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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-81429
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 27, 2000)
$380,161,000 (APPROXIMATE)
SEQUOIA MORTGAGE TRUST 4
MORTGAGE LOAN ASSET BACKED PASS-THROUGH CERTIFICATES, CLASS A
SEQUOIA MORTGAGE FUNDING CORPORATION
Seller
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
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THE TRUST FUND
- will issue five classes of certificates, four classes of which will be
subordinated to the Class A Certificates as described in this prospectus
supplement. Only the Class A Certificates are offered by this prospectus
supplement and the accompanying prospectus.
- will make payments on the certificates primarily from collections on a
pool of high principal balance, adjustable rate, first lien, one-to
four-family mortgage loans, the interest rates of which may be converted
to adjustable rates based on a different index, and certain related
property.
THE CLASS A CERTIFICATES
- will accrue interest at a pass-through rate that will adjust monthly, be
subject to an interest rate cap and be subject to increase after the
optional termination date, in each case as described in this prospectus
supplement.
- will have principal and interest payable on the 22nd day of each month or,
if the 22nd is not a business day, on the following business day,
beginning in April 2000.
- will be subject to redemption when the aggregate principal balance of the
mortgage loans is 20% or less of their initial aggregate principal balance
as described in this prospectus supplement.
CREDIT ENHANCEMENT
To the extent provided in this prospectus supplement, credit enhancement
will be provided to the Class A Certificates by
- the subordination of the subordinated certificates;
- any excess cash flow on the mortgage loans; and
- a certificate guaranty insurance policy issued by Ambac Assurance
Corporation.
[LOGO]
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YOU SHOULD READ THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS,
ESPECIALLY THE SPECIAL CONSIDERATIONS BEGINNING ON PAGE S-8 OF THIS
PROSPECTUS SUPPLEMENT, BEFORE MAKING A DECISION TO INVEST IN THE CLASS A
CERTIFICATES.
The certificates will represent interests in the trust fund only and
will not represent interests in or obligations of any other person or
entity.
This prospectus supplement may be used to offer and sell the Class A
Certificates offered hereby only if accompanied by the prospectus.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE
TO TELL YOU OTHERWISE.
The underwriters listed below will offer the Class A Certificates to the
public from time to time at negotiated prices determined at the time of sale.
See "Method of Distribution" in this prospectus supplement. The Class A
Certificates are expected to be delivered in book entry form on or about March
21, 2000. The Class A Certificates will be offered in the United States and
Europe.
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MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
GREENWICH CAPITAL MARKETS, INC.
MORGAN STANLEY DEAN WITTER
The date of this prospectus supplement is March 8, 2000.
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the certificates in two separate
documents that provide progressively more detailed information:
- the accompanying prospectus, which provides general information,
some of which may not apply to your series of certificates; and
- this prospectus supplement, which describes the specific terms
of your series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used both in
the prospectus and prospectus supplement are defined under the caption "Index of
Defined Terms" beginning on page 102 in the accompanying prospectus and under
the caption "Index of Principal Terms" beginning on page S-59 in this prospectus
supplement.
The Depositor's principal offices are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310, and
its phone number is (212) 449-0357.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
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Summary.....................................................................S-1
Special Considerations......................................................S-8
The Mortgage Pool..........................................................S-11
MLCC and Its Mortgage Programs.............................................S-19
Servicing of the Mortgage Loans............................................S-27
Description of the Certificates............................................S-30
Prepayment and Yield Considerations........................................S-44
The Certificate Insurance Policy and the Certificate Insurer...............S-49
Certain Federal Income Tax Consequences....................................S-52
ERISA Considerations.......................................................S-54
Legal Investment Considerations............................................S-56
Use of Proceeds............................................................S-56
Method of Distribution.....................................................S-56
Experts....................................................................S-58
Legal Matters..............................................................S-58
Certificate Rating.........................................................S-58
</TABLE>
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER WHEN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE
CERTIFICATES, READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS CAREFULLY.
SECURITIES
Sequoia Mortgage Trust 4 Mortgage Loan Asset Backed Pass-Through Certificates.
The securities will be divided into five classes, of which only the Class A
Certificates are offered hereby. The other classes of certificates will be
subordinated to the Class A Certificates as described herein. The subordinated
certificates are not offered hereby and the seller may retain or sell the
subordinated certificates.
See "Description of the Certificates--General" in this prospectus supplement.
DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., a Delaware corporation and a
wholly-owned, limited purpose subsidiary of Merrill Lynch Mortgage Capital Inc.,
which is a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. The
depositor is also an affiliate of both the master servicer and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, one of the underwriters. None of Merrill
Lynch & Co., Inc., any of its affiliates, including the depositor and the master
servicer, or the seller has insured or guaranteed the certificates.
See "The Depositor" in the prospectus.
SELLER
Sequoia Mortgage Funding Corporation, a Delaware corporation. The seller is a
limited purpose finance corporation whose stock is wholly-owned by Redwood
Trust, Inc., a Maryland corporation.
Prior to the closing date, the master servicer and RWT Holdings, Inc., a
Delaware corporation and a taxable affiliate of Redwood Trust, Inc., entered
into a master mortgage loan purchase agreement, a master servicing agreement and
a pledged asset mortgage servicing agreement pursuant to which RWT Holdings,
Inc. purchased the mortgage loans from the master servicer, and the master
servicer agreed to perform certain servicing functions with respect to the
mortgage loans and certain additional pledged assets.
On or before the closing date, the mortgage loans will be sold by RWT Holdings,
Inc. to the seller, and by the seller to the depositor, pursuant to a mortgage
loan purchase agreement in a privately negotiated transaction. The depositor, in
turn, will assign all of its rights in the mortgage loans and the servicing
agreements to the trust fund.
MASTER SERVICER
Merrill Lynch Credit Corporation, a wholly-owned indirect subsidiary of Merrill
Lynch & Co., Inc. and an affiliate of both the depositor and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, one of the underwriters.
See "MLCC and its Mortgage Programs" in this prospectus supplement.
POOLING AND SERVICING AGREEMENT
The Pooling and Servicing Agreement dated as of March 1, 2000, among the
depositor, the seller, the master servicer, and Norwest Bank Minnesota, National
Association, as trustee.
CUT-OFF DATE
March 1, 2000.
CLOSING DATE
On or about March 21, 2000.
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THE MORTGAGE LOANS
High principal balance, adjustable rate mortgage loans secured by first liens on
one- to four-family residential properties. Generally, high principal balance
mortgage loans are loans whose initial principal balances exceed, and in certain
cases substantially exceed, the maximum initial principal amount of mortgage
loans eligible to be purchased by Fannie Mae or Freddie Mac. Certain of the
mortgage loans may have initial principal balances below such thresholds. The
mortgage loans were originated by Merrill Lynch Credit Corporation in the
ordinary course of its real estate lending activities or acquired by it in the
course of its correspondent lending activities.
Each mortgage loan has an original term to maturity of 25 years and is scheduled
to pay only interest for the first 10 years of its term. Commencing in its
eleventh year, each mortgage loan is scheduled to amortize on a 15-year fully
amortizing basis. Monthly payments of interest and, to the extent described
herein, principal on the mortgage loans will be due on the first day of each
month.
The per annum mortgage interest rate for certain of the mortgage loans will be
adjusted monthly and the mortgage interest rate for the remainder of the
mortgage loans will be adjusted every six months on the related interest
adjustment date. The mortgage interest rate borne by a mortgage loan initially
will be calculated based on one of two indices, as of the cut-off date. The
indices are the "One-Month LIBOR Index" and the "Six-Month LIBOR Index." All of
the mortgage loans will be subject to a maximum mortgage interest rate. None of
the mortgage loans will be subject to a periodic interest rate cap.
Substantially all of the mortgage loans are index convertible mortgage loans,
which provide that, at the option of the related borrowers, the index for such
mortgage loans may be converted to a different index, provided that certain
conditions have been satisfied. In addition to the two indices noted above, the
available indices to which an index convertible mortgage loan may be converted
also include the "Treasury Index" and the "Prime Index." Except in the case of
0.41% (by cut-off date pool balance) of the mortgage loans, the mortgage loans
may not be converted to a fixed interest rate. The frequency of the interest
adjustment date is not changed in connection with such a conversion. Following
its conversion from one index to another index, a converted mortgage loan may be
repurchased from the trust fund by the Class R-LT Certificateholder, but such
repurchase is optional and not mandatory. Following its conversion from any
index to a fixed interest rate, Merrill Lynch Credit Corporation will have the
obligation to repurchase a converted mortgage loan from the trust fund, pursuant
to the master mortgage loan purchase agreement between Merrill Lynch Credit
Corporation and RWT Holdings, Inc.
