
solely to such class of Certificates. Such shortfalls will not be offset by a
reduction in the Servicing Fees payable to the Master Servicer or otherwise,
except as described herein with respect to certain Prepayment Interest
Shortfalls. See "Yield Considerations" in the Prospectus and "Description of the
Certificates--Interest Distributions" herein for a discussion of the effect of
principal prepayments on the Mortgage Loans on the yield to maturity of the
Offered Certificates and certain possible shortfalls in the collection of
interest.
The yield to investors in the Offered Certificates will be affected by
Prepayment Interest Shortfalls allocable thereto in the month preceding any
Distribution Date to the extent that such shortfalls exceed the amount offset by
the Master Servicer. See "Description of the Certificates--Interest
Distributions" herein.
Because the Loan Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates (other than the Class A-IO Certificates) are fixed,
such rates will not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
such Offered Certificates were to rise, the market value of such Offered
Certificates may decline.
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. No assurances can be given as to the rate of prepayments
on the Mortgage Loans in stable or changing interest rate environments.
S-37
<PAGE>
The periodic increase in interest paid by the mortgagor of a Buydown
Mortgage Loan may increase the risk of default with respect to the related
Mortgage Loan. Mortgagors of Relocation Loans generally are more likely to be
transferred by their employers than mortgagors in general, therefore, such
Mortgage Loans may prepay faster than other loans with similar characteristics
that are not Relocation Loans. See "Yield Considerations--Prepayments--Maturity
and Weighted Average Life" in the Prospectus.
CLASS A-3 CERTIFICATES: Investors in the Class A-3 Certificates should
be aware that because the Class A-3 Certificates do not receive any
distributions of principal prepayments of principal prior to the Distribution
Date occurring in May 2004 and until the Distribution Date occurring in May 2008
may receive a disproportionately small portion of principal prepayments (unless
the Class Certificate Balances of the Senior Certificates (other than the Class
A-3 Certificates and Class A-PO Certificates) have been reduced to zero), the
weighted average life of such Certificates will be longer than would otherwise
be the case, and the effect on the market value of such Certificates of changes
in market interest rates or market yields for similar securities will be greater
than for other classes of Senior Certificates entitled to such distributions.
CERTIFICATES WITH SUBORDINATION FEATURES: After the Class Certificate
Balances of the Class B-5, Class B-4 and Class B-3 Certificates have been
reduced to zero, the yield to maturity on the Class of Class M, Class B-1 and
Class B-2 Certificates then outstanding with the lowest payment priority will be
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
because the entire amount of losses that are covered by Subordination will be
allocated to such Class of Subordinated Certificates. Furthermore, because
principal distributions are paid to certain classes of Senior Certificates and
Class M, Class B-1 and Class B-2 Certificates before other Classes, holders of
classes having a later priority of payment bear a greater risk of losses than
holders of classes having earlier priority for distribution of principal.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to certain Classes of the Offered 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated
(the "Underwriter") 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."
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
prepayment speed assumption "PSA", represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% PSA assumes constant prepayment
rates of 0.20% per annum of the then outstanding principal
S-38
<PAGE>
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional 0.20% per annum in each month thereafter until the 30th
month. Beginning in the 30th month and in each month thereafter during the life
of the mortgage loans, 100% PSA assumes a constant prepayment rate of 6% per
annum each month. As used in the table below, "0% PSA" assumes prepayment rates
equal to 0% of PSA (no prepayments). Correspondingly, "275% PSA" assumes
prepayment rates equal to 275% of PSA, and so forth. PSA 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-40 through S-43 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 the initial Class
Certificate Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-40 through S-43. 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-40
through S-43 were determined assuming that (the "Structuring Assumptions"): (i)
the Mortgage Loans have the following characteristics:
<TABLE>
<CAPTION>
Discount Non-Discount
Mortgage Loans Mortgage Loans
-------------- --------------
<S> <C> <C>
Aggregate principal balance.......................... $31,240,065.38 $181,024,414.21
Weighted average Loan Rate........................... 6.499099% 7.140337%
Weighted average Net Mortgage Rate 6.299099% 6.933609%
Weighted average original term
to maturity (months)................................. 354 358
Weighted average remaining term to
maturity (months).................................... 354 358
</TABLE>
(ii) the closing date for the Offered Certificates occurs on April 29, 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 May 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 PSA indicated, (v) prepayments include thirty days' interest
thereon, (vi) the Originator 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) scheduled payments for all Mortgage Loans are received
on the first day of each month commencing in May 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, (viii) 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, (ix) such prepayments are received on the
last day of each month commencing in the month prior to the Closing Date, and
(x) the Pass-Through Rates for the Offered Certificates are as set forth herein.
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 initial Class Certificate Balance of each such
Class that would be outstanding after each of the dates shown.
S-39
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS CERTIFICATE BALANCE OUTSTANDING* AT THE FOLLOWING PERCENTAGES OF PSA
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A-1 CLASS A-2
-------------------------------------------------------------------------------
Distribution Date 0% 150% 275% 400% 550% 0% 150% 275% 400% 550%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
April 25, 2000.................................... 99 96 94 92 90 100 100 100 100 100
April 25, 2001.................................... 98 89 81 74 66 100 100 100 100 100
April 25, 2002.................................... 96 78 63 50 36 100 100 100 100 100
April 25, 2003.................................... 95 67 48 32 16 100 100 100 100 100
April 25, 2004.................................... 94 58 35 18 2 100 100 100 100 100
April 25, 2005.................................... 92 50 26 9 0 100 100 100 100 41
April 25, 2006.................................... 90 43 18 2 0 100 100 100 100 0
April 25, 2007.................................... 89 37 13 0 0 100 100 100 83 0
April 25, 2008.................................... 87 32 9 0 0 100 100 100 56 0
April 25, 2009.................................... 84 28 5 0 0 100 100 100 42 0
April 25, 2010.................................... 82 24 3 0 0 100 100 100 31 0
April 25, 2011.................................... 80 20 1 0 0 100 100 100 23 0
April 25, 2012.................................... 77 17 0 0 0 100 100 89 17 0
April 25, 2013.................................... 75 14 0 0 0 100 100 72 12 0
April 25, 2014.................................... 72 11 0 0 0 100 100 58 9 0
April 25, 2015.................................... 68 9 0 0 0 100 100 47 7 0
April 25, 2016.................................... 65 6 0 0 0 100 100 37 5 0
April 25, 2017.................................... 61 4 0 0 0 100 100 30 3 0
April 25, 2018.................................... 57 3 0 0 0 100 100 23 2 0
April 25, 2019.................................... 53 1 0 0 0 100 100 18 2 0
April 25, 2020.................................... 49 0 0 0 0 100 95 14 1 0
April 25, 2021.................................... 44 0 0 0 0 100 79 11 1 0
April 25, 2022.................................... 39 0 0 0 0 100 65 8 1 0
April 25, 2023.................................... 33 0 0 0 0 100 52 6 0 0
April 25, 2024.................................... 27 0 0 0 0 100 40 4 0 0
April 25, 2025.................................... 21 0 0 0 0 100 30 3 0 0
April 25, 2026.................................... 14 0 0 0 0 100 21 2 0 0
April 25, 2027.................................... 6 0 0 0 0 100 13 1 0 0
April 25, 2028.................................... 0 0 0 0 0 81 5 0 0 0
April 25, 2029.................................... 0 0 0 0 0 0 0 0 0 0
----- ---- ---- ---- ---- ----- ----- ----- ----- ----
Weighted Average Life
(in years)** 18.99 7.41 4.50 3.30 2.63 29.34 24.54 16.78 10.51 5.96
===== ==== ==== ==== ==== ===== ===== ===== ===== ====
</TABLE>
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Certificate is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on such Class of Certificate by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum
by the aggregate amount of the assumed net reduction of the Class
Certificate Balance of such Class of Certificate.
(TABLE CONTINUED ON NEXT PAGE).
S-40
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS CERTIFICATE BALANCE OUTSTANDING* AT THE FOLLOWING PERCENTAGES OF PSA
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A-3 CLASS A-4
-------------------------------------------------------------------------------
Distribution Date 0% 150% 275% 400% 550% 0% 150% 275% 400% 550%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
April 25, 2000.................................... 99 99 99 99 99 99 96 93 91 88
April 25, 2001.................................... 98 98 98 98 98 97 86 77 69 58
April 25, 2002.................................... 97 97 97 97 97 96 73 56 40 23
April 25, 2003.................................... 95 95 95 95 95 94 61 37 18 0
April 25, 2004.................................... 94 94 94 94 94 92 49 22 1 0
April 25, 2005.................................... 93 90 88 85 82 90 40 10 0 0
April 25, 2006.................................... 91 85 80 75 66 88 31 1 0 0
April 25, 2007.................................... 89 79 71 63 40 86 24 0 0 0
April 25, 2008.................................... 88 72 60 49 25 84 18 0 0 0
April 25, 2009.................................... 86 64 49 37 16 81 13 0 0 0
April 25, 2010.................................... 84 57 40 27 11 79 8 0 0 0
April 25, 2011.................................... 81 50 32 20 7 76 3 0 0 0
April 25, 2012.................................... 79 44 26 15 5 73 0 0 0 0
April 25, 2013.................................... 76 39 21 11 3 69 0 0 0 0
April 25, 2014.................................... 74 34 17 8 2 66 0 0 0 0
April 25, 2015.................................... 71 30 14 6 1 62 0 0 0 0
April 25, 2016.................................... 68 26 11 4 1 58 0 0 0 0
April 25, 2017.................................... 64 23 9 3 0 53 0 0 0 0
April 25, 2018.................................... 61 19 7 2 0 48 0 0 0 0
April 25, 2019.................................... 57 16 5 2 0 43 0 0 0 0
April 25, 2020.................................... 53 14 4 1 0 38 0 0 0 0
April 25, 2021.................................... 48 12 3 1 0 32 0 0 0 0
April 25, 2022.................................... 43 9 2 1 0 26 0 0 0 0
April 25, 2023.................................... 38 8 2 0 0 19 0 0 0 0
April 25, 2024.................................... 33 6 1 0 0 12 0 0 0 0
April 25, 2025.................................... 27 4 1 0 0 4 0 0 0 0
April 25, 2026.................................... 20 3 1 0 0 0 0 0 0 0
April 25, 2027.................................... 13 2 0 0 0 0 0 0 0 0
April 25, 2028.................................... 6 1 0 0 0 0 0 0 0 0
April 25, 2029.................................... 0 0 0 0 0 0 0 0 0 0
----- ----- ----- ---- ---- ----- ---- ---- ---- ----
Weighted Average Life
(in years)** 19.78 13.24 10.80 9.45 7.94 17.17 5.55 3.50 2.71 2.23
===== ===== ===== ==== ==== ===== ==== ==== ==== ====
</TABLE>
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Certificate is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on such Class of Certificate by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum
by the aggregate amount of the assumed net reduction of the Class
Certificate Balance of such Class of Certificate.
(TABLE CONTINUED FROM PREVIOUS PAGE AND CONTINUED ON NEXT PAGE).
S-41
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS CERTIFICATE BALANCE OUTSTANDING* AT THE FOLLOWING PERCENTAGES OF PSA
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A-5 CLASS A-6
-------------------------------------------------------------------------------
Distribution Date 0% 150% 275% 400% 550% 0% 150% 275% 400% 550%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
April 25, 2000.................................. 100 100 100 100 100 99 97 95 94 92
April 25, 2001.................................. 100 100 100 100 100 98 90 84 79 72
April 25, 2002.................................. 100 100 100 100 100 96 81 70 60 49
April 25, 2003.................................. 100 100 100 100 91 95 73 58 45 32
April 25, 2004.................................. 100 100 100 100 13 93 65 47 34 21
April 25, 2005.................................. 100 100 100 50 0 92 59 39 25 14
April 25, 2006.................................. 100 100 100 14 0 90 52 32 19 9
April 25, 2007.................................. 100 100 73 0 0 88 47 26 14 6
April 25, 2008.................................. 100 100 49 0 0 86 41 21 10 4
April 25, 2009.................................. 100 100 32 0 0 84 37 17 8 3
April 25, 2010.................................. 100 100 17 0 0 82 33 14 6 2
April 25, 2011.................................. 100 100 5 0 0 80 29 11 4 1
April 25, 2012.................................. 100 97 0 0 0 77 25 9 3 1
April 25, 2013.................................. 100 80 0 0 0 74 22 7 2 0
April 25, 2014.................................. 100 64 0 0 0 71 20 6 2 0
April 25, 2015.................................. 100 50 0 0 0 68 17 5 1 0
April 25, 2016.................................. 100 37 0 0 0 65 15 4 1 0
April 25, 2017.................................. 100 26 0 0 0 62 13 3 1 0
April 25, 2018.................................. 100 15 0 0 0 58 11 2 0 0
April 25, 2019.................................. 100 6 0 0 0 54 9 2 0 0
April 25, 2020.................................. 100 0 0 0 0 50 8 1 0 0
April 25, 2021.................................. 100 0 0 0 0 45 6 1 0 0
April 25, 2022.................................. 100 0 0 0 0 40 5 1 0 0
April 25, 2023.................................. 100 0 0 0 0 35 4 1 0 0
April 25, 2024.................................. 100 0 0 0 0 30 3 0 0 0
April 25, 2025.................................. 100 0 0 0 0 24 2 0 0 0
April 25, 2026.................................. 79 0 0 0 0 18 2 0 0 0
April 25, 2027.................................. 37 0 0 0 0 11 1 0 0 0
April 25, 2028.................................. 0 0 0 0 0 4 0 0 0 0
April 25, 2029.................................. 0 0 0 0 0 0 0 0 0 0
----- ----- ---- ---- ---- ----- ---- ---- ---- ----
Weighted Average Life
(in years)** 27.71 16.28 9.29 6.13 4.53 19.22 9.20 6.13 4.60 3.59
===== ===== ==== ==== ==== ===== ==== ==== ==== ====
</TABLE>
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Certificate is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on such Class of Certificate by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum
by the aggregate amount of the assumed net reduction of the Class
Certificate Balance of such Class of Certificate.
(TABLE CONTINUED FROM PREVIOUS PAGE AND CONTINUED ON NEXT PAGE).
S-42
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CLASS CERTIFICATE BALANCE OUTSTANDING* AT THE FOLLOWING PERCENTAGES OF PSA
- ----------------------------------------------------------------------------------------------
CLASS M, B-1, AND B-2
--------------------------------
Distribution Date 0% 150% 275% 400% 550%
- ----------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100%
April 25, 2000.................................... 99 99 99 99 99
April 25, 2001.................................... 98 98 98 98 98
April 25, 2002.................................... 97 97 97 97 97
April 25, 2003.................................... 95 95 95 95 95
April 25, 2004.................................... 94 94 94 94 94
April 25, 2005.................................... 93 90 88 85 82
April 25, 2006.................................... 91 85 80 75 69
April 25, 2007.................................... 89 79 71 63 53
April 25, 2008.................................... 88 72 60 49 38
April 25, 2009.................................... 86 64 49 37 25
April 25, 2010.................................... 84 57 40 27 16
April 25, 2011.................................... 81 50 32 20 11
April 25, 2012.................................... 79 44 26 15 7
April 25, 2013.................................... 76 39 21 11 4
April 25, 2014.................................... 74 34 17 8 3
April 25, 2015.................................... 71 30 14 6 2
April 25, 2016.................................... 68 26 11 4 1
April 25, 2017.................................... 64 23 9 3 1
April 25, 2018.................................... 61 19 7 2 0
April 25, 2019.................................... 57 16 5 2 0
April 25, 2020.................................... 53 14 4 1 0
April 25, 2021.................................... 48 12 3 1 0
April 25, 2022.................................... 43 9 2 1 0
April 25, 2023.................................... 38 8 2 0 0
April 25, 2024.................................... 33 6 1 0 0
April 25, 2025.................................... 27 4 1 0 0
April 25, 2026.................................... 20 3 1 0 0
April 25, 2027.................................... 13 2 0 0 0
April 25, 2028.................................... 6 1 0 0 0
April 25, 2029.................................... 0 0 0 0 0
----- ----- ----- ---- ----
Weighted Average Life
(in years)** 19.78 13.24 10.80 9.45 8.47
===== ===== ===== ==== ====
</TABLE>
- ---------------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Certificate is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on such Class of Certificate by the number of
years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum
by the aggregate amount of the assumed net reduction of the Class
Certificate Balance of such Class of Certificate.
(TABLE CONTINUED FROM PREVIOUS PAGE).
S-43
<PAGE>
CLASS A-PO CERTIFICATES AND CLASS A-IO CERTIFICATES YIELD CONSIDERATIONS
Because the Class A-PO Certificates will be purchased at a discount,
the yield on the Class A-PO Certificates will be adversely affected by slower
than expected payments of principal (including prepayments, defaults,
liquidations and purchases of Mortgage Loans due to a breach of a representation
and warranty) on the Discount Mortgage Loans.
The yield to maturity on the Class A-IO Certificates will be extremely
sensitive to both the timing of receipt of prepayments and the overall rate of
principal prepayments and defaults on the Non-Discount Mortgage Loans, which
rate may fluctuate significantly over time. Investors in the Class A-IO
Certificates should fully consider the risk that a rapid rate of prepayments on
the Non-Discount Mortgage Loans could result in the failure of such investors to
fully recover their investments.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class A-PO Certificates and Class A-IO Certificates to various
constant rates of prepayment on the Mortgage Loans by projecting the monthly
aggregate payments on the Class A-PO Certificates and Class A-IO Certificates
and computing the corresponding pre-tax yields to maturity on a corporate bond
equivalent basis, based on the Structuring Assumptions including the assumptions
regarding the characteristics and performance of the Mortgage Loans which differ
from the actual characteristics and performance thereof and assuming the
purchase prices set forth below. Any differences between such assumptions and
the actual characteristics and performance of the Mortgage Loans and of such
Certificates may result in yields being different from those shown in such
tables. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying prepayment
scenarios.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS A-PO
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
ASSUMED PURCHASE PRICE 0% 150% 275% 400% 550%
---------------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
63.96875% 2.436% 5.605% 8.535% 11.295% 14.332%
</TABLE>
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS A-IO
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
ASSUMED PURCHASE PRICE 0% 150% 275% 400% 550%
---------------------- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.796875% 23.294% 15.743% 9.304% 2.732% (5.326)%
</TABLE>
*Purchase price does not include accrued interest.
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class A-PO Certificates and Class
A-IO Certificates, as applicable, would cause the discounted present value of
such assumed stream of cash flows to equal the assumed purchase price listed in
the applicable table. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class A-IO Certificates or Class A-PO Certificates, and
thus do not reflect the return on any investment in the Class A-IO Certificates
or Class A-PO Certificates when any reinvestment rates other than the discount
rates set forth in the preceding tables are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields to maturity on the Class
A-IO Certificates and Class A-PO Certificates is likely to differ from those
shown in the tables, even if all of the Mortgage Loans prepay at the constant
percentages of PSA indicated in the tables above over any given time period or
over the entire life of the Certificates. A lower than anticipated rate of
principal prepayments on the Discount Mortgage Loans will have a material
adverse
S-44
<PAGE>
effect on the yield to maturity of the Class A-PO Certificates. The rate and
timing of principal prepayments on the Discount Mortgage Loans may differ from
the rate and timing of principal prepayments on the Mortgage Pool. In addition,
because the Discount Mortgage Loans have Net Mortgage Rates that are lower than
the Net Mortgage Rates of the Non-Discount Mortgage Loans, and because Mortgage
Loans with lower Net Mortgage Rates are likely to have lower Loan Rates, the
Discount Mortgage Loans are generally likely to prepay under most circumstances
at a lower rate than the Non-Discount Mortgage Loans. In addition, holders of
the Class A-IO Certificates generally have rights to relatively larger portions
of interest payments on Mortgage Loans with higher Loan Rates; thus, the yield
on the Class A-IO Certificates will be materially adversely affected to a
greater extent than on the other Offered Certificates if the Mortgage Loans with
higher Loan Rates prepay faster than the Mortgage Loans with lower Loan Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class A-IO Certificates and Class A-PO
Certificates will conform to the yields described herein. Moreover, the various
remaining terms to maturity and Loan Rates of the Mortgage Loans could produce
slower or faster principal distributions than indicated in the preceding table
at the various constant percentages of PSA specified, even if the weighted
average remaining term to maturity and weighted average Loan Rate of the
Mortgage Loans are as assumed. Investors are urged to make their investment
decisions based on their determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class A-IO Certificates should
fully consider the risk that a rapid rate of prepayments on the Mortgage Loans
could result in the failure of such investors to fully recover their
investments.
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 Offered Certificates has been set to equal
the Distribution Date in the twelfth month after the month of maturity of the
latest maturing Mortgage Loan. Since the rate of distributions in reduction of
the Class Certificate Balance of each Class of Offered Certificates will depend
on the rate of payment (including prepayments) of the Mortgage Loans, the Class
Certificate Balance of any such Class could be reduced to zero significantly
earlier or later than the Final Scheduled Distribution Date. The rate of
payments on the Mortgage Loans will depend on their particular characteristics,
as well as on prevailing interest rates from time to time and other economic
factors, and no assurance can be given as to the actual payment experience of
the Mortgage Loans.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and "Material Federal Income
Tax Consequences" in the Prospectus.
Pursuant to the Pooling and Servicing Agreement, transfers of Residual
Certificates are prohibited to any non-United States person. Transfers of
certain of the Certificates, including the Residual Certificates, are also
subject to additional transfer restrictions as set forth in the Pooling and
Servicing Agreement. See "Certain Federal Income Tax Consequences" herein and
"Material Federal Income Tax Consequences--REMICs" and "--Tax-Related
Restrictions on Transfers of REMIC Residual Certificates--Noneconomic REMIC
Residual Certificates" in the Prospectus.
S-45
<PAGE>
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
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, the Residual Certificates will
constitute the sole class of "residual interests" in the REMIC. The Senior
Certificates (other than the Residual Certificates), the Class M Certificates
and Class B Certificates will represent ownership of "regular interests" in the
REMIC. See "Material Federal Income Tax Consequences--REMICs" in the Prospectus.
The Class A-1, Class A-3 and Class A-4 Certificates will not, and the
Class A-2 Certificates may, and the Class M, Class B-1, Class B-2, Class A-PO
and Class A-IO Certificates will, 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, market discount and premium, if any,
for federal income tax purposes will be based on the assumption that, subsequent
to the date of any determination the Mortgage Loans will prepay at a rate equal
to 275%. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount and Premium" in the Prospectus.
Purchasers of the Class A-IO Certificates should be aware that Section
1272(a)(6) of the Code and the OID Regulations do not adequately address certain
issues relevant to, or applicable to, prepayable securities bearing a variable
rate of interest such as the Class A-IO Certificates. In the absence of other
authority, the Trustee intends to be guided by certain principles of the OID
Regulations applicable to variable rate debt instruments in determining whether
such Certificates should be treated as issued with original issue discount and
in adapting the provisions of Section 1272(a)(6) of the Code to such Offered
Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Offered Certificates and
because the rules relating to debt instruments having a variable rate of
interest are limited in their application in ways that could preclude their
application to such Offered Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class A-IO Certificates
should be governed by some other method not yet set forth in regulations.