On each interest adjustment date for a mortgage loan during the first 10 years
of its term, the monthly payment will be adjusted to equal one month's interest
at the mortgage interest rate determined for such interest adjustment date.
During the last 15 years, the monthly payment will be adjusted on each interest
adjustment date to equal an amount that will fully amortize the outstanding
principal balance of the mortgage loan over its remaining term at the related
mortgage interest rate.
Except for 1.11% of the mortgage loans (by cut-off date pool balance), none of
the mortgage loans, including mortgage loans having a loan-to-value ratio
greater than 80%, are insured under any primary mortgage insurance policy or
other credit insurance policy.
Mortgage loans having a loan-to-value ratio at origination greater than 80% are
generally Mortgage 100(SM) or Parent Power(R) loans, which, in addition to being
secured by real property, are secured by a security interest in a limited amount
of additional collateral owned by the borrower or are supported by a third-party
guarantee. Such additional collateral and guarantee are no longer required when
the principal balance of such additional collateral mortgage loan is reduced to
a predetermined amount set forth in the related pledge agreement or guaranty
agreement, as applicable, or when
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the loan-to-value ratio for such additional collateral mortgage loan is reduced
to the master servicer's applicable loan-to-value ratio limit for such mortgage
loan by virtue of an increase in the appraised value of the mortgaged property
as determined by the master servicer.
In connection with the additional collateral mortgage loans, a limited purpose
surety bond is in effect to cover a limited amount of losses that may be
realized upon the liquidation of any required additional collateral securing an
additional collateral mortgage loan.
See "The Mortgage Pool" and "MLCC and Its Mortgage Programs" in this prospectus
supplement.
The following table summarizes the characteristics of the mortgage loans as of
the cut-off date.
<TABLE>
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Original Pool Principal Balance ................................................. $384,001,241
Number of Mortgage Loans ........................................................ 905
Weighted Average Mortgage Rate .................................................. 7.585%
Range of Mortgage Rates ......................................................... 6.375%
to 8.875%
Percent of Mortgage Loans
Using the following Index in
determining the Mortgage Rate:
One-Month LIBOR Index .................................................. 68.66%
Six-Month LIBOR Index .................................................. 31.34%
Weighted Average Margins:
One-Month LIBOR Index
Mortgage Loans .................................................... 1.731%
Six-Month LIBOR Index
Mortgage Loans .................................................... 1.905%
Frequency of Interest Adjustment
Dates:
Monthly ................................................................ 68.66%
Six-Month .............................................................. 31.34%
Range of Maximum
Mortgage Rates ............................................................. 12.000%
to 13.750%
Weighted Average of Maximum
Mortgage Rates ............................................................. 12.280%
Weighted Average Remaining Term
to Stated Maturity ......................................................... 288 months
Range of Remaining Terms to
Stated Maturity ............................................................ 265 months
to 296 months
Range of Outstanding Principal
Balance of Mortgage
Loans ................................................................. $23,000 to $2,000,000
Average Outstanding Principal
Balance of Mortgage
Loans ...................................................................... $ 424,311
Latest Maturity Date ............................................................ November 2024
Weighted Average Loan-to-Value
Ratio at Origination ....................................................... 83.02%
Percent of Mortgage Loans
with Constructive Loan-to-Value Ratios:
Less Than or Equal to 70% .............................................. 78.98%
Greater Than 70% and Less
Than or Equal to 80% .............................................. 19.50%
Greater Than 80% ....................................................... 1.52%
Percent of Mortgage Loans
which are Additional Collateral
Mortgage Loans ............................................................. 53.90%
Percent of Mortgage Loans
which are Index Convertible
Mortgage Loans (convertible to a new Index) ............................... 100.00%
</TABLE>
See "The Mortgage Pool" in this prospectus supplement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A Certificates will evidence beneficial interests in a trust fund
consisting of a pool of mortgage loans and certain other property held in trust
for the benefit of the certificateholders. Exclusive of the interest of the
Class R Certificates (consisting of the Class R-UT and Class R-LT Certificates)
and the Class C Certificates, each of which do not have principal balances, the
Class A Certificates initially will evidence in the aggregate a beneficial
interest of approximately 99.00% in the mortgage loans and the Class B
Certificates initially will evidence the remaining approximately 1.00%. The
original principal balance of the Class A Certificates will be approximately
$380,161,000, subject to a permitted variance of plus or minus five percent. The
original principal balance of the Class B Certificates will be approximately
$3,840,241. As described in this prospectus supplement, the Class B, Class C and
Class R Certificates are subordinated in certain respects to the Class A
Certificates.
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DENOMINATIONS
The Class A Certificates will be issuable in denominations of $25,000 and
integral multiples of $1,000 in excess thereof.
REGISTRATION OF CERTIFICATES
The Class A Certificates initially will be issued in book-entry form. Persons
acquiring beneficial ownership interests in the certificates may elect to hold
their beneficial interests through The Depository Trust Company or "DTC," in the
United States, or Clearstream, Luxembourg or the Euroclear System, in Europe.
See "Description of Certificates-- Registration of Class A Certificates" in this
prospectus supplement.
CLASS A PASS-THROUGH RATE
The pass-through rate for the Class A Certificates is an adjustable rate that
may change from distribution date to distribution date. On any distribution
date, the pass-through rate for the Class A Certificates will be equal to the
least of:
- - one-month LIBOR plus a margin of 0.36%;
- - the weighted average net mortgage rate for the mortgage loans, as
described in this prospectus supplement; and
- - 11.78% per annum.
The margin added to one-month LIBOR will increase to 0.72% for each distribution
date occurring 120 days or more after the first distribution date in respect of
which the aggregate outstanding principal balance of the mortgage loans is 10%
or less of the aggregate unpaid principal balance of the mortgage loans as of
the cut-off date. Additional interest in excess of the applicable weighted
average net mortgage rate for the mortgage loans may be payable on the Class A
Certificates from a carryover reserve fund.
See "Description of the Certificates-- Distributions on the Certificates" and
"--Calculation of LIBOR" in this prospectus supplement.
DISTRIBUTION DATES
Distributions of interest and any principal to each holder of a Class A
Certificate will be made on the 22nd day of each month (or if such 22nd day is
not a business day, then on the next succeeding business day), commencing on
April 24, 2000.
INTEREST PAYMENTS
On each distribution date holders of the Class A Certificates will be entitled
to receive:
- - the interest that has accrued on the Class A Certificates at the related
pass-through rate during the related accrual period, and
- - any interest due on a prior distribution date that was not paid.
The "accrual period" will be the thirty-day period beginning on the preceding
distribution date (or March 21, 2000 in the case of the first distribution
date).
All calculations of interest on the certificates will be made on the basis of a
360-day year divided into twelve 30-day months.
There are certain circumstances that could reduce the amount of interest paid to
you, including net interest shortfalls resulting from principal prepayments in
full by borrowers.
See "Description of the Certificates-- Distributions on the Certificates" in
this prospectus supplement.
PRINCIPAL PAYMENTS
On each distribution date, Class A Certificateholders will receive the
distribution of principal on their certificates to which they are entitled on
that date if there is sufficient cash available on that date for the payment of
principal.
Certificateholders should review the priority of payments described under
"Description of the
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Certificates -- Distributions on the Certificates" in this prospectus
supplement.
In no event will the aggregate distributions of principal to the Class A
Certificateholders (whether out of collections on the mortgage loans, payments
under the certificate insurance policy or payments under the limited purpose
surety bond) exceed the original principal balance of the Class A Certificates.
CREDIT ENHANCEMENT
Credit enhancements provide limited protection to Class A Certificateholders
against shortfalls in payments received on the mortgage loans. This transaction
employs the following forms of credit enhancement.
SUBORDINATION
The issuance of senior certificates and subordinated certificates by the trust
fund is designed to increase the likelihood that the Class A Certificateholders
will receive regular payments of the full amount of monthly distributions due
them. The Class A Certificates constitute the "senior certificates," and the
Class B, Class C and Class R Certificates constitute the "subordinated
certificates."
The Class A Certificates will have payment priority over the subordinated
certificates. Within the classes of subordinated certificates:
- - the Class B Certificates will have payment priority over the Class C
Certificates and the Class R Certificates; and
- - the Class C Certificates will have payment priority over the Class R
Certificates.
This subordination is intended to enhance the likelihood of regular receipt by
the Class A Certificateholders of the full amount of monthly distributions due
them and to protect the Class A Certificateholders and the Certificate Insurer
against losses, but no assurance can be given that the Class A
Certificateholders will not experience losses. In general, this protection is
accomplished by the preferential right of the Class A Certificates to receive,
prior to distributions being made to the holders of the subordinated
certificates, the amount of monthly distributions due on the Class A
Certificates.
See "Description of the Certificates-- Subordinated Certificates" in this
prospectus supplement.
EXCESS CASH FLOW
Because the borrowers are expected to pay more interest on the mortgage loans
than is necessary to pay the interest on the Class A and Class B Certificates
and certain administrative expenses each month, there may be excess cash flow.
Some of this excess cash flow may be applied to protect the Class A Certificates
against some losses by means of the priority of payments described under
"Description of the Certificates -- Distributions on the Certificates" in this
prospectus supplement. Otherwise, such excess cash flow will be paid to
reimburse the holders of the Class B Certificates for any unreimbursed
reductions in the principal balance of their certificates or paid to the holders
of the Class C Certificates.
CERTIFICATE INSURANCE POLICY
The depositor will obtain the certificate insurance policy which will provide
for payment of insured amounts solely to the holders of the Class A Certificates
in accordance with the terms of the certificate insurance policy. Payment of an
insured amount, if applicable, is intended to provide the trustee with
sufficient funds to make distributions to the Class A Certificateholders of the
full amount of interest, together with the related principal distribution
amount, due on the Class A Certificates on each distribution date. In addition,
on the distribution date in April 2025, the outstanding principal balance, if
any, of the Class A Certificates will be due and will be covered by the
certificate insurance policy.
The certificate insurance policy does not guarantee to the Class A
Certificateholders, and does not protect against any adverse consequences caused
by, any specified rate of prepayments of the mortgage loans and does not
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protect the Class A Certificateholders against any adverse consequences caused
by any net interest shortfalls or any interest in excess of the pass-through
rate, which is payable only from the carryover reserve fund.
See "The Certificate Insurance Policy and the Certificate Insurer" in this
prospectus supplement.
CERTIFICATE INSURER
Ambac Assurance Corporation.
ADVANCES
The master servicer is obligated to make advances of cash, which will be
included with mortgage collections, in an amount equal to the delinquent monthly
payments due on the immediately preceding monthly payment date. The master
servicer is under no obligation to make advances to the extent it determines
such advances are not recoverable from future payments or collections on the
related mortgage loans or to otherwise guarantee or insure against losses.
See "Servicing of the Mortgage Loans-- Advances" in this prospectus supplement.
OPTIONAL TERMINATION
On any distribution date on or after which the aggregate outstanding principal
balance of the mortgage loans is 20% or less of the aggregate unpaid principal
balance of the mortgage loans as of the cut-off date, the Class R-LT
Certificateholder may, at its option, either (1) purchase from the trust fund
all mortgage loans remaining outstanding or (2) purchase, in whole but not in
part, all outstanding Certificates. In the absence of the exercise of either of
such purchase options by the Class R-LT Certificateholder, the certificate
insurer or the surety bond provider may, at its option, purchase from the trust
fund all mortgage loans remaining outstanding on any distribution date on or
after the distribution date on which the aggregate outstanding principal balance
of the mortgage loans is 10% or less of the aggregate unpaid principal balance
of the mortgage loans as of the cut-off date.
See "Description of the Certificates-- Optional Termination" in this prospectus
supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the trust fund (exclusive of the rights in any
additional collateral and the carryover reserve fund) will comprise two real
estate mortgage investment conduits, organized in a tiered REMIC structure. The
Class A Certificates, Class B Certificates and Class C Certificates will
represent beneficial ownership of REMIC "regular interests" in the upper tier
REMIC identified in the pooling and servicing agreement.
The treatment of the rights of the Class A Certificates and Class B Certificates
to receive any basis risk carryover amounts is unclear for federal income tax
purposes. Such rights may be treated as representing beneficial interests in the
right to receive payments from a separate reserve fund pursuant to an interest
rate cap agreement treated as a notional principal contract. Alternatively, the
rights of such certificates to receive any basis risk carryover amounts may be
treated as representing beneficial interests in partnership with the Class C
Certificates in respect of the Class C Certificates' entitlement to interest.
The Class R-UT Certificates and the Class R-LT Certificates will represent the
beneficial ownership of the sole class of "residual interest" in the upper tier
REMIC and the lower tier REMIC, respectively.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
"Material Federal Income Tax Consequences" in the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
So long as the Class A Certificates are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating agency, the
Class A Certificates will constitute
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"mortgage related securities" under the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment Considerations" in this prospectus supplement.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended, or section 4975 of the Internal Revenue
Code of 1986, as amended, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
CERTIFICATE RATINGS
It is a condition to the issuance of the Class A Certificates that they be rated
"AAAr" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and
"Aaa" by Moody's Investors Service, Inc. Standard & Poor's assigns the
additional symbol of "r" to highlight classes of securities that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks; however, the absence of an "r" symbol should
not be taken as an indication that a class will exhibit no volatility or
variability in total return.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. A security rating does not address the frequency of prepayments on the
mortgage loans or the corresponding effect on yield to investors.
See "Certificate Rating" in this prospectus supplement.
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SPECIAL CONSIDERATIONS
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS DISCUSSED IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, THE FOLLOWING
FACTORS, WHICH ARE DISCUSSED AS NOTED IN GREATER DETAIL ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS.
YOU MAY HAVE DIFFICULTY
RESELLING CERTIFICATES There is currently no market for the
Class A Certificates. While the
underwriters currently intend to make a
market in the Class A Certificates, they
are under no obligation to do so. There
can be no assurance that a secondary
market will develop or, if a secondary
market does develop, that it will provide
holders of the Class A Certificates with
liquidity of investment or that it will
continue for the lives of the Class A
Certificates.
YOU COULD BE ADVERSELY AFFECTED An overall decline in the residential
BY LOCAL REAL ESTATE MARKETS real estate markets in the states in
which the mortgaged properties are
located could adversely affect the values
of the mortgaged properties such that the
outstanding mortgage loan balances equal
or exceed the value of the affected
mortgaged properties. Such declines would
adversely affect the position of the
trust fund as the holder of the mortgage
loans. Residential real estate markets in
some states have declined in recent
years.
See "The Mortgage Pool" and "MLCC and Its
Mortgage Programs--Delinquency and Loan
Loss Experience" in this prospectus
supplement.
THE WEIGHTED AVERAGE LIFE OF
THE CLASS A CERTIFICATES WILL
BE AFFECTED BY PREPAYMENTS AND
REPURCHASES The mortgage loans may be prepaid in
whole or in part at any time without
penalty. The trust fund's prepayment
experience may be affected by a wide
variety of factors, including general
economic conditions, the level of
prevailing interest rates, the
availability of alternative financing and
homeowner mobility. The weighted average
life of the Class A Certificates will be
sensitive to the rate and timing of
principal payments (including
prepayments) on the mortgage loans, which
may fluctuate significantly from time to
time.
Prepayments, liquidation and repurchases
of the mortgage loans (including
repurchases by the seller or RWT
Holdings, Inc. of defective mortgage
loans or loans as to which a breach of a
representation or warranty has occurred,
optional purchases by the holder of the
Class R-LT Certificate of converted
mortgage loans that have converted to a
different index, mandatory purchases by
Merrill Lynch Credit Corporation of
converted mortgage loans that have
converted to a fixed interest rate and
purchases of the mortgage loans by the
holder of the Class R-LT Certificate, the
certificate insurer or the surety bond
provider in connection with any optional
termination of the trust fund) will
result in distributions on the
certificates of principal amounts which
would otherwise have been distributed
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over the remaining terms of the mortgage
loans. In addition, the holder of the
Class R-LT Certificate may, at its
option, effect an optional redemption of
the certificates by purchasing all of the
outstanding certificates instead of
purchasing all of the mortgage loans. No
assurance can be given as to the level of
prepayments that the trust fund will
experience as a result of prepayments,
liquidations or any such purchases of
mortgage loans.
See "Prepayment and Yield Considerations"
in this prospectus supplement.