Prospective purchasers of the Class A-IO Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, the amount of original issue discount allocable to such
period would be zero and such Certificateholder will be permitted to offset such
negative amount only against future original issue discount (if any)
attributable to such Offered Certificates.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Trustee in preparing reports to the
Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult
S-46
<PAGE>
their tax advisors regarding the possibility of making an election to amortize
such premium. See "Material Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Regular Certificates" in the Prospectus.
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 of 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 such Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Offered Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Depositor to repurchase such Offered Certificates may
adversely affect any REMIC that holds such Offered Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See "The Pooling and Servicing Agreement--Termination" herein and "Material
Federal Income Tax Consequences--REMICs" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations under the provisions of the Code
that significantly affect holders of Residual Certificates. The REMIC
Regulations impose restrictions on the transfer or acquisition of certain
residual interests, including the Residual Certificates. The Pooling and
Servicing Agreement includes certain other provisions regarding the transfer of
Residual Certificates, including (I) the requirement that any transferee of a
Residual Certificate provide an affidavit representing that such transferee (a)
is not a "disqualified organization," (b) is not acquiring the Residual
Certificate on behalf of a "disqualified organization" and (c) will maintain
such status and will obtain a similar affidavit from any person to whom such
transferee shall subsequently transfer a Residual Certificate, (ii) a provision
that any transfer of a Residual Certificate to a "disqualified person" shall be
null and void and (iii) a grant to the Master Servicer of the right, without
notice to the holder or any prior holder, to sell to a purchaser of its choice
any Residual Certificate that shall become owned by a "disqualified
organization" despite (I) and (ii) above. In addition, pursuant to the Pooling
and Servicing Agreement, the Residual Certificates may not be transferred to
non-United States persons.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates will constitute noneconomic residual
interests for purposes of the REMIC Regulations and, accordingly, unless no
significant purpose of a transfer is to impede the assessment or collection of
tax, transfers of the Residual Certificates will be disregarded and purported
transferors will remain liable for any taxes due with respect to the income on
the Residual Certificates. All transfers of the Residual Certificates will be
subject to certain restrictions under the terms of the Pooling and Servicing
Agreement that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Residual Certificates constitute noneconomic
residual interests. See "Material Federal Income Tax Consequences--REMICs--
Taxation of Owners of REMIC Residual Certificates--Tax Related Restrictions on
Transfers of REMIC Residual Certificates" in the Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the related
REMIC's term that significantly exceeds the amount of cash distributions
received by such Residual Certificateholders from the REMIC with respect to such
periods. Furthermore, the tax on such income may exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the REMIC's term as a result of their ownership of the
Residual Certificates. In addition, the required inclusion of this amount of
taxable income during the REMIC's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Residual Certificate (or possibly later under
the "wash sale" rules
S-47
<PAGE>
of Section 1091 of the Code) may cause the Residual Certificateholders'
after-tax rate of return to be zero or negative even if the Residual
Certificateholders' pre-tax rate of return is positive. That is, on a present
value basis, the Residual Certificateholders' resulting tax liabilities could
substantially exceed the sum of any tax benefits and the amount of any cash
distributions on such Residual Certificates over their life.
An individual, trust or estate that holds (whether directly or
indirectly through certain pass-through entities) a Residual Certificate may
have significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the REMIC in computing such
Certificateholder's regular tax liability and will not be able to deduct such
fees or expenses to any extent in computing such Certificateholder's alternative
minimum tax liability. Such expenses will be allocated for federal income tax
information reporting purposes entirely to the Residual Certificates. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Pass-Through of Non-Interest Expenses of the REMIC" in
the Prospectus.
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
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 (each a "Plan") should carefully review with its legal advisors whether
the purchase or holding of Offered Certificates could give rise to a transaction
that is prohibited or is not otherwise permitted either under ERISA or Section
4975 of the Code.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), on May 24, 1990 to the
Underwriter which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 502(i) of ERISA, certain transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding of
mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this discussion, the term "Underwriter"
shall include (a) Merrill Lynch, Pierce, Fenner & Smith Incorporated, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with Merrill Lynch, Pierce, Fenner & Smith
Incorporated and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to the Offered Certificates.
The purchase or holding of the Offered Certificates (other than the
Class M Certificates, Class B-1 Certificates, Class B-2 Certificates or Residual
Certificates) by or on behalf of, or with Plan Assets (as defined in Department
of Labor ("DOL") regulations at 29 C.F.R. Section 2510.3-101) of, a Plan may
qualify for exemptive relief under the Exemption. However, the Exemption
contains a number of conditions which must be met for the Exemption to apply,
including the requirement that any such 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.
S-48
<PAGE>
Insurance companies contemplating the investment of general account
assets in the Offered Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA. The DOL issued proposed
regulations under Section 401(c) on December 22, 1997, but the required final
regulations have not been issued as of the date hereof.
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 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 Fund 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 exemptive relief afforded by the Exemption (or any similar
exemption that may be available) will not likely apply to the purchase, sale or
holding of the Class M, Class B-1 or Class B-2 Certificates, no such Class of
Certificates (or any interest therein) may be acquired or held by any Plan, any
trustee or other person acting on behalf of any Plan, or any other person using
Plan Assets to effect such acquisition or holding (each, a "Plan Investor")
unless (i) such acquirer or holder is an insurance company, (ii) the source of
funds used to acquire or hold such Certificate (or interest therein) is an
"insurance company general account" (as defined in U.S. Department of Labor
Prohibited Transaction Class Exemption ("PTCE") 95-60), and (iii) the conditions
set forth in Sections I and III of PTCE 95-60 have been satisfied. Each
Beneficial Owner of a Class M, Class B-1 and Class B-2 Certificate (or any
interest therein) shall be deemed to have represented, by virtue of its
acquisition or holding of such Certificate (or interest therein), that either
(i) it is not a Plan Investor or (ii) (1) it is an insurance company, (2) the
source of funds used to acquire or hold such Certificate (or interest therein)
is an "insurance company general account" (as such term is defined in PTCE
95-60), and (3) the conditions set forth in Sections I and III of PTCE 95-60
have been satisfied.
If any Class M, Class B-1 or Class B-2 Certificate (or any interest
therein) is acquired or held in violation of the provisions of the preceding
paragraph, the next preceding permitted Beneficial Owner will be treated as the
Beneficial Owner of such Class M, Class B-1 or Class B-2 Certificate,
retroactive to the date of transfer to the purported Beneficial Owner. Any
purported Beneficial Owner whose acquisition or holding of any such Certificate
(or interest therein) was effected in violation of the provisions of the
preceding paragraph shall indemnify and hold harmless the Depositor, the
Trustee, the Master Servicer and the Trust from and against any and all
liabilities, claims, costs or expenses incurred by such parties as a result of
such acquisition or holding.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) also will not likely apply to the purchase,
sale or holding of the Residual Certificates, transfers of such Certificates to
any Plan Investor will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion of
counsel satisfactory to the Depositor, the Trustee and the Master Servicer,
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer, that the purchase of such Certificates by or on behalf of such
Plan Investor is permissible under applicable law, will not constitute or result
in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement.
Any fiduciary or other investor of Plan Assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to: (I) whether the specific and
general conditions and the other requirements in the Exemption would be
satisfied, or whether any other prohibited transaction exemption would apply,
and (ii) the potential applicability of the general fiduciary responsibility
provisions
S-49
<PAGE>
of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related Underwriter that such an
investment meets all relevant legal requirements with respect to investments by
Plans generally or any particular Plan, or that such an investment is
appropriate for Plans generally or any particular
Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Senior Certificates and Class M 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 B-1 and Class B-2 Certificates 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 the Underwriter (an affiliate of the
Depositor), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered Certificates.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. The Underwriter may effect such
transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriter, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of 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").
Delivery of the Offered Certificates (other than the Class A-IO, Class
A-PO and Residual Certificates) will be made in book-entry form through the
facilities of The Depository Trust Company, Cedelbank and the Euroclear System
on or about April 29, 1999, and delivery of the Class A-IO, Class A-PO and the
Residual Certificates will be made at the offices of the Underwriter, New York,
New York on or about April 29, 1999, against payment therefor in immediately
available funds.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but has 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 Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
S-50
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood,
New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Certificates receive the following ratings from Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's")
and Fitch IBCA, Inc. ("Fitch IBCA"):
Class Standard & Poor's Fitch IBCA
----- ----------------- ----------
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
A-IO AAAr AAA
A-PO AAAr AAA
R AAA AAA
M -- AA
B-1 -- A
B-2 -- BBB
Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders of the Offered Certificates of payments
required under the Pooling and Servicing Agreement. Standard & Poor's ratings
take into consideration the credit quality of the mortgage pool, structural and
legal aspects associated with the Offered Certificates, and the extent to which
the payment stream in the mortgage pool is adequate to make payments required
under the Certificates. Standard & Poor's rating on the Certificates does not,
however, constitute a statement regarding frequency of prepayments on the
mortgages. See "Offered Yield, Prepayment and Maturity Considerations" herein.
The "r" of the "AAAr" rating of the Class A-PO Certificates and Class A-IO
Certificates by Standard & Poor's is attached to highlight derivative, hybrid,
and certain other obligations that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest return
is indexed to equities, commodities, or currencies; certain swaps and options;
and interest only and principal only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The ratings assigned by Fitch IBCA to mortgage pass-through
certificates address the likelihood of the receipt by holders of the Offered
Certificates of all distributions to which they are entitled under the
transaction structure. Fitch IBCA ratings reflect its analysis of the riskiness
of the underlying mortgage loans and the structure of the transaction as set
forth in the operative documents. Fitch IBCA's ratings do not address the effect
on the certificates' yield attributable to prepayments or recoveries on the
underlying mortgage loans. Further, the rating on the Class A-IO Certificates
does not address whether investors therein will recoup their initial
investments. The rating on the Class A- PO Certificates only addresses the
return of the Certificate Principal Balance thereof. The rating on the Residual
Certificates only addresses the return of the Certificate Principal Balance
thereof and interest thereon at the related Pass- Through Rate.