YOUR YIELD MAY BE AFFECTED BY
CHANGES IN INTEREST RATES No prediction can be made as to future
levels of LIBOR, the One-Month LIBOR
Index, the Six-Month LIBOR Index, the
Prime Index or the Treasury Index or as
to the timing of any changes therein or
as to the conversion of mortgage loans to
other indices, each of which will
directly affect the yields of the Class A
Certificates. Except for any payments
made from the carryover reserve fund, the
holders of the Class A Certificates will
absorb the yield risk associated with a
possible elimination or inversion of the
spread between the Class A Pass-Through
Rate calculated on the basis of the LIBOR
formula and the weighted average net
mortgage rate. The mortgage rates reset
at different times and are subject to
lifetime interest rate caps.
See "Prepayment and Yield Considerations"
in this prospectus supplement.
YOU MAY SUFFER LOSSES IF THE
CERTIFICATE INSURER FAILS TO
PERFORM ITS OBLIGATIONS Credit enhancement with respect to the
Class A Certificates will be provided by
the certificate insurance policy. See
"The Certificate Insurance Policy and the
Certificate Insurer" in this prospectus
supplement. If the certificate insurer
fails or is unable to perform its
obligations under the certificate
insurance policy, the Class A
Certificateholders will be directly
affected by losses on the mortgage loans.
REPURCHASES OF MORTGAGE LOANS
WILL DEPEND UPON THE CREDIT
OF A THIRD PARTY The mortgage loans have been purchased by
RWT Holdings, Inc. in accordance with its
loan purchase program. RWT Holdings, Inc.
will make certain representations and
warranties in the mortgage loan purchase
agreement regarding the mortgage loans
and, in the event of a breach of any such
representation or warranty that
materially and adversely affects the
certificateholders or the certificate
insurer, RWT Holdings, Inc. will be
required either to cure such breach or to
repurchase the related mortgage loan or
loans.
BANKRUPTCY OR INSOLVENCY MAY
AFFECT THE TIMING AND AMOUNT OF
DISTRIBUTIONS ON THE The transfer of the mortgage loans by RWT
CERTIFICATES Holdings, Inc. to the seller, and the
transfer thereof by the seller to the
depositor, in each case will be
characterized in the mortgage loan
purchase agreement as a sale transaction.
Nevertheless, in the event of a
bankruptcy of a RWT Holdings, Inc., the
trustee in
S-9
<PAGE> 12
bankruptcy could attempt to
recharacterize the sale of the mortgage
loans to the seller as a borrowing
secured by a pledge of the mortgage
loans, and in the event of a bankruptcy
of the seller, the trustee in bankruptcy
could attempt to recharacterize the sale
of the mortgage loans to the depositor as
a borrowing secured by a pledge of the
mortgage loans.
In either case, if such an attempt to
recharacterize the transfer of the
mortgage loans were successful, a trustee
in bankruptcy could elect to accelerate
payment of the certificates and liquidate
the mortgage loans, with the holders of
the certificates entitled to no more than
the outstanding class principal balances,
if any, of the classes of certificates,
together with interest thereon at the
applicable pass-through rate to the date
of payment. In the event of an
acceleration of the certificates, the
holders of the certificates would lose
the right to future payments of interest,
might suffer reinvestment losses in a
lower interest rate environment and may
fail to recover their initial investment.
Whether or not an acceleration takes
place, delays in payments on the
certificates and possible reductions in
the amount of such payments could occur.
The depositor will warrant in the pooling
and servicing agreement that the transfer
of the mortgage loans to the trust fund
is a valid transfer and sale of all of
the depositor's right, title and interest
in the mortgage loans to the trust fund.
YOU COULD BE ADVERSELY
AFFECTED BY VIOLATIONS OF
CONSUMER PROTECTION LAWS Applicable state laws generally regulate
interest rates and other charges and
require certain disclosures. In addition,
state and federal consumer protection
laws, unfair and deceptive practices acts
and debt collection practices acts may
apply to the origination or collection of
the mortgage loans. Depending on the
provisions of the applicable law,
violations of these laws may limit the
ability of the master servicer to collect
all or part of the principal of or
interest on the mortgage loans, may
entitle the borrower to a refund of
amounts previously paid and, in addition,
could subject the master servicer to
damages and administrative enforcement.
See "Certain Legal Aspects of the
Mortgage Loans" in the Prospectus.
S-10
<PAGE> 13
THE MORTGAGE POOL
GENERAL
The mortgage pool with respect to the Certificates (the "MORTGAGE POOL")
will consist of conventional mortgage loans (the "MORTGAGE LOANS") evidenced by
high balance, adjustable interest rate promissory notes (each, a "MORTGAGE
NOTE"). The Mortgage Notes are secured by mortgages or deeds of trust or other
similar security instruments creating first liens on one- to four-family
residential properties and shares issued by private non-profit housing
corporations ("COOPERATIVES") and related proprietary leases or occupancy
agreements granting exclusive rights to occupy specified units in such
Cooperatives' buildings (the "MORTGAGED PROPERTIES"). The Mortgaged Properties
will consist of detached individual dwelling units, individual condominiums,
townhouses, duplexes, cooperative apartments, individual units in planned unit
developments and other attached dwelling units.
The Sequoia Mortgage Trust Fund 4 (the "TRUST FUND") will include, in
addition to the Mortgage Pool, (i) the amounts held from time to time in one or
more accounts (collectively, the "CERTIFICATE ACCOUNT") maintained in the name
of the Trustee pursuant to the Pooling and Servicing Agreement dated as of March
1, 2000 (the "AGREEMENT"), by and among Merrill Lynch Mortgage Investors, Inc.,
as depositor (the "DEPOSITOR"), Sequoia Mortgage Funding Corporation, as seller
(the "SELLER"), Merrill Lynch Credit Corporation ("MLCC"), as master servicer
(the "MASTER SERVICER"), and Norwest Bank Minnesota, National Association, as
trustee (the "TRUSTEE"), (ii) the amounts held from time to time in the
Distribution Account (the "DISTRIBUTION ACCOUNT") maintained in the name of the
Trustee pursuant to the Agreement, (iii) any property which initially secured a
Mortgage Loan and which is acquired by foreclosure or deed in lieu of
foreclosure, (iv) all insurance policies and any Insurance Proceeds, (v) all of
the right, title and interest of the Depositor to the Mortgage Loan Purchase
Agreement as described under "-Assignment of the Mortgage Loans" below, (vi) the
pledge agreements or guaranty agreements, as applicable, in respect of the
Additional Collateral Loans, (vii) the Certificate Insurance Policy and the
proceeds thereof, (viii) the Limited Purpose Surety Bond and the proceeds
thereof and (ix) any amounts on deposit in the Carryover Reserve Fund. The
rights in respect of the Additional Collateral and the Carryover Reserve Fund
will not be part of either the Upper-Tier REMIC or the Lower-Tier REMIC.
Monthly payments of interest and, to the extent described herein,
principal on the Mortgage Loans ("MONTHLY PAYMENTS") will be due on the first
day of each month (each, a "DUE DATE").
The per annum interest rate (the "MORTGAGE RATE") for certain of the
Mortgage Loans will be adjusted monthly and the Mortgage Rate for the remainder
of the Mortgage Loans will be adjusted every six months. The adjustment date is
referred to as the "INTEREST ADJUSTMENT DATE". The Mortgage Rate borne by a
Mortgage Loan may be calculated as follows:
One-Month LIBOR Index. The Mortgage Rate borne by approximately
68.66% of the Mortgage Loans (by Cut-off Date Pool Balance) is adjusted
every month to equal the London interbank offered rate for one-month
U.S. dollar deposits (the "ONE-MONTH LIBOR INDEX") as listed under
"Money Rates" in The Wall Street Journal most recently available as of
25 days prior to the related Interest Adjustment Date plus a margin (a
"MARGIN") ranging from 0.625% to 2.750%.
Six-Month LIBOR Index. The Mortgage Rate borne by approximately
31.34% of the Mortgage Loans (by Cut-off Date Pool Balance) is adjusted
every six months to equal the London interbank offered rate for
six-month U.S. dollar deposits (the "SIX-MONTH LIBOR INDEX") as
S-11
<PAGE> 14
listed under "Money Rates" in The Wall Street Journal most recently
available as of 45 days prior to the related Interest Adjustment Date
plus a Margin ranging from 1.000% to 3.125%.