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
S-51
<PAGE>
Certificates by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Offered Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-52
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Act ...............................................................S-50
Adjustment Amount.......................................................S-36
Advance ...............................................................S-21
Applicable Credit Support Percentage....................................S-34
Audit Committee Investigation...........................................S-17
Available Funds.........................................................S-29
Bankruptcy Loss Coverage Amount.........................................S-36
Bankruptcy Losses.......................................................S-35
Beneficial Owner........................................................S-25
Bishop's Gate.....................................................S-10, S-18
Bishop's Gate Mortgage Loan Purchase Agreement..........................S-10
Book-Entry Certificates.................................................S-25
Cedelbank...............................................................S-27
Cedelbank Participants..................................................S-27
Cendant ...............................................................S-17
Cendant Investigation...................................................S-17
Cendant Mortgage Loan Purchase Agreement................................S-10
Certificate Owners......................................................S-25
Certificateholder.......................................................S-25
Certificates............................................................S-25
Class A-PO Deferred Amount..............................................S-35
Class A-PO Principal Distribution Amount..........................S-32, S-33
Class Certificate Balance...............................................S-30
Collection Account......................................................S-21
Compensating Interest...................................................S-23
Cooperative.............................................................S-27
CUC ...............................................................S-17
Cut-off Date............................................................S-10
Cut-off Date Principal Balance..........................................S-10
Defective Mortgage Loans................................................S-21
Definitive Certificate..................................................S-25
Determination Date......................................................S-23
Discount Mortgage Loan..................................................S-32
Distribution Account....................................................S-21
Distribution Date.......................................................S-25
DOL ...............................................................S-48
DTC ...............................................................S-56
DTC Services............................................................S-29
Due Date .........................................................S-10, S-11
due-on-sale.............................................................S-10
Eligible Account........................................................S-21
ERISA" ...............................................................S-48
Euroclear...............................................................S-27
Euroclear Operator......................................................S-27
Euroclear Participants..................................................S-27
European Depositaries...................................................S-25
Excess Losses...........................................................S-35
Exemption...............................................................S-48
Extraordinary Losses....................................................S-30
Financial Intermediary..................................................S-25
Fitch IBCA..............................................................S-51
Fraud Loss Coverage Amount..............................................S-36
S-53
<PAGE>
Fraud Losses............................................................S-36
Global Securities.......................................................S-56
Government Investigations...............................................S-17
IML ...............................................................S-27
Industry ...............................................................S-29
Interest Accrual Period.................................................S-30
Investigations..........................................................S-17
Limited Documentation Programs..........................................S-16
Liquidated Mortgage Loan................................................S-36
Loan Rate...............................................................S-11
Lockout Prepayment Percentage...........................................S-32
Merrill Lynch...........................................................S-18
Method of Distribution.....................................................2
Mortgage ...............................................................S-11
Mortgage Loan Purchase Agreements.......................................S-10
Mortgage Loan Schedule..................................................S-20
Mortgage Loans..........................................................S-10
Mortgage Pool...........................................................S-10
Mortgaged Property......................................................S-11
Net Mortgage Rate.......................................................S-32
No Asset, No Income Program.............................................S-16
Non-Discount Mortgage Loan..............................................S-32
Notional Amount.........................................................S-30
Offered Certificates....................................................S-25
Optional Termination Date...............................................S-23
Original Applicable Credit Support Percentage...........................S-34
Original Subordinated Principal Balance.................................S-34
out-of-pocket...........................................................S-22
Pass-Through Rate.......................................................S-30
Percentage Interest.....................................................S-24
Plan ...............................................................S-48
Plan Investor...........................................................S-49
PO Formula Principal Amount.............................................S-32
PO Percentage...........................................................S-32
Pool Balance............................................................S-10
Pooling and Servicing Agreement.........................................S-19
Prepayment Interest Shortfall...........................................S-23
Prepayment Period.......................................................S-30
Principal Balance.......................................................S-10
PSA ...............................................................S-38
PTCE ...............................................................S-49
Purchase Price..........................................................S-20
Realized Loss...........................................................S-35
Record Date.............................................................S-25
Reduced Documentation Program...........................................S-16
Related Documents.......................................................S-20
Relevant Depositary.....................................................S-25
Relocation Mortgage Loans...............................................S-16
REO Property............................................................S-22
Report ...............................................................S-17
Residual Certificates...................................................S-24
residual interests......................................................S-46
Restricted Classes......................................................S-34
Rules ...............................................................S-26
Scheduled Principal Distribution Amounts................................S-33
S-54
<PAGE>
SEC ...............................................................S-17
Senior Certificates.....................................................S-24
Senior Credit Support Depletion Date....................................S-33
Senior Interest Distribution Amount.....................................S-31
Senior Percentage.......................................................S-33
Senior Prepayment Percentage............................................S-33
Senior Principal Distribution Amount..............................S-31, S-33
Servicing Advance.......................................................S-22
Servicing Fee...........................................................S-23
SMMEA ...............................................................S-50
Special Hazard Loss Coverage Amount.....................................S-36
Special Hazard Losses...................................................S-36
Special Hazard Mortgage Loan............................................S-36
Standard & Poor's.......................................................S-51
Stated Principal Balance................................................S-33
Step Down Conditions....................................................S-34
Streamlined Documentation Program.......................................S-16
Structuring Assumptions.................................................S-39
Subordinate Certificates................................................S-24
Subordinated Principal Distribution Amount..............................S-35
Systems ...............................................................S-29
Termination Price.......................................................S-23
Terms and Conditions....................................................S-27
Trust Fund..............................................................S-10
Trustee ...............................................................S-22
Trustee Fee.............................................................S-22
U.S. Person.............................................................S-58
Underwriter.......................................................S-38, S-48
Willkie Farr............................................................S-17
Year 2000 problems......................................................S-29
S-55
<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.
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.
S-56
<PAGE>
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 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.
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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 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
S-58
<PAGE>
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.
S-59
<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.
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<PAGE>
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.
2
<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
3
<PAGE>
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Securities (the "Securityholders") upon
request to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the
Agreements--Evidence as to Compliance." The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust Fund
as are required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the rules and regulations of the Commission thereunder, as
interpreted by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, or by telephone at (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT..................................................................................... 2
AVAILABLE INFORMATION..................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................................................... 3
SUMMARY OF PROSPECTUS..................................................................................... 5
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>
5
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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>
<CAPTION>
<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 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
6
<PAGE>
the Prospectus Supplement. The Prospectus Supplement will indicate
additional jurisdictions, if any, in which the Mortgaged Properties
may be located. Unless otherwise provided in the related Prospectus
Supplement, all Mortgage Loans will have individual principal
balances at origination of not less than $25,000 and original terms
to maturity of not more than 40 years. All Mortgage Loans will have
been originated by persons other than the Depositor, and all Mortgage
Assets will have been purchased, either directly or indirectly, by
the Depositor on or before the date of initial issuance of the
related series of Certificates. The related Prospectus Supplement
will indicate if any such persons are affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that
adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the mortgagor's election, in each
case as described in the related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust Fund may be based on
one or more indices. Each Mortgage Loan may provide for scheduled
payments to maturity, payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events, and may provide for negative amortization or
accelerated amortization, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each
case as described in the related Prospectus Supplement. Each Mortgage
Loan may contain prohibitions on prepayment or require payment of a
premium or a yield maintenance penalty in connection with a
prepayment, in each case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly,
semi-annually or at such other interval as is specified in the
related Prospectus Supplement. See "Description of the Trust
Funds--Assets."
(b) Government Securities............... If so provided in the related Prospectus Supplement, the Trust Fund
may include, in addition to Mortgage Assets, certain direct
obligations of the United States, agencies thereof or agencies
created thereby which provide for payment of interest and/or
principal (collectively, "Government Securities").
(c) Collection Accounts................. Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or
persons designated in the related Prospectus Supplement will, to the
extent described herein and in such Prospectus Supplement, deposit
all payments and collections received or advanced with respect to the
Assets and other assets in the Trust Fund. Such an account may
be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of
the Agreements--Collection Account and Related Accounts."
(d) Credit Support...................... If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more classes of
Securities of the related series in the form of subordination of one
or more other classes of Securities of such series, which other
classes may include one or more classes of Offered Securities, and/or
by one or more of the following types of credit support that has the
effect of covering losses on Assets: a letter of credit, insurance
policy, guarantee, reserve fund or other type of credit support
consistent with the foregoing (any such coverage with respect to the
Securities of any series, "Credit Support"). The amount and types of
coverage, the identification of the entity providing the coverage (if
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<PAGE>
applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus
Supplement for a series of Securities. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any similar forms of credit support that
are provided by or with respect to, or are included as part of the
trust fund evidenced by or providing security for, such MBS. See
"Risk Factors--Credit Support Limitations" and "Description of Credit
Support."
(e) Cash Flow Agreements................ If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys
held in the funds and accounts established for the related series
will be invested at a specified rate. The Trust Fund may also include
one or more of the following agreements: interest rate exchange
agreements, interest rate cap or floor agreements, currency exchange
agreements, other swaps and derivative instruments or other
agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect
to the obligor under any such Cash Flow Agreement. The Prospectus
Supplement for any series of Securities evidencing an interest in a
Trust Fund that includes MBS will describe any cash flow agreements
that are included as part of the trust fund evidenced by or providing
security for such MBS. See "Description of the Trust Funds--Cash Flow
Agreements."
(f) Pre-Funding Account................. To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the satisfaction
of certain conditions described in the applicable Agreement),
additional Assets (the "Subsequent Assets") from time to time (as
frequently as daily) within the number of months specified in the
Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for such series on date of such issuance.
Description of Securities................. Each series of Certificates will evidence an interest in the related
Trust Fund and will be issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and servicing agreements and
trust agreements are referred to herein as the "Agreements." If a
series of Securities includes Notes, such Notes will represent
indebtedness of the related Trust Fund and will be secured by a
security interest in the Assets of the Trust Fund (or a specified
group thereof) pursuant to an indenture.
Each series of Securities will include one or more classes. Each
class of Securities (other than certain Stripped Interest Securities,
as defined below) will have a stated principal amount (a "Security
Balance") and except for certain Stripped Principal Securities, as
defined below, will accrue interest thereon based on a fixed,
variable or adjustable interest rate (in the case of Certificates, a
"Pass-Through Rate"). The related Prospectus Supplement will specify
the Security Balance, if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the case of a variable or
adjustable Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate.
Distributions on Securities............... Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates; (ii) be senior
(collectively, "Senior Securities") or subordinate (collectively,
"Subordinate Securities") to one or more other
8
<PAGE>
classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions
(collectively, "Stripped Principal Securities"); (iv) be entitled to
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Stripped Interest
Securities"); (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of
such series (collectively, "Accrual Securities"); (vi) provide for
distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph, including a Stripped
Principal Security component and a Stripped Interest Security
component, to the extent of available funds, in each case as
described in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from
a designated portion of the Mortgage Loans in the related Mortgage
Pool (each such portion of Mortgage Loans, a "Mortgage Loan Group.")
See "Description of the Securities--General." Any such classes may
include classes of Offered Securities. With respect to Securities
with two or more components, references herein to
Security Balance, notional amount and Pass-Through Rate or interest
rate refer to the principal balance, if any, notional amount, if any,
and the Pass-Through Rate or interest rate, if any, for any such
component.
The Securities will not be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency or instrumentality
or by any other person, unless otherwise provided in the related
Prospectus Supplement. See "Risk Factors--Limited Assets" and
"Description of the Securities."
(a) Interest............................ Interest on each class of Offered Securities (other than Stripped
Principal Securities and certain classes of Stripped Interest
Securities) of each series will accrue at the applicable Pass-Through
Rate or interest rate on the outstanding Security Balance thereof and
will be distributed to Securityholders as provided in the related
Prospectus Supplement. The specified date on which distributions are
to be made is a "Distribution Date." Distributions with respect to
interest on Stripped Interest Securities may be made on each
Distribution Date on the basis of a notional amount as described in
the related Prospectus Supplement. Distributions of interest with
respect to one or more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment interest
shortfalls, and other contingencies described herein and in the
related Prospectus Supplement. See "Risk Factors--Average Life of
Securities; Prepayments; Yields," "Yield Considerations" and
"Description of the Securities--Distributions of Interest on the
Securities."
(b) Principal........................... The Securities of each series initially will have an aggregate
Security Balance no greater than the outstanding principal balance of
the Assets as of, unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of the month of
formation of the related Trust Fund (the "Cut-off Date"), after
application of scheduled payments due on or before such date, whether
or not received. The Security Balance of a Security outstanding from
time to time represents the maximum amount that the holder thereof is
then entitled to receive in respect of principal from future cash
flow on the assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or
classes of Securities entitled thereto until the Security Balances of
such Securities have been reduced to zero. Unless otherwise specified
in the related Prospectus
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Supplement, distributions of principal of any class of Securities
will be made on a pro rata basis among all of the Securities of such
class or by random selection, as described in the related Prospectus
Supplement or otherwise established by the related Trustee. Stripped
Interest Securities with no Security Balance will not receive
distributions in respect of principal. See "Description of the
Securities--Distributions of Principal of the Securities."
Risk Factors.............................. There are material risks to be considered in investing in the
Securities. See "Risk Factors" herein and, if applicable, in the
related Prospectus Supplement.