In addition to the One-Month LIBOR Index and the Six-Month LIBOR Index,
the Mortgage Rate of an Index Convertible Mortgage Loan may be converted to the
Prime Index or the Treasury Index, which Mortgage Rate based on each such index
may be calculated as follows:
Prime Index. The Mortgage Rate may be adjusted to equal the
highest Prime Rate (the "PRIME INDEX") as listed under "Money Rates" in
The Wall Street Journal most recently available as of 45 days, in the
case of six-month adjustable Mortgage Loans, or 25 days, in the case of
monthly adjustable Mortgage Loans, prior to the related Interest
Adjustment Date plus or minus a specified Margin.
Treasury Index. The Mortgage Rate may be adjusted to equal the
weekly average yield on the United States Treasury Securities adjusted
to a constant maturity of one year, as made available by the Federal
Reserve board in Statistical Release H.15 (the "TREASURY INDEX") most
recently available as of 45 days, in the case of six-month adjustable
Mortgage Loans, or 25 days, in the case of monthly adjustable Mortgage
Loans, prior to the related Interest Adjustment Date plus a specified
Margin.
Notwithstanding the foregoing, each of the Mortgage Loans will be
subject to a maximum Mortgage Rate (the "MAXIMUM MORTGAGE RATE"). The Maximum
Mortgage Rates for the Mortgage Loans range from 12.000% to 13.750%. None of the
Mortgage Loans will be subject to a periodic interest rate cap.
Substantially all of the Mortgage Loans are "INDEX CONVERTIBLE MORTGAGE
LOANS", which provide that, at the option of the related obligor on the Mortgage
Note (the "MORTGAGOR"), the adjustable rate on such Mortgage Loan may be
converted to a different Index, provided in each case that certain conditions
have been satisfied. The available indices to which a six-month adjustable Index
Convertible Mortgage Loan may be converted are the Prime Index, the Six-Month
LIBOR Index and the Treasury Index. The available indices to which a monthly
adjustable Index Convertible Mortgage Loan may be converted are the Prime Index,
the One-Month LIBOR Index and the Treasury Index. The margins generally
applicable to such Indices are specified under "MLCC and Its Mortgage Programs."
In connection with the conversion to a different Index, the frequency of the
Interest Adjustment Date is not changed. In addition, in the case of 0.41% (by
Cut-off Date Pool Balance) of the Mortgage Loans, the adjustable rate on such
Mortgage Loans may be converted to a fixed interest rate. The Class R-LT
Certificateholder may (but will not be obligated to) purchase any Mortgage Loan
from the Trust Fund on or after its conversion to a different index. Merrill
Lynch Credit Corporation will be obligated to purchase any Mortgage Loan from
the Trust Fund on or after its conversion to a fixed interest rate, pursuant to
the Master Mortgage Loan Purchase Agreement (the "MASTER MORTGAGE LOAN PURCHASE
AGREEMENT"), dated as of April 1, 1998, as amended, between RWT Holdings and
Merrill Lynch Credit Corporation (under which RWT Holdings purchased the
Mortgage Loans from Merrill Lynch Credit Corporation).
On each Interest Adjustment Date for a Mortgage Loan during the first 10
years of its term, the Monthly Payment will be adjusted to equal one month's
interest at the Mortgage Rate determined for such Interest Adjustment Date.
During the last 15 years, the Monthly Payment will be adjusted on each Interest
Adjustment Date to equal an amount that will fully amortize the outstanding
principal balance of the Mortgage Loan over its remaining term at the related
Mortgage Rate.
S-12
<PAGE> 15
Except for 1.11% (by Cut-off Date Pool Balance) of the Mortgage Loans,
none of the Mortgage Loans, including Mortgage Loans having a Loan-to-Value
Ratio greater than 80%, are insured under any policy of primary mortgage
insurance or other credit insurance policy. Mortgage Loans having a
Loan-to-Value Ratio at origination greater than 80% are generally Mortgage
100(SM) or Parent Power(R) loans, which, in addition to being secured by real
property, are secured by a security interest in a limited amount of additional
collateral owned by the borrower or are supported by a third-party guarantee
(the "ADDITIONAL COLLATERAL LOANS"). The Master Servicer will attempt to realize
for the benefit of the Trust Fund and the Certificate Insurer on the security
interest in the Additional Collateral of a defaulted Additional Collateral Loan
that is in liquidation. See "MLCC and Its Mortgage Programs" herein.
On the date on which the Certificates are issued (the "CLOSING DATE"),
the Mortgage Pool will consist of approximately 905 Mortgage Loans having an
aggregate principal balance as of March 1, 2000 (the "CUT-OFF DATE") of
approximately $384,001,241 (the "CUT-OFF DATE POOL BALANCE"). Substantially all
of the Mortgage Loans were originated by MLCC in the ordinary course of its real
estate lending activities, except for 7.98% (by Cut-off Date Pool Balance) of
the Mortgage Loans, which were acquired by MLCC in the course of its
correspondent lending activities. With respect to approximately 1.23% (by
Cut-off Date Pool Balance) of the Mortgage Loans, the borrowers were initially
solicited by, and the documentation for the Mortgage Loans was provided by,
mortgage brokers that are not affiliated with MLCC, under MLCC's mortgage broker
program. Personnel of MLCC reviewed the documentation for each such Mortgage
Loan and underwrote such loans in accordance with MLCC's underwriting standards.
See "MLCC and Its Mortgage Programs" herein for a description of MLCC's mortgage
broker and correspondent lending activities.
Based upon representations obtained from the Mortgagors at the time of
origination of the Mortgage Loans, approximately 81.37% (by Cut-off Date Pool
Balance) of the related Mortgaged Properties are owner-occupied. As of the
Cut-off Date, none of the Mortgage Loans will be delinquent more than one month.
The Mortgage Loans were originated from November 1996 through November
1999. No more than 1.03% (by Cut-Off Date Pool Balance) of the Mortgaged
Properties securing the Mortgage Loans are located in any one zip code area. At
origination, all of the Mortgage Loans had terms to stated maturity of 25 years.
The latest month and year in which any Mortgage Loan matures is November 2024.
The Mortgage Loans had remaining terms to stated maturity, calculated as of the
Cut-off Date, of between approximately 265 and 296 months and a weighted average
remaining term to stated maturity as of the Cut-off Date of approximately 288
months. The Mortgage Rates borne by the Mortgage Loans as of the Cut-off Date
ranged from 6.375% per annum to 8.875% per annum and the weighted average
Mortgage Rate as of the Cut-off Date was approximately 7.585% per annum.
Employees of Merrill Lynch & Co., Inc. and its affiliates are the Mortgagors
under 8.30% (by Cut-Off Date Pool Balance) of the Mortgage Loans.
Each Mortgage Loan had an original principal balance of not less than
$23,000 nor more than $2,000,000. The average outstanding principal balance of
the Mortgage Loans as of the Cut-off Date was approximately $424,311.
Certain additional characteristics with respect to the Mortgage Loans
are set forth below. References herein to percentages of Mortgage Loans refer in
each case to the percentage of the Cut-off Date Pool Balance after giving effect
to scheduled Monthly Payments due on or prior to the Cut-off Date.
The sum of the percentages in each table below may not equal the total
because of rounding.
S-13
<PAGE> 16
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
- -------------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATE OR TERRITORY LOANS BALANCE BALANCE
- -------------------------------------------------------------------
<S> <C> <C> <C>
California................ 122 $ 74,140,520.78 19.31%
Florida................... 109 45,153,228.21 11.76
New York.................. 77 38,192,052.94 9.95
Georgia................... 73 26,137,548.10 6.81
Texas..................... 63 23,381,535.94 6.09
New Jersey................ 42 19,970,323.57 5.20
Others(1)................. 419 157,026,031.01 40.89
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) "Others" includes 42 other States, the District of Columbia, and Virgin
Islands with under 5.00% concentrations individually.