Advances.................................. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be obligated as part of its servicing
responsibilities to make certain advances that in its good faith
judgment it deems recoverable with respect to delinquent scheduled
payments on the Whole Loans in such Trust Fund. Neither the Depositor
nor any of its affiliates will have any responsibility to make such
advances. Advances made by a Master Servicer are reimbursable
generally from subsequent recoveries in respect of such Whole Loans
and otherwise to the extent described herein and in the related
Prospectus Supplement. If and to the extent provided in the
Prospectus Supplement for any series, the Master Servicer will be
entitled to receive interest on its outstanding advances, payable
from amounts in the related Trust Fund. The Prospectus Supplement for
any series of Securities evidencing an interest in a Trust Fund that
includes MBS will describe any corresponding advancing obligation of
any person in connection with such MBS. See "Description of the
Securities--Advances in Respect of Delinquencies."
Termination............................... If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in the manner set
forth therein. If so provided in the related Prospectus Supplement,
upon the reduction of the Security Balance of a specified class or
classes of Securities to a specified percentage or amount or on and
after a date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient portion of such Assets
to retire such class or classes, or purchase such Assets at a price
set forth in the related Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement, certain classes of
Securities may be purchased subject to similar conditions. See
"Description of the Securities--Termination."
Registration of Securities................ If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities will initially be represented by
one or more certificates or notes, as applicable, registered in the
name of Cede & Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be entitled to
receive a definitive certificate or note, as applicable, representing
such person's interest except in the event that definitive
certificates or notes, as applicable, are issued under the limited
circumstances described herein. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry
Registration and Definitive Securities."
Tax Status of the Certificates............ The Certificates of each series will constitute, as specified in the
related Prospectus Supplement, either (i) "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual
Certificates") in a Trust Fund treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A through 860G of the
Internal Revenue Code of 1986, as amended (the "Code"),
(ii) interests ("Grantor Trust Certificates") in a Trust Fund treated
as a grantor trust under applicable provisions of the
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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
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
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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."
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RISK THAT PREPAYMENTS WILL ADVERSELY AFFECT AVERAGE LIFE AND YIELDS OF
SECURITIES
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time is influenced
by a variety of economic, demographic, geographic, social, tax, legal and other
factors. There can be no assurance as to the rate of prepayment on the Assets in
any Trust Fund or that the rate of payments will conform to any model described
herein or in any Prospectus Supplement. If prevailing interest rates fall
significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rates borne by the Mortgage Loans underlying or comprising the Mortgage
Assets in any Trust Fund. As a result, the actual maturity of any class of
Securities evidencing an interest in a Trust Fund containing Mortgage Assets
could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL--RISK THAT DEFAULTS BY
OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED PROPERTIES WILL RESULT IN LOSSES
TO INVESTORS
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the relevant residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the related Mortgage Loans, and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry in
that market. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest, the principal balances of such Mortgage Loans could be increased to an
amount equal to or in excess of the value of the underlying Mortgaged
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Support, if any, holders of
Securities of the series evidencing interests in the related Mortgage Loans will
bear all risk of loss resulting from default by mortgagors and will have to look
primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of Mortgage Loans may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans provide for escalating or variable payments by the mortgagor under the
Mortgage Loan, as to which the mortgagor is generally qualified on the basis of
the initial payment amount. In some instances the Mortgagor's income may not be
sufficient to
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enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase. In addition to the foregoing,
certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of loss
particularly with respect to any related junior Mortgage Loans. See "--Junior
Mortgage Loans."
In addition, a Prospectus Supplement may specify that the Loan-to-Value
Ratios for the Mortgage Loans in the related Trust will be in excess of 100%.
The related Mortgaged Properties, therefore, will be highly unlikely to provide
adequate security for such Mortgage Loans. To the extent specified in such
Prospectus Supplement, the assessment of the credit history of a borrower and
such borrower's capacity to make payments on the related Mortgage Loan will have
been the primary considerations in underwriting the Mortgage Loans included in
such Trust. The evaluation of the adequacy of the Loan-to-Value Ratio, if so
specified in the related Prospectus Supplement, will have been given less
consideration, and in certain cases no consideration, in underwriting such
Mortgage Loans.
JUNIOR MORTGAGE LOANS--RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE
TO HOLDERS OF JUNIOR LIEN MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior lien"),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien and the Mortgage Loan. In the event that a
holder of the senior lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage. See "Certain Legal Aspects of the Mortgage
Loans--Junior Mortgages."
CREDIT SUPPORT LIMITATIONS--RISK THAT CREDIT SUPPORT WILL NOT COVER ALL LOSSES
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or other parties.
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A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a "Covered
Trust"), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels.
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
See "-- Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
SUBORDINATION OF THE SUBORDINATE SECURITIES; EFFECT OF LOSSES ON THE SUBORDINATE
SECURITIES
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See "Description of the Securities--General" and
"--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
BALLOON PAYMENTS--RISK THAT OBLIGOR WILL NOT BE ABLE TO MAKE BALLOON PAYMENT
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because
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the ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to timely refinance the loan or to timely sell the related
Mortgaged Property. The ability of a mortgagor to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage interest rates at the time of sale or refinancing, the mortgagor's
equity in the related Mortgaged Property, the financial condition of the
mortgagor, the value of the Mortgaged Property, tax laws, prevailing general
economic conditions and the availability of credit for single family or
multifamily real properties generally.
OPTIONAL TERMINATION OF A TRUST FUND--POSSIBILITY, IF PROSPECTUS SUPPLEMENT SO
PROVIDES, THAT AMOUNT RECEIVED MAY BE LESS THAN OUTSTANDING PRINCIPAL AMOUNT
PLUS ACCRUED INTEREST
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities to a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
In either such case, if the related Prospectus Supplement so provides, the
proceeds available for distribution to Securityholders may be less than the
outstanding principal balance of their Securities plus accrued interest thereon,
in which event such Securityholders could incur a loss on their investment.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain "negative value" REMIC residual interests. See
"Material Federal Income Tax Consequences--REMICs."
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
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which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating. See "Rating."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as "Securityholders" (as that term is to be used in the related
Agreement). Hence, until such time, Securityholders will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Securities--Book-Entry Registration and
Definitive Securities.
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include (i) one-
to five-family mortgage loans (or certain balances thereof) (collectively, the
"Mortgage Loans"), including without limitation, Home Equity Loans and Home
Improvement Contracts, (ii) pass-through certificates or other mortgage-backed
securities (such as debt obligations or participation interests or certificates)
evidencing interests in or secured by one or more Mortgage Loans or other
similar participations, certificates or securities ("MBS") or (iii) direct
obligations of the United States, agencies thereof or agencies created thereby
which are (a) interest-bearing securities, (b) non-interest-bearing securities,
(c) originally interest-bearing securities from which coupons representing the
right to payment of interest have been removed, or (d) interest-bearing
securities from which the right to payment of principal has been removed (the
"Government Securities"). As used herein, "Mortgage Loans" refers to both whole
Mortgage Loans (or certain balances thereof) and Mortgage Loans underlying MBS.
Mortgage Loans that secure, or interests in which are evidenced by, MBS are
herein sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans (or
certain balances thereof) that are not Underlying Mortgage Loans are sometimes
referred to as "Whole Loans." Any pass-through certificates or other
asset-backed certificates in which an MBS evidences an interest or which secure
an MBS are sometimes referred to herein also as MBS or as "Underlying MBS."
Mortgage Loans and MBS are sometimes referred to herein as "Mortgage Assets."
The Mortgage Assets will not be guaranteed or insured by Merrill Lynch Mortgage
Investors, Inc. (the "Depositor") or any of its affiliates or, unless otherwise
provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an "Asset Seller"), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or the issuer of
such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to five-family residential property (a "Single Family Property" and
the related Mortgage Loan a "Single Family Mortgage Loan") or (ii) a security
interests in shares
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issued by private cooperative housing corporations ("Cooperatives"). If so
specified in the related Prospectus Supplement, a Mortgaged Property may include
some commercial use. Mortgaged Properties will be located, unless otherwise
specified in the related Prospectus Supplement, in any one of the fifty states,
the District of Columbia, the Commonwealth of Puerto Rico or any U.S.
possession. To the extent specified in the related Prospectus Supplement, the
Mortgage Loans will be secured by first and/or junior mortgages or deeds of
trust or other similar security instruments creating a first or junior lien on
Mortgaged Property. The Mortgaged Properties may include apartments owned by
Cooperatives and leasehold interests in properties, the title to which is held
by third party lessors. Unless otherwise specified in the Prospectus Supplement,
the term of any such leasehold shall exceed the term of the related mortgage
note by at least five years. Each Mortgage Loan will have been originated by a
person (the "Originator") other than the Depositor. The related Prospectus
Supplement will indicate if any Originator is an affiliate of the Depositor. The
Mortgage Loans will be evidenced by promissory notes (the "Mortgage Notes")
secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. No more than 20% of
the Mortgage Loans (by principal balance) in a Trust Fund will be, as of the
related Cut-off Date, 30 days or more past their most recent contractually
scheduled payment date.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan plus the principal balance of any senior mortgage loan to the
Value of the related Mortgaged Property. The "Value" of a Mortgaged Property,
other than with respect to Refinance Loans, is generally the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such loan and (b) the sales price for such property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise set forth in
the related Prospectus Supplement, the Value of the Mortgaged Property securing
a Refinance Loan is the appraised value thereof determined in an appraisal
obtained at the time of origination of the Refinance Loan. The Value of a
Mortgaged Property as of the date of initial issuance of the related series of
Certificates may be less than the value at origination and will fluctuate from
time to time based upon changes in economic conditions and the real estate
market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ("ARM Loans"), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
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The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the "Home
Improvement Contracts") originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by borrowers
under the revolving Home Equity Loans will, during a specified period of time,
automatically become part of the Trust Fund for a series. As a result, the
aggregate balance of the revolving Home Equity Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal
collections are applied to purchase such balances. Such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions may
be made to the extent that such additions could be made in connection with a
Trust Fund with respect to which a REMIC election has been made. The related
Prospectus Supplement will set forth the characteristics that such additional
Mortgage Loans will be required to meet. Such characteristics will be specified
in terms of the categories described in the second preceding paragraph.
Payment Provisions Of The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of not
less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the
"MBS Servicer") of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the
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MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer or the MBS Servicer
or another person specified in the related Prospectus Supplement may have the
right or obligation to repurchase or substitute assets underlying the MBS after
a certain date or under other circumstances specified in the related Prospectus
Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under "Description
of Credit Support" may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements" above, and the type of information in respect of the Underlying MBS
described in this paragraph, (xii) the characteristics of any cash flow
agreements that are included as part of the trust fund evidenced or secured by
the MBS and (xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company.
Each MBS will be either (i) a security exempted from the registration
requirements of the Securities Act, (ii) a security that has been previously
registered under the Securities Act or (iii) a security that is eligible for
sale under Rule 144(k) under the Securities Act. In the case of clauses
(ii) and (iii), such security will be acquired in a secondary market transaction
not from the issuer thereof or an affiliate of such issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the "Subsequent Assets") from time to
time (as frequently as daily) within the number of months
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specified in the related Prospectus Supplement after the issuance of such series
of Securities having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such
series on date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreement--Collection
Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
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YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans. The rate of principal payments on some or all of
the classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions or with lower Prepayment
Premiums.
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If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Securities entitled to payments of interest because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans comprising or underlying the Assets in
a particular Trust Fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans comprising or underlying the Assets is paid to such class, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans comprising or underlying the Assets
in a Trust Fund. If any Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
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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
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costs, or other financial incentives. In addition, Sub-Servicers may encourage
the refinancing of Mortgage Loans, including defaulted Mortgage Loans, that
would permit creditworthy borrowers to assume the outstanding indebtedness of
such Mortgage Loans.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale" clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an "Indenture"). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Securities") or
subordinate (collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Securities"); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Securities"); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, "Accrual Securities"); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, a Trust Fund may include
(i) additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or (ii) in the case of
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revolving Home Equity loans or certain balances thereof, any additional balances
advanced to the borrowers under the revolving Home Equity loans during certain
periods. If so specified in the related Prospectus Supplement, distributions on
one or more classes of a series of Securities may be limited to collections from
a designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus Supplement. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a like aggregate Security Balance,
notional amount or percentage interest but of different authorized
denominations. See "Risk Factors--Limited Liquidity" and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a "Due Period" with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day
after
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the Cut-off Date in the case of the first Due Period, and will end on
the first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
"Accrued Security Interest"
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will be equal to interest accrued for a specified period on the outstanding
Security Balance thereof immediately prior to the Distribution Date, at the
applicable Pass-Through Rate or interest rate, reduced as described below.
Unless otherwise provided in the Prospectus Supplement, Accrued Security
Interest on Stripped Interest Securities will be equal to interest accrued for a
specified period on the outstanding notional amount thereof immediately prior to
each Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. The method of determining the notional amount for
any class of Stripped Interest Securities will be described in the related
Prospectus Supplement. Reference to notional amount is solely for convenience in
certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Security Interest on a series of Securities will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans comprising or
underlying the Assets in the Trust Fund for such series. The particular manner
in which such shortfalls are to be allocated among some or all of the classes of
Securities of that series will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise distributable
on (or, in the case of Accrual Securities, that may otherwise be added to the
Security Balance of) a class of Offered Securities may be reduced as a result of
any other contingencies, including delinquencies, losses and deferred interest
on or in respect of the Mortgage Loans comprising or underlying the Assets in
the related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, any reduction in the amount of Accrued Security Interest otherwise
distributable on a class of Securities by reason of the allocation to such class
of a portion of any deferred interest on the Mortgage Loans comprising or
underlying the Assets in the related Trust Fund will result in a corresponding
increase in the Security Balance of such class. See "Risk Factors--Average Life
of Securities; Prepayments; Yields" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interests on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
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ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Mortgage Loan,
"Related Proceeds") and, if so provided in the Prospectus Supplement, out of any
amounts otherwise distributable on one or more classes of Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Collection Account prior to any distributions being made
on the Securities to the extent that the Master Servicer (or such other entity)
shall determine in good faith that such advance (a "Nonrecoverable Advance") is
not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess funds
in the Collection Account, the Master Servicer is required to replace such funds
in the Collection Account on any future Distribution Date to the extent that
funds in the Collection Account on such Distribution Date are less than payments
required to be made to Securityholders on such date. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
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The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, (a) the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the loan number of the related Mortgage Loan and (b) the date of
acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as if such
Mortgage Loan were still outstanding taking into account certain limited
modifications to the terms thereof specified in the Agreement), (c) the
aggregate amount of unreimbursed servicing expenses and unreimbursed
advances in respect thereof and (d) if applicable, the aggregate amount of
interest accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the
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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
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requirements of the Code as are from time to time in force. See "Description of
the Securities-- Registration and Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ("Security Owners") will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
("Cede"), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only "Securityholder" (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be
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permitted to exercise the rights of Securityholders under the related Agreement,
Trust Agreement or Indenture, as applicable, only indirectly through the
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the
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Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Consequences" in this Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to the
related Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Security under the
Indenture, Trust Agreement or Pooling and Servicing Agreement, as applicable, on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and Euroclear
will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
Transfers between DTC's participating organizations (the "Participants")
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
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Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue its
services, the Administrator would seek an alternative depository (if available)
or cause the issuance of Definitive Securities to the owners thereof or their
nominees in the manner described in the Prospectus under "Description of the
Securities--Book Entry Registration and Definitive Securities".
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance and servicing of the related Assets, the Pooling and Servicing
Agreement may be referred to herein as the "Agreement". Notwithstanding the
foregoing, if the Assets of the Trust Fund for such a series consists only of
Government Securities or MBS, such Assets will be conveyed to the Trust Fund and
administered pursuant to a trust agreement between the Depositor and the Trustee
(a "Trust Agreement"), which may also be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related Trust
Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the "Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
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General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in respect of each Whole Loan included in the related
Trust Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and Loan-to-Value Ratio as of the
date indicated and payment and prepayment provisions, if applicable; and
(ii) in respect of each MBS included in the related Trust Fund, including
without limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the
pass-through or bond rate or formula for determining such rate, the issue date
and original and remaining term to maturity, if applicable, the original and
outstanding principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the
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Trustee in recordable form. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Depositor delivers to the Trustee or the custodian a copy or a
duplicate original of the Mortgage Note, together with an affidavit certifying
that the original thereof has been lost or destroyed. With respect to such
Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. Unless otherwise specified in the
related Prospectus Supplement, the Asset Seller will be required to agree to
repurchase, or substitute for, each such Mortgage Loan that is subsequently in
default if the enforcement thereof or of the related Mortgage is materially
adversely affected by the absence of the original Mortgage Note. Unless
otherwise provided in the related Prospectus Supplement, the related Agreement
will require the Depositor or another party specified therein to promptly cause
each such assignment of Mortgage to be recorded in the appropriate public office
for real property records, except in the State of California or in other states
where, in the opinion of counsel acceptable to the Trustee, such recording is
not required to protect the Trustee's interest in the related Whole Loan against
the claim of any subsequent transferee or any successor to or creditor of the
Depositor, the Master Servicer, the relevant Asset Seller or any other prior
holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans and Home Improvement Contracts will not be delivered to the Trustee (or a
custodian), but will be retained by the Master Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will not be recorded, unless otherwise provided in the related Prospectus
Supplement.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name of
the Trustee for the benefit of the Securityholders. Unless otherwise provided in
the related Prospectus Supplement, the related Agreement will require that
either the Depositor or the Trustee promptly cause any MBS and Government
Securities in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
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REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters: (i) the accuracy of the information set forth for
such Whole Loan on the schedule of Assets appearing as an exhibit to the related
Agreement; (ii) the existence of title insurance insuring the lien priority of
the Whole Loan; (iii) the authority of the Warranting Party to sell the Whole
Loan; (iv) the payment status of the Whole Loan; (v) in the case of a Whole
Loan, the existence of customary provisions in the related Mortgage Note and
Mortgage to permit realization against the Mortgaged Property of the benefit of
the security of the Mortgage; and (vi) the existence of hazard and extended
perils insurance coverage on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Whole Loan or the interests therein of
the Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Whole
Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor. As
to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Rate from
the date as to which interest was last paid to the due date in the Due Period in
which the relevant purchase is to occur, plus certain servicing expenses that
are reimbursable to the Master Servicer. If so provided in the Prospectus
Supplement for a series, a Warranting Party, rather than repurchase a Whole Loan
as to which a breach has occurred, will have the option, within a specified
period after initial issuance of such series of Certificates, to cause the
removal of such Whole Loan from the Trust Fund and substitute in its place one
or more other Whole Loans in accordance with the standards described in the
related Prospectus Supplement. If so provided in the Prospectus Supplement for a
series, a Warranting Party, rather than repurchase or substitute a Whole Loan as
to which a breach has occurred, will have the option to reimburse the Trust Fund
or the Securityholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Securities or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
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Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See "Events of Default" and "Rights Upon Event of
Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and, if so
specified in the related Prospectus Supplement, the uninsured deposits in which
are otherwise secured such that the Trustee have a claim with respect to the
funds in the Collection Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the institution with which the
Collection Account is maintained or (ii) otherwise maintained with a bank or
trust company, and in a manner, satisfactory to the Rating Agency or Agencies
rating any class of Securities of such series. The collateral eligible to secure
amounts in the Collection Account is limited to United States government
securities and other investment grade obligations specified in the Agreement
("Permitted Investments"). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
DEPOSITS
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
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(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;
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(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under "Material Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "Assignment of Assets; Repurchase" and
"Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
OTHER COLLECTION ACCOUNTS
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans and
held for its own
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account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"Servicing Standard"). In connection therewith, the Master Servicer will be
permitted in its discretion to waive any late payment charge or penalty interest
in respect of a late payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Whole Loan or (ii) in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, (i) in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent and (ii)
in its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such Master
Servicer will remain obligated under the related Agreement. Each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must be consistent with the terms of the related Agreement and must
provide that, if for any reason the Master Servicer for the related series of
Securities is no longer acting in such capacity, the Trustee or any successor
Master Servicer may assume the Master Servicer's rights and obligations under
such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under an
Agreement. See "Retained Interest; Servicing Compensation and Payment of
Expenses."
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing
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Standard. A significant period of time may elapse before the Master Servicer is
able to assess the success of such corrective action or the need for additional
initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Master Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation through foreclosure, repossession or
similar proceedings. The related Agreement will provide that any such offering
be made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
"Representations and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within three years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to three
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Master
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Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of the Liquidation Proceeds recovered on any defaulted
Whole Loan, prior to the distribution of such Liquidation Proceeds to
Securityholders, amounts representing its normal servicing compensation on the
Whole Loan, unreimbursed servicing expenses incurred with respect to the Whole
Loan and any unreimbursed advances of delinquent payments made with respect to
the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage
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resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds of
uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
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RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ("FHLMC") or such other audit or attestation program used
by the Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other audit or attestation program requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC or such other audit or attestation program used by
such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
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Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans under each Agreement will be named in the related Prospectus Supplement.
The entity serving as Master Servicer (or as such servicer) may be an affiliate
of the Depositor and may have other normal business relationships with the
Depositor or the Depositor's affiliates. Reference herein to the Master Servicer
shall be deemed to be to the servicer of substantially all of the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or
otherwise incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an enforcement
action in respect of any specific Whole Loan or Whole Loans (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the related
Agreement. In addition, each Agreement will provide that neither any Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
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therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement, Events of
Default under the related Agreement will include (i) any failure by the Master
Servicer to distribute or cause to be distributed to Securityholders, or to
remit to the Trustee or Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a grace period, if
any; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the Agreement
which continues unremedied for thirty days (or such other period specified in
the related Prospectus Supplement) after written notice of such failure has been
given to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Securities evidencing
not less than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Master Servicer under the Agreement which materially and
adversely affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in the related
Prospectus Supplement) after written notice of such breach has been given to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights; and (iv) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events of
Default (other than to shorten cure periods or eliminate notice requirements)
will be specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the Trustee shall, not later
than the later of 60 days after the occurrence of any event which constitutes
or, with notice or lapse of time or both, would constitute an Event of Default
and five days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Securityholders of the applicable series notice of such occurrence, unless such
default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
Unless otherwise specified in the related Prospectus Supplement, in the event
that the Trustee is unwilling or unable so to act, it may or, at the written
request of the holders of Securities entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the Rating Agency
with a net worth at the time of such appointment of at least $15,000,000 (or
such other amount specified in the related Prospectus Supplement) to act as
successor to the
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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 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
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as Trustee may have a banking relationship with the Depositor and its affiliates
and with any Master Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Holders of the Securities of any series entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series may at any time remove the Trustee without cause
and appoint a successor trustee.
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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.
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The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities the Credit Support will not provide protection against all risks
of loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities,
(ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement. See "Risk Factors--Credit Support
Limitations--Risk That Credit Support Will Not Cover All Losses."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Assets prior to
distributions on Subordinate
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Securities evidencing interests in a different group of Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans in the related Trust Fund will be covered for various default risks
by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Assets on the related
Cut-off Date or of the initial aggregate Security Balance of one or more classes
of Securities. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws in the event of only certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the L/C Bank under the letter of credit for each series of
Securities will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
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Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor
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grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale as security for the indebtedness evidenced by the related
note. A deed to secure debt typically has two parties. By executing a deed to
secure debt, the grantor conveys title to, as opposed to merely creating a lien
upon, the subject property to the grantee until such time as the underlying debt
is repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage note.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the mortgage, the law of the state in which the real
property is located, certain federal laws (including, without limitation, the
Soldiers' and Sailors' Civil Relief Act of 1940) and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a
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significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperatives's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the Mortgage Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
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EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property.