<TABLE>
<CAPTION>
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES(1)
- ------------------------------------------------------------------
NUMBER PERCENT
OF CUT-OFF BY CUT-OFF
RANGE OF INITIAL DATE DATE
CUT-OFF DATE MORTGAGE PRINCIPAL PRINCIPAL
PRINCIPAL BALANCES LOANS BALANCE BALANCE
- ------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.01-$ 25,000.00.. 1 $ 23,000.00 0.01%
$ 25,000.01-$ 50,000.00.. 7 264,499.38 0.07
$ 50,000.01-$ 75,000.00.. 20 1,303,645.60 0.34
$ 75,000.01-$ 100,000.00.. 42 3,715,910.42 0.97
$ 100,000.01-$ 200,000.00.. 192 29,513,750.62 7.69
$ 200,000.01-$ 300,000.00.. 155 39,539,043.54 10.30
$ 300,000.01-$ 400,000.00.. 150 52,749,129.13 13.74
$ 400,000.01-$ 500,000.00.. 86 39,290,852.71 10.23
$ 500,000.01-$ 600,000.00.. 68 37,769,128.55 9.84
$ 600,000.01-$ 700,000.00.. 42 27,542,735.64 7.17
$ 700,000.01-$ 800,000.00.. 33 25,228,217.60 6.57
$ 800,000.01-$ 900,000.00.. 24 20,678,007.39 5.38
$ 900,000.01-$1,000,000.00.. 35 33,968,664.56 8.85
$1,000,000.01-$1,500,000.00.. 35 45,741,994.34 11.91
$1,500,000.01-$2,000,000.00.. 15 26,672,661.07 6.95
--- --------------- ------
Total............... 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans was approximately $424,311.
<TABLE>
<CAPTION>
RANGE OF ORIGINAL CONSTRUCTIVE LOSS-TO-VALUE RATIOS(1)(2)
- -------------------------------------------------------------------
RANGE OF PERCENT
ORIGINAL NUMBER CUT-OFF BY CUT-OFF
CONSTRUCTIVE OF DATE DATE
LOAN-TO-VALUE MORTGAGE PRINCIPAL PRINCIPAL
RATIOS LOANS BALANCE BALANCE
- -------------------------------------------------------------------
<S> <C> <C> <C>
0.00-10.00............... 3 $ 734,921.27 0.19%
10.01-20.00............... 6 1,907,100.34 0.50
20.01-30.00............... 8 2,828,854.95 0.74
30.01-40.00............... 16 8,615,219.18 2.24
40.01-50.00............... 104 36,973,304.81 9.63
50.01-60.00............... 62 33,043,390.68 8.61
60.01-70.00............... 501 219,166,211.45 57.07
70.01-75.00............... 58 28,912,550.29 7.53
75.01-80.00............... 125 45,976,215.14 11.97
80.01-85.00............... 3 1,095,082.74 0.29
85.01-90.00............... 8 2,161,763.44 0.56
90.01-95.00............... 11 2,586,626.26 0.67
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) The "Constructive Loss-to-Value Ratio" is calculated as (i) the original
loan amount less the amount of any required Additional Collateral, generally
30%, divided by (ii) the lesser of the appraised value of the Mortgaged
Property at origination and, if the Mortgage Loan is a purchase money loan,
the sales price of the Mortgaged Property. See "MLCC and Its Mortgage
Programs" herein for a description of the program requirements for
Additional Collateral Mortgage Loans and the releasing of Additional
Collateral during the term of a Mortgage Loan.
(2) As of the Cut-off Date, the weighted average Constructive Loan-to-Value
Ratio at origination was approximately 66.22%.
<TABLE>
<CAPTION>
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS(1)
- -------------------------------------------------------------------
PERCENT
RANGE OF NUMBER CUT-OFF BY CUT-OFF
ORIGINAL OF DATE DATE
LOAN-TO-VALUE MORTGAGE PRINCIPAL PRINCIPAL
RATIOS LOANS BALANCE BALANCE
- -------------------------------------------------------------------
<S> <C> <C> <C>
0.01- 10.00.............. 1 $ 249,921.27 0.07%
10.01- 20.00............. 6 1,907,100.34 0.50
20.01- 30.00............. 7 1,828,854.95 0.48
30.01- 40.00............. 16 8,615,219.18 2.24
40.01- 50.00............. 38 15,904,435.63 4.14
50.01- 60.00............. 48 24,708,585.84 6.43
60.01- 70.00............. 86 48,912,964.73 12.74
70.01- 75.00............. 56 26,577,099.30 6.92
75.01- 80.00............. 131 44,827,831.66 11.67
80.01- 85.00............. 11 5,144,535.00 1.34
85.01- 90.00............. 31 12,042,278.36 3.14
90.01- 95.00............. 42 19,467,533.01 5.07
95.01-100.00............. 429 172,079,568.28 44.81
100.01-100.89............. 3 1,735,313.00 0.45
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination was approximately 83.02%.
<TABLE>
<CAPTION>
OCCUPANCY STATUS
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATUS LOANS BALANCE BALANCE
- -------------------------------------------------------------------
<S> <C> <C> <C>
Owner-Occupied............ 726 $312,454,220.62 81.37%
Second Home............... 109 51,432,152.84 13.39
Investment Property....... 70 20,114,867.09 5.24
--- --------------- ------
Total.............. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
<TABLE>
<CAPTION>
LOAN PURPOSE
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- -------------------------------------------------------------------
<S> <C> <C> <C>
Purchase.................. 667 $271,170,985.74 70.62%
Cash-Out Refinance(1)..... 177 89,620,389.12 23.34
Rate and Term Refinance... 61 23,209,865.69 6.04
--- --------------- ------
Total.............. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) MLCC categorizes as cash-out refinance mortgage loans those loans in respect
of which the cash taken out by the mortgagor exceeded the sum of (i) closing
costs and points, (ii) funds applied to pay off a subordinate loan that was
outstanding at least one year and (iii) an amount equal to 1% of the
principal amount of such new loan.
S-14
<PAGE> 17
<TABLE>
<CAPTION>
MORTGAGE PROPERTIES
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY TYPE LOANS BALANCE BALANCE
------------- -------- --------------- ----------
<S> <C> <C> <C>
Single Family............. 528 $239,830,699.40 62.46%
Planed Unit Development... 247 103,461,035.64 26.94
Condominium............... 98 30,809,051.74 8.02
2-to-4 Family............. 16 5,615,720.26 1.46
Cooperative............... 16 4,284,733.51 1.12
--- --------------- ------
Total 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES(1)
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MAXIMUM MORTGAGE RATES LOANS BALANCE BALANCE
---------------------- -------- --------------- ----------
<S> <C> <C> <C>
12.000%-12.249%........... 522 $217,197,097.08 56.56%
12.250%-12.499%........... 120 58,466,156.02 15.23
12.500%-12.749%........... 110 48,963,160.30 12.75
12.750%-12.999%........... 69 29,586,016.62 7.70
13.000%-13.249%........... 64 25,462,923.47 6.63
13.250%-13.499%........... 13 3,172,524.62 0.83
13.500%-13.749%........... 5 971,400.00 0.25
13.750%-13.999%........... 2 181,962.44 0.05
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate was
12.280%.
<TABLE>
<CAPTION>
RANGE OF CURRENT MORTGAGE RATES(1)
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
RANGE OF CURRENT MORTGAGE MORTGAGE PRINCIPAL PRINCIPAL
RATES LOANS BALANCE BALANCE
- ------------------------- -------- --------------- ----------
<S> <C> <C> <C>
6.250%-6.499%............. 1 $ 880,000.00 0.23%
6.500%-6.749%............. 2 2,025,000.00 0.53
6.750%-6.999%............. 8 3,802,507.60 0.99
7.000%-7.249%............. 63 45,597,291.24 11.87
7.250%-7.499%............. 119 50,800,861.56 13.23
7.500%-7.749%............. 389 149,056,035.45 38.82
7.750%-7.999%............. 191 83,618,590.46 21.78
8.000%-8.249%............. 66 26,911,739.25 7.01
8.250%-8.499%............. 51 18,033,103.86 4.70
8.500%-8.749%............. 9 2,011,411.13 0.52
8.750%-8.999%............. 6 1,264,700.00 0.33
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Mortgage Rate was
7.585%.