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For example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the
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Agreement will permit foreclosed property to be held for more than three years
if the Internal Revenue Service grants an extension of time within which to sell
such property or independent counsel renders an opinion to the effect that
holding such property for such additional period is permissible under the REMIC
Provisions.
COOPERATIVE LOANS
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
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JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
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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
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now fully enforceable pursuant to preemptive regulations of the Comptroller of
the Currency and the National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not
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be usurious and the mortgagor's counsel has rendered an opinion that such choice
of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
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FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Securities applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Securities.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any state thereof or the District of Columbia
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), an estate whose income is subject to U.S.
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision of the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. Persons
as well.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will be
treated as a grantor trust, then Brown & Wood LLP will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
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A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
CHARACTERIZATION. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the applicable amount and (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
A Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Master Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the Master Servicer, whichever
is earlier. If the servicing fees paid to the Master Servicer are deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of the
Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Code
Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), to the extent that the
Mortgage Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . . which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
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The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
STRIPPED BONDS AND COUPONS. Certain Trust Funds may consist of Government
Securities which constitute "stripped bonds" or "stripped coupons" as those
terms are defined in section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having OID based on the purchase price
and the stated redemption price at maturity of each Security. As such, Grantor
Trust Certificateholders would be required to include in income their pro rata
share of the OID on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the Grantor
Trust Certificateholder in any taxable year may exceed amounts actually received
during such year.
BUYDOWN LOANS. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Certificates. Absent further guidance from
the IRS, the Trustee intends to account for amortizable bond premium in the
manner described above. Prospective Certificateholders should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
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ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that
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accrues during such taxable year and is, in general, allowed as a deduction not
later than the year in which such market discount is includible in income. If
such holder elects to include market discount in income currently as it accrues
on all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
ELECTION TO TREAT ALL INTEREST AS OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including
de minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. STRIPPED BONDS AND STRIPPED COUPONS
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the "Stripped
Bond Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See "--Non-REMIC Certificates" and "Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID
de minimis rule when the Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing fees in excess of reasonable servicing
fees) is stripped off of the Trust Fund's Mortgage Assets. Pursuant to Revenue
Procedure 91-49, issued on August 8, 1991, purchasers of Stripped Bond
Certificates using an inconsistent method of accounting must change their method
of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return filed
after August 8, 1991.
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The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
TREATMENT OF CERTAIN OWNERS. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the underlying Mortgage Assets and interest on such Mortgage Assets qualify
for such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] . . . which [are]
principally secured, directly or indirectly, by an interest in real property"
within the meaning of Code Section 860G(a)(3).
2. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN
ARM LOANS
The OID rules of Code Sections 1271 through 1275 will be applicable to a
Certificateholder's interest in those Mortgage Assets as to which the conditions
for the application of those sections are met. Rules regarding periodic
inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage Assets.
OID on each Grantor Trust Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest, in
advance of receipt of the cash attributable to such income. The amount of OID
required to be included in an owner's income in any taxable year
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with respect to a Grantor Trust Certificate representing an interest in Mortgage
Assets other than Mortgage Assets with interest rates that adjust periodically
("ARM Loans") likely will be computed as described below under "--Accrual of
Original Issue Discount." The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). The OID Regulations generally are effective for debt instruments
issued on or after April 4, 1994, but may be relied upon as authority with
respect to debt instruments, such as the Grantor Trust Certificates, issued
after December 21, 1992. Alternatively, proposed Treasury regulations issued
December 21, 1992 may be treated as authority for debt instruments issued after
December 21, 1992 and prior to April 4, 1994, and proposed Treasury regulations
issued in 1986 and 1991 may be treated as authority for instruments issued
before December 21, 1992. In applying these dates, the issued date of the
Mortgage Assets should be used, or, in the case of Stripped Bond Certificates or
Stripped Coupon Certificates, the date such Certificates are acquired. The
holder of a Certificate should be aware, however, that neither the proposed OID
Regulations nor the OID Regulations adequately address certain issues relevant
to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the Master Servicer intends to calculate and report OID
under the method described below.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing
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during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. With
respect to an initial accrual period shorter than a full monthly accrual period,
the daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues under
a constant interest method that takes into account the compounding of interest
as it accrues rather than when received. However, the amount of OID includible
in the income of a holder of an obligation is reduced when the obligation is
acquired after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued OID, less prior payments of
principal. Accordingly, if such Mortgage Assets acquired by a Certificateholder
are purchased at a price equal to the then unpaid principal amount of such
Mortgage Asset, no OID attributable to the difference between the issue price
and the original principal amount of such Mortgage Asset (i.e. points) will be
includible by such holder. Other OID on the Mortgage Assets (e.g., that arising
from a "teaser" rate) would still need to be accrued.
3. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(generally more than one year). Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations.
Prospective investors should consult their own tax advisors concerning the
treatment of capital gains.
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
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D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust Certificateholder holding on behalf of an owner that is not a U.S. Person
will be subject to federal income tax, collected by withholding, at a rate of
30% or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust Certificate evidences ownership in Mortgage Assets issued
after July 18, 1984, by natural persons if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder). Additional restrictions apply to Mortgage Assets of where
the mortgagor is not a natural person in order to qualify for the exemption from
withholding.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With
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respect to each Trust Fund that elects REMIC status, Brown & Wood LLP will
deliver its opinion generally to the effect that, under then existing law and
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, such Trust Fund will qualify as a REMIC, and the related Certificates
will be considered to be regular interests ("REMIC Regular Certificates") or a
sole class of residual interests ("REMIC Residual Certificates") in the REMIC.
The related Prospectus Supplement for each Series of Certificates will indicate
whether the Trust Fund will make a REMIC election and whether a class of
Certificates will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) such Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c). The
Small Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code Section
593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in "--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates" above. REMIC Certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(4)(A), and REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
TIERED REMIC STRUCTURES. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code; (ii) "loans secured by
an interest in real property" under Section
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7701(a)(19)(C) of the Code; and (iii) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a REMIC Regular Certificate and its
"issue price." Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
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Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not applicable to instruments governed by Code Section
1272(a)(6), they represent the only guidance regarding the current views of the
IRS with respect to contingent payment instruments. In the alternative, the IRS
could assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under "--Taxation of Owners of REMIC Regular Certificates--Premium" would
apply. It is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not
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be treated as a Super-Premium Certificate and the rules described below under
"--REMIC Regular Certificates--Premium" should apply. However, it is possible
that holders of REMIC Regular Certificates issued at a premium, even if the
premium is less than 25% of such Certificate's actual principal balance, will be
required to amortize the premium under an original issue discount method or
contingent interest method even though no election under Code Section 171 is
made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the "daily portions," as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period ("an accrual period") that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificates as calculated under
the Prepayment Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments, and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates,"
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one "qualified inverse floating rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
ELECTION TO TREAT ALL INTEREST AS OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including
de minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election and thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
MARKET DISCOUNT. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
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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 authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. For purposes of calculating market discount
under any of the above methods in the case of instruments (such as the REMIC
Regular Certificates) that provide for payments that may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Certificate purchased with market discount. For these purposes, the
de minimis rule referred to above applies. Any such deferred interest expense
would not exceed the market discount that accrues during such taxable year and
is, in general, allowed as a deduction not later than the year in which such
market discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On December 30,
1997, the IRS issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code section
1272(a)(6). Absent further guidance from the IRS the Trust intends to account
for amortizable bond premium in the manner described above. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
DEFERRED INTEREST. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of
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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.
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The REMIC Regular Certificate information reports will include a statement
of the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
ACCRUED INTEREST CERTIFICATES. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the REMIC Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
NON-INTEREST EXPENSES OF THE REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a "single-class REMIC," a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Taxation of Owners of REMIC Residual
Certificates" below.
TREATMENT OF REALIZED LOSSES. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
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NON-U.S. PERSONS. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective for
payments made after December 31, 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
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taxable to the holders of REMIC Residual Certificates without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income derived
from REMIC Residual Certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to the limitations on the deductibility of
"passive losses." As residual interests, the REMIC Residual Certificates will be
subject to tax rules, described below, that differ from those that would apply
if the REMIC Residual Certificates were treated for federal income tax purposes
as direct ownership interests in the Certificates or as debt instruments issued
by the REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See "--Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
TAXABLE INCOME OF THE REMIC ATTRIBUTABLE TO RESIDUAL INTERESTS. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized losses
to the REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and original issue discount expense on the REMIC Regular Certificates, servicing
fees on the Mortgage Loans, other administrative expenses of the REMIC and
realized losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC will continue until there are no Certificates of any class of the
related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A
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Mortgage Asset will be deemed to have been acquired with discount or premium to
the extent that the REMIC's basis therein is less than or greater than its
principal balance, respectively. Any such discount (whether market discount or
OID) will be includible in the income of the REMIC as it accrues, in advance of
receipt of the cash attributable to such income, under a method similar to the
method described above for accruing OID on the REMIC Regular Certificates. The
REMIC expects to elect under Code Section 171 to amortize any premium on the
Mortgage Assets. Premium on any Mortgage Asset to which such election applies
would be amortized under a constant yield method. It is not clear whether the
yield of a Mortgage Asset would be calculated for this purpose based on
scheduled payments or taking account of the Prepayment Assumption. Additionally,
such an election would not apply to the yield with respect to any underlying
mortgage loan originated on or before September 27, 1985. Instead, premium with
respect to such a mortgage loan would be allocated among the principal payments
thereon and would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See "--Sale or Exchange of REMIC Residual
Certificates" below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see "--Allocation of the Income of
the REMIC to the REMIC Residual Certificates" above.
NET LOSSES OF THE REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
MARK TO MARKET RULES. A Residual Certificate acquired after January 3,
1995 cannot be marked to market.
PASS-THROUGH OF NON-INTEREST EXPENSES OF THE REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a "single class REMIC," however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
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In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
EXCESS INCLUSIONS. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as "unrelated business taxable income" within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see "--Tax-Exempt Investors" below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below. An
exception to the excess inclusion rules that applied to thrifts holding certain
residuals was repealed by the Small Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the "daily accruals" (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters, and decreased
(but not below zero) by the aggregate amount of payments made on the REMIC
Residual Certificate before the beginning of such quarter. The "federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
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PAYMENTS. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
SALE OR EXCHANGE OF REMIC RESIDUAL CERTIFICATES. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the "Contributions Tax"). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer,
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Trustee or Asset Seller, as the case may be, out of its own funds or (ii) the
Asset Seller's obligation to repurchase a Mortgage Loan, such tax will be borne
by the Asset Seller. In the event that such Master Servicer, Trustee or Asset
Seller, as the case may be, fails to pay or is not required to pay any such tax
as provided above, such tax will be payable out of the Trust Fund for such
Series and will result in a reduction in amounts available to be distributed to
the Certificateholders of such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons"
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as "portfolio interest," subject to the conditions
described in "--Taxation of Owners of REMIC Regular Certificates" above, but
only to the extent that the underlying mortgage loans were originated
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after July 18, 1984. Furthermore, the rate of withholding on any income on a
REMIC Residual Certificate that is excess inclusion income will not be subject
to reduction under any applicable tax treaties. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the REMIC Residual
Certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-
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through entities is generally effective for periods after March 31, 1988, except
that in the case of regulated investment companies, real estate investment
trusts, common trust funds and publicly-traded partnerships the tax shall apply
only to taxable years of such entities beginning after December 31, 1988. Under
the Taxpayer Relief Act of 1997, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a "U.S. Person," as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess inclusion,
and that such amounts will be distributed at or after the time the excess
inclusion accrues and not later than the end of the calendar year following the
year of accrual. If the non-U.S. Person transfers the REMIC Residual Certificate
to a U.S. Person, the transfer will be disregarded, and the foreign transferor
will continue to be treated as the owner, if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions. The
provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed IRS Form 4224 and the Trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to
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consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a pass-
through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, ETC. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a
de minimis amount (i.e., 1/4% of their principal amount multiplied by the number
of full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any
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interest expense otherwise deductible on indebtedness incurred to purchase or
carry the Short-Term Note until the taxable disposition of the Short-Term Note.
A cash basis taxpayer may elect under Section 1281 of the Code to accrue
interest income on all nongovernment debt obligations with a term of one year or
less, in which case the taxpayer would include interest on the Short-Term Note
in income as it accrues, but would not be subject to the interest expense
deferral rule referred to in the preceding sentence. Certain special rules apply
if a Short-Term Note is purchased for more or less than its principal amount.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations. Prospective investors should consult their own tax advisors
concerning the treatment of capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Asset Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
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POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund would likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be
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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
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Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person
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throughout the year. In addition, brokers and financial institutions that hold
Certificates through a nominee are required to furnish directly to the Trust
Fund information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not required
to furnish any such information statement to the Trust Fund. The information
referred to above for any calendar year must be furnished to the Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust Fund with the information described above may be
subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
NEW WITHHOLDING REGULATIONS. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1999,
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subject to certain transition rules. Prospective investors are urged to consult
their own tax advisors regarding the New Regulations.
TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates will
be treated as indebtedness for federal income tax purposes, then based on the
application of existing law to the facts as set forth in the Trust Agreement and
other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ("Tax Counsel"), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related Trust
Agreement their intent that, for applicable tax purposes, the Certificates will
be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as "unconditionally payable" under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
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C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be treated
as indebtedness in the hands of the Certificateholders for U.S. federal income
tax purposes and that the entity constituted by the Trust will not be a publicly
traded partnership treated as a corporation or an association taxable as a
corporation, the Depositor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
portion of an entity) that is a "taxable mortgage pool" will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that all
of the provisions of the Trust Agreement, as in effect on the date of issuance,
will be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Trust Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
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E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United sates and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not to subject to backup withholding. Should a non-exempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
QUALIFICATION AS A FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
ASSET COMPOSITION. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted
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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.
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Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties in
interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master Servicer,
the Trustee, any insurer of the Assets and other persons, in providing services
with respect to the assets of the Trust Fund, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own at
least 25% of the value of any class of equity interest. "Benefit plan investors"
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interest" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
AVAILABILITY OF UNDERWRITER'S EXEMPTION FOR CERTIFICATES
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
GENERAL CONDITIONS OF THE EXEMPTION. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
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(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Credit Rating Co., Fitch IBCA,
Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the "Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Asset Seller pursuant to the sale
of the Assets to the Trust Fund represents not more than the fair market
value of such Assets; the sum of all payments made to and retained by the
Master Servicer represent not more than reasonable compensation for the
Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ("PTCE 83-1") for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not applicable to
manufactured housing contract pool investment trusts or multifamily mortgage
pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider
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the exemptive relief granted by Labor for transactions involving insurance
company general accounts in Prohibited Transactions Exemption 95-60, 60 Fed.
Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation before
the October 4, 1991 cutoff established by SMMEA for such enactments, limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities, in most cases by requiring
the affected investors to rely solely upon existing state law, and not SMMEA.
Investors affected by such legislation will be authorized to invest in SMMEA
Certificates only to the extent provided in such legislation. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in "mortgage
related securities," or require the sale or other disposition of such
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement") setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
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to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with
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other underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch or
any other Underwriter in connection with offers and sales related to market
making transactions.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood LLP, New York, New York. Certain matters with respect to Delaware law
will be passed upon for the Depositor by Richards, Layton & Finger, P.A.,
Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
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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
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<S> <C>
1986 Act ...........................................................................................74, 78
Accrual Securities............................................................................................9, 27
Accrued Security Interest........................................................................................29
adjusted issue price.........................................................................................74, 88
Agreement ...............................................................................................37
Amortizable Bond Premium Regulations.............................................................................70
an accrual period ...............................................................................................80
Applicable Amount ...............................................................................................88
ARM Loans ...........................................................................................19, 74
Asset Seller ...............................................................................................18
Assets .........................................................................................1, 6, 18
Available Distribution Amount....................................................................................28
Balloon Mortgage Loans...........................................................................................16
benefit plan investors..........................................................................................106
Book-Entry Securities............................................................................................28
Buydown Mortgage Loans...........................................................................................26
Buydown Period ...............................................................................................26
capital asset ...........................................................................................75, 83
Cash Flow Agreement...........................................................................................8, 22
Cash Flow Agreements..............................................................................................1
Cede ............................................................................................4, 34
CEDEL ...............................................................................................35
CEDEL Participants...............................................................................................35
Certificateholder ..............................................................................................101
clearing agency ...............................................................................................34
clearing corporation.........................................................................................34, 39
Closing Date ...............................................................................................78
Code ...............................................................................................10
Collection Account...............................................................................................41
Commission ................................................................................................3
Contributions Tax ...............................................................................................89
Cooperative ...........................................................................................35, 59
Cooperatives ...............................................................................................19
Covered Trust ...........................................................................................16, 56
CPR ...............................................................................................25
Credit Support .........................................................................................1, 7, 22
Crime Control Act ...............................................................................................68
Cut-off Date ................................................................................................9
daily accruals ...............................................................................................88
daily portions ...........................................................................................74, 80
Deferred Interest ...............................................................................................75
Definitive Securities........................................................................................28, 37
Depositor ............................................................................................6, 18
Determination Date...............................................................................................28
disqualified organization........................................................................................91
Distribution Date ................................................................................................9
112
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
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DTC ............................................................................................4, 34
Due Period ...............................................................................................28
Eligible Corporations...........................................................................................103
equity of redemption.............................................................................................62
ERISA ...............................................................................................11
Euroclear ...............................................................................................35
Euroclear Operator...............................................................................................35
Euroclear Participants...........................................................................................35
Events of Default ...............................................................................................52
excess inclusions ...............................................................................................91
excess servicing ...............................................................................................72
Exchange Act ................................................................................................4
Exemption ..............................................................................................106
FASIT Qualification Test........................................................................................102
FDIC ..........................................................................................41, 108
Federal long-term rate...........................................................................................88
FHLMC ...............................................................................................49
foreign person ...........................................................................................92, 94
Government Securities.............................................................................1, 7, 18, 77, 104
Grantor Trust Certificates.......................................................................................10
Home Equity Loans ............................................................................................6, 20
Home Improvement Contracts....................................................................................6, 20
Indenture ...........................................................................................27, 37
Indenture Trustee ...............................................................................................37
Indirect Participants............................................................................................34
Insurance Proceeds...............................................................................................42
L/C Bank ...............................................................................................57
Labor ..............................................................................................106
Legislative History..............................................................................................74
Liquidation Proceeds.............................................................................................42
Loan-to-Value Ratio..............................................................................................19
Master REMIC ...............................................................................................77
Master Servicer ................................................................................................6
MBS .........................................................................................1, 6, 18
MBS Agreement ...............................................................................................20
MBS Issuer ...............................................................................................20
MBS Servicer ...............................................................................................20
MBS Trustee ...............................................................................................20
Merrill Lynch ..............................................................................................109
Model Law ..............................................................................................109
Mortgage Assets ................................................................................................1
Mortgage Loan Group...........................................................................................9, 28
Mortgage Loans .........................................................................................1, 6, 18
Mortgage Notes ...............................................................................................19
Mortgage Rate ............................................................................................7, 20
Mortgages ...............................................................................................19
mortgagor ...............................................................................................58
NCUA ..............................................................................................108
113
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
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new partnership ...............................................................................................96
New Regulations ..................................................................................76, 85, 98, 101
Nonrecoverable Advance...........................................................................................31
Notes .............................................................................................1, 6
Offered Securities................................................................................................1
OID ...........................................................................................69, 71
OID Regulations ...............................................................................................71
Originator ...............................................................................................19
OTS ..............................................................................................108
ownership interests.............................................................................................102
Participants ...........................................................................................34, 36
parties in interest.............................................................................................105
pass-through entity..............................................................................................91
pass-through interest holder.....................................................................................88
pass-through interest holders....................................................................................84
Pass-Through Rate ............................................................................................8, 29
passive losses ...............................................................................................86
Payment Lag Certificates.........................................................................................84
Permitted Investments............................................................................................41
phantom income ...............................................................................................86
plan assets ..............................................................................................107
Plans ..............................................................................................105
Policy Statement ..............................................................................................108
Pooling and Servicing Agreement..................................................................................37
portfolio income ...............................................................................................86
portfolio interest.......................................................................................90, 94, 98
Pre-Funded Amount ............................................................................................8, 22
pre-issuance accrued interest....................................................................................84
prepayment ...............................................................................................24
Prepayment Assumption............................................................................................74
Prohibited Transactions......................................................................................76, 89
Prohibited Transactions Tax......................................................................................89
PTCE 83-1 ..............................................................................................107
Purchase Price ...............................................................................................40
qualified mortgage...............................................................................................77
qualified stated interest........................................................................................78
Rating Agency ...............................................................................................12
real estate assets..............................................................................11, 69, 73, 77, 104
Record Date ...............................................................................................28
regular interests ..........................................................................................10, 102
Related Proceeds ...............................................................................................31
Relief Act ...............................................................................................67
REMIC ...............................................................................................10
REMIC Certificates...............................................................................................76
REMIC Regular Certificateholders.................................................................................78
REMIC Regular Certificates.......................................................................................77
REMIC Regulations ...............................................................................................68
REMIC Residual Certificates......................................................................................77
114
<PAGE>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
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Restricted Group ..............................................................................................107
Retained Interest ...............................................................................................49
RICO ...............................................................................................68
Securities .............................................................................................1, 6
Securities Act ................................................................................................3
Security ...............................................................................................38
Security Balance ............................................................................................8, 30
Security Owners ...............................................................................................34
Securityholder ...............................................................................................34
senior lien ...............................................................................................15
Senior Securities ............................................................................................8, 27
Servicing Agreement..............................................................................................37
Servicing Standard...............................................................................................45
Single Family Mortgage Loan......................................................................................18
Single Family Properties..........................................................................................6
Single Family Property...........................................................................................18
single family residences.........................................................................................77
SMMEA ..........................................................................................12, 108
SMMEA Securities ..............................................................................................108
SPA ...............................................................................................25
Stripped ARM Obligations.........................................................................................75
Stripped Bond Certificates.......................................................................................72
stripped bonds ...............................................................................................72
Stripped Coupon Certificates.....................................................................................72
stripped coupons ...............................................................................................72
Stripped Interest Securities..................................................................................9, 27
Stripped Principal Securities.................................................................................9, 27
Sub-Servicer ...............................................................................................45
Sub-Servicing Agreement..........................................................................................45
Subordinate Securities...........................................................................................27
Subsequent Assets ............................................................................................8, 21
Subsidiary REMIC ...............................................................................................77
Super-Premium Certificates.......................................................................................79
tax avoidance potential..........................................................................................92
Tax Counsel ...............................................................................................99
taxable mortgage pool.......................................................................................89, 100
Terms and Conditions.............................................................................................36
Title V ...............................................................................................66
Title VIII ...............................................................................................67
Trust Agreement ...............................................................................................37
Trust Assets ................................................................................................3
Trustee ................................................................................................6
U.S. Person ...............................................................................................68
UCC ...............................................................................................34
Value ...............................................................................................19
Voting Rights ...............................................................................................51
Warranting Party ...............................................................................................40
</TABLE>
<PAGE>
$210,460,231
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1999-2
CENDANT MORTGAGE CORPORATION
ORIGINATOR AND MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
--------------------------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------------------------
MERRILL LYNCH & CO.
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 Mortgage Pass-Through Certificates, Series
1999-2 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 Mortgage Pass-Through Certificates, Series 1999-2 and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Mortgage Pass-Through Certificates, Series 1999-2 will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
April 26, 1999