<TABLE>
<CAPTION>
REMAINING TERMS TO STATED MATURITY IN MONTHS(1)
- -------------------------------------------------------------------
PERCENT
NUMBER BY CUT-OFF
OF CUT-OFF DATE DATE
REMAINING TERMS TO STATED MORTGAGE PRINCIPAL PRINCIPAL
MATURITY IN MONTHS LOANS BALANCE BALANCE
- ------------------------- -------- --------------- ----------
<S> <C> <C> <C>
265....................... 1 $ 295,919.58 0.08%
266....................... 1 212,115.59 0.06
267....................... 1 514,432.75 0.13
268....................... 1 2,000,000.00 0.52
269....................... 4 529,733.27 0.14
270....................... 5 1,425,052.69 0.37
271....................... 5 2,371,373.49 0.62
272....................... 5 1,536,162.79 0.40
273....................... 6 2,972,663.00 0.77
274....................... 3 726,705.64 0.19
275....................... 7 1,954,195.47 0.51
276....................... 3 1,541,696.53 0.40
277....................... 31 9,699,394.16 2.53
278....................... 37 17,490,077.34 4.55
279....................... 31 17,444,178.69 4.54
280....................... 37 23,693,808.49 6.17
281....................... 19 9,486,915.36 2.47
282....................... 21 10,199,833.55 2.66
283....................... 14 7,538,774.20 1.96
284....................... 13 8,980,954.15 2.34
285....................... 9 5,207,848.17 1.36
286....................... 13 6,715,091.96 1.75
287....................... 14 6,935,038.33 1.81
288....................... 18 9,740,428.35 2.54
289....................... 39 20,904,055.73 5.44
290....................... 33 18,058,756.23 4.70
291....................... 48 24,460,098.53 6.37
292....................... 80 32,969,415.03 8.59
293....................... 85 36,569,150.38 9.52
294....................... 104 31,487,718.84 8.20
295....................... 115 38,845,026.97 10.12
296....................... 102 31,494,625.29 8.20
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was 288 months.
S-15
<PAGE> 18
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR ALL MORTGAGE LOANS
- -------------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- -------------------------- -------- --------------- ----------
<S> <C> <C> <C>
April 1, 2000............. 689 $285,607,883.87 74.38%
May 1, 2000............... 48 21,551,918.55 5.61
June 1, 2000.............. 32 13,603,214.18 3.54
July 1, 2000.............. 54 28,588,841.28 7.44
August 1, 2000............ 40 19,275,163.20 5.02
September 1, 2000......... 42 15,374,219.47 4.00
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 1.751 months.
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR SIX-MONTH LIBOR INDEX MORTGAGE LOANS
- ------------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- --------------------- -------- --------------- --------------
<S> <C> <C> <C>
April 1, 2000........ 51 $ 21,949,679.25 18.24%
May 1, 2000.......... 48 21,551,918.55 17.91
June 1, 2000......... 32 13,603,214.18 11.30
July 1, 2000......... 54 28,588,841.28 23.76
August 1, 2000....... 40 19,275,163.20 16.02
September 1, 2000.... 42 15,374,219.47 12.78
--- --------------- ------
Total............. 267 $120,343,035.93 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 3.397 months.
<TABLE>
<CAPTION>
CREDIT SCORES(1)(2)
- -------------------------------------------------------------------
CUT-OFF PERCENT
NUMBER DATE BY CUT-OFF
OF UNPAID DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF CREDIT SCORES LOANS BALANCE BALANCE
- -------------------------- -------- --------------- ----------
<S> <C> <C> <C>
Not Available............. 11 $ 3,769,214.88 0.98%
500 - 599................. 20 8,665,480.15 2.26
600 - 619................. 9 4,781,264.27 1.25
620 - 639................. 29 13,994,793.65 3.64
640 - 659................. 59 24,086,687.60 6.27
660 - 679................. 47 18,997,436.59 4.95
680 - 699................. 85 38,158,423.75 9.94
700 - 719................. 108 54,259,532.32 14.13
720 - 739................. 111 49,387,392.73 12.86
740 - 759................. 129 53,511,348.89 13.94
760 - 779................. 137 53,025,421.93 13.81
780 - 799................. 130 48,437,597.06 12.61
800 or greater............ 30 12,926,646.73 3.37
--- --------------- ------
Total.................. 905 $384,001,240.55 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As described in "MLCC and Its Mortgage Programs," MLCC amy review an
applicant's "Credit Score" as part of the underwriting process. This is a
statistical credit score obtained by MLCC in connection with the loan
application and underwriting process to potentially assess an applicant's
credit worthiness. Generally, a Credit Score is generated by various models
developed by third parties and is made available to MLCC and other lenders
through three national credit bureaus. The models were derived by analyzing
historical data on borrowers to establish patterns which are perceived to be
indicative of the borrowers' probability of default. The Credit Score is
based on a borrower's historical credit data, including, among other things,
payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. A Credit Score for a particular applicant can range from
approximately 250 to approximately 900, with higher scores indicating an
individual with a more favorable credit history compared to an individual
with a lower score.
However, no assurance can be given that the Credit Scores for a pool of
mortgage loans will correlate to the delinquency rate for that pool. A
Credit Score purports only to be a measurement of the relative degree of
risk an applicant represents to a lender, that is to say that an applicant
with a higher score is statistically expected to be less likely to default
in payment than an applicant with a lower score. Credit Scores were
developed to indicate a level of default probability over a two-year period
which does not correspond to the life of mortgage loans such as the Mortgage
Loans. Furthermore, Credit Scores were not developed specifically for use in
connection with mortgage loans in particular, but rather for consumer loans
in general. A Credit Score does not take into consideration the effect of
mortgage loan characteristics on the probability of repayment by the
applicant.
The Credit Scores included in the above table were obtained by MLCC from the
applicable credit reporting agencies at the time of the origination of the
corresponding Mortgage Loans and are presented for informational purposes
only. Neither MLCC, nor the Depositor nor the Seller makes any
representations or warranties as to the actual performance of any Mortgage
Loan or that a particular Credit Score should be relied upon as a basis for
an expectation that any particular borrower will repay the Mortgage Loan
according to its terms. See "MLCC and Its Mortgage Programs" herein.
(2) As of the Cut-off Date, the weighted average Credit Score at origination was
approximately 725, for such Mortgage Loans for which a Credit Score was
available.
S-16
<PAGE> 19
<TABLE>
<CAPTION>
ONE-MONTH LIBOR INDEX MORTGAGE LOAN MARGIN(1)
- ------------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN LOANS BALANCE BALANCE
- ------------------------------------------------------------------
<S> <C> <C> <C>
0.625................ 1 $ 880,000.00 0.33%
0.750................ 1 625,000.00 0.24
1.000................ 4 2,252,475.00 0.85
1.125................ 1 416,125.00 0.16
1.250................ 13 7,403,747.87 2.81
1.375................ 46 35,930,845.71 13.63
1.500................ 16 10,518,508.81 3.99
1.625................ 91 34,294,772.08 13.01
1.750................ 303 103,745,995.18 39.35
1.875................ 23 12,261,625.54 4.65
2.000................ 25 9,009,700.24 3.42
2.125................ 87 36,592,809.12 13.88
2.250................ 14 7,975,900.59 3.03
2.375................ 5 1,039,709.73 0.39
2.500................ 2 272,621.98 0.10
2.625................ 4 296,407.58 0.11
2.750................ 2 141,960.19 0.05
--- --------------- ------
Total............. 638 $263,658,204.62 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 1.731%.
<TABLE>
<CAPTION>
SIX-MONTH LIBOR INDEX MORTGAGE LOAN MARGIN(1)
- ------------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN LOANS BALANCE BALANCE
- ------------------------------------------------------------------
<S> <C> <C> <C>
1.000................ 1 $ 592,359.00 0.49%
1.250................ 1 374,999.99 0.31
1.375................ 1 1,225,000.00 1.02
1.500................ 33 16,031,596.56 13.32
1.625................ 19 12,216,468.25 10.15
1.750................ 37 18,506,155.35 15.38
1.875................ 75 32,817,944.72 27.27
2.000................ 19 7,313,831.80 6.08
2.125................ 10 5,688,137.70 4.73
2.250................ 49 16,095,631.60 13.37
2.375................ 3 892,099.98 0.74
2.500................ 8 2,630,100.33 2.19
2.625................ 2 766,810.65 0.64
2.750................ 3 2,044,400.00 1.70
2.875................ 5 1,747,500.00 1.45
3.125................ 1 1,400,000.00 1.16
--- --------------- ------
Total............. 267 $120,343,035.93 100.00%
=== =============== ======
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 1.905%.
S-17
<PAGE> 20
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to a Mortgage Loan Purchase Agreement (the "MORTGAGE LOAN PURCHASE AGREEMENT")
dated as of March 8, 2000 among RWT Holdings, Inc. ("RWT HOLDINGS"), the Seller
and the Depositor. Under the Mortgage Loan Purchase Agreement, RWT Holdings will
make certain representations, warranties and covenants to the Seller and the
Depositor relating to, among other things, certain characteristics of the
Mortgage Loans and, subject to the limitations described below, will be
obligated to the same extent as the Seller as herein described to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or as to which there has been an uncured breach
of any representation or warranty relating to the characteristics of the
Mortgage Loans that materially and adversely affects the value of such Mortgage
Loan or the interests of the Certificateholders or the Certificate Insurer in
such Mortgage Loan (each, a "DEFECTIVE MORTGAGE LOAN").
Pursuant to the Agreement, on the Closing Date the Depositor will sell,
transfer, assign, set over and otherwise convey without recourse to the Trustee,
in trust for the benefit of the holders of the Certificates and the Certificate
Insurer, all right, title and interest of the Depositor in and to (i) each
Mortgage Loan, (ii) the Mortgage Loan Purchase Agreement and (iii) certain other
assets included in the Trust Fund, including all principal and interest due and
received by the Master Servicer with respect to the Mortgage Loans after the
Cut-off Date (to the extent not applied in computing the Cut-off Date Pool
Balance). Under the Agreement, the Depositor will assign all its right, title
and interest in and to the representations, warranties and covenants made by RWT
Holdings and the Seller in the Mortgage Loan Purchase Agreement (including the
repurchase obligations described above) to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer. Except for a representation and
warranty by the Depositor with respect to its ownership of the Mortgage Loans
free of any liens, the Depositor will make no representations or warranties with
respect to the Mortgage Loans and will have no obligation to repurchase or
substitute for Mortgage Loans with deficient documentation or which are
otherwise defective. RWT Holdings and the Seller are selling the Mortgage Loans
without recourse and will have no obligation with respect to the Certificates
other than the repurchase or substitution obligations described above and below.
In connection with such transfer and assignment of the Mortgage Loans,
the Seller will deliver or cause to be delivered to a custodian for the Trustee,
among other things, the original Mortgage Note (and any modification or
amendment thereto) endorsed in blank without recourse, the original instrument
creating a first lien on the related Mortgaged Property (the "MORTGAGE") with
evidence of recording indicated thereon, an assignment in recordable form of the
Mortgage, the title policy with respect to the related Mortgaged Property and,
if applicable, all recorded intervening assignments of the Mortgage and any
riders or modifications to such Mortgage Note and Mortgage (except for any such
document not returned from the public recording office, which will be delivered
to the custodian for the Trustee as soon as the same is available to the Seller)
(collectively, the "MORTGAGE FILE"). Assignments of the Mortgage Loans to the
Trustee (or its nominee) will be recorded in the appropriate public office for
real property records promptly following the Closing Date, except in states
where, in the opinion of counsel acceptable to the Trustee and the Certificate
Insurer, such recording is not required to protect the Trustee's interest in the
Mortgage Loans against the claim of any subsequent transferee or any successor
to or creditor of the Seller; provided, however, notwithstanding the delivery of
any legal opinions, each assignment of a Mortgage shall be recorded upon the
earliest to occur of (i) the direction by the Certificate Insurer, or (ii) any
bankruptcy, insolvency or foreclosure with respect to the related Mortgagor.
The Trustee will review, or cause to be reviewed, each Mortgage File
within 30 days of the Closing Date (or promptly after the Trustee's receipt of
any document permitted to be delivered after the Closing Date) and will hold
such documents in trust for the benefit of the Certificateholders and the
S-18
<PAGE> 21
Certificate Insurer. If any document is found to be missing or defective in any
material respect, the Trustee is required to notify the Seller and the
Certificate Insurer in writing. If the Seller cannot or does not cure such
omission or defect within 90 days after its receipt of notice from the Trustee,
the Seller is required to repurchase such Defective Mortgage Loan from the Trust
Fund at a price (the "PURCHASE PRICE") generally equal to 100% of the
outstanding principal balance thereof plus accrued interest thereon at the
Mortgage Rate to the first day of the month in which the Purchase Price is to be
distributed. Rather than repurchase the Defective Mortgage Loan as provided
above, the Seller may remove such Mortgage Loan (a "DELETED MORTGAGE LOAN") from
the Trust Fund and substitute in its place one or more Mortgage Loans of like
kind (such loan or loans, collectively, a "REPLACEMENT MORTGAGE LOAN");
provided, however, that such substitution is permitted only within two years
after the Closing Date and may not be made unless an opinion of counsel is
provided to the effect that such substitution would not disqualify the REMIC
status of the Trust Fund or result in a prohibited transaction tax under the
Code. The Depositor expects that the above review of the Mortgage Files will be
performed for each file by the custodian that will maintain custody of the
Mortgage Files on behalf of the Trustee.
Any Replacement Mortgage Loan generally will, on the date of
substitution, among other characteristics set forth in the Agreement, (i) have
an outstanding principal balance, after deduction of the principal portion of
the Monthly Payment due in the month of substitution, not in excess of (and not
less than 90% of) the outstanding principal balance of the Deleted Mortgage Loan
(the amount of any shortfall to be deposited by the Seller in the Certificate
Account not later than the succeeding Determination Date and held for
distribution to the holders of the Certificates on the related Distribution
Date), (ii) have a Maximum Mortgage Rate not less than (and not more than two
percentage points greater than) the Maximum Mortgage Rate of the Deleted
Mortgage Loan, (iii) have a gross Margin not less than that of the Deleted
Mortgage Loan and, if Mortgage Loans equal to 1% or more of the aggregate
Cut-off Date Pool Balance have become Deleted Mortgage Loans, not more than two
percentage points more than that of the Deleted Mortgage Loan, (iv) have a
Constructive Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan, (v) have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan, (vi) not permit
conversion of the related Mortgage Rate to a permanent fixed Mortgage Rate,
(vii) have the same or higher credit score, (viii) have an initial Interest
Adjustment Date no earlier than five months before(and no later than five months
after) the initial Interest Adjustment Date of the Deleted Mortgage Loan, (ix)
be a "qualified replacement mortgage" within the meaning of Section 860G(a)(4)
of the Code, and (x) comply with all of the representations and warranties set
forth in the Agreement as of the date of substitution. This cure, repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
Mortgage Loan document.
As used in this Prospectus Supplement, "CONSTRUCTIVE LOAN-TO-VALUE
RATIO" means a fraction, expressed as a percentage, the numerator of which is
the outstanding principal amount of the related Mortgage Loan at the time of
origination thereof, less the amount of the Additional Collateral required at
the time of origination, if any, and the denominator of which is the appraised
value of the related Mortgaged Property at such time or, in the case of a
Mortgage Loan financing the acquisition of the Mortgaged Property, the sales
price of the Mortgaged Property, if such sales price is less than such appraised
value.
MLCC AND ITS MORTGAGE PROGRAMS
MLCC, a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc.
("ML & CO.") and an affiliate of both the Depositor and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, one of the Underwriters, is a Delaware corporation
qualified to do business (to the extent qualification is required) in each state
where its mortgage program is offered. It maintains licenses in various states
as a real estate or mortgage broker, and/or as a mortgage banker, and/or as a
first or second mortgage lender, as applicable.
S-19
<PAGE> 22
It also has the following approvals: HUD nonsupervised one- to four-family
mortgagee; FHA approved mortgagee; Fannie Mae first and second mortgage one- to
four-family seller/servicer; Freddie Mac first and second mortgage one- to
four-family seller/servicer; GNMA mortgage backed securities issuer under the
GNMA I and GNMA II single family programs; and supervised VA lender.
MLCC's offices are located in Jacksonville, Florida. MLCC generally does
not establish local offices in the states where its loans are offered, but has,
in the past, and where required, appointed employees of other Merrill Lynch
companies which do have local offices as officers or agents of MLCC, and has
used the other Merrill Lynch companies' local offices as MLCC's local offices
for licensing purposes.
MLCC is in the business of originating, purchasing and servicing real
estate mortgage loans secured by conforming and non-conforming fixed and
adjustable rate mortgage loans (including its PrimeFirst(R) mortgages) and other
loan products. MLCC also originates home equity lines of credit to individuals.
MLCC currently originates and services loans in fifty states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands. All of the Mortgage Loans
were originated under MLCC's PrimeFirst(R) mortgage program. PrimeFirst(R) loans
are secured by first liens on one- to four-family residences, condominiums and
cooperative apartments (New York State only), most of which are owner-occupied.
MLCC's mortgage programs are marketed primarily through financial
consultants employed by Merrill Lynch, Pierce, Fenner & Smith Incorporated and
mortgage and credit specialists employed by MLCC, as well as through newspaper
and other print advertising and direct marketing campaigns.
MLCC underwriting guidelines are applied to evaluate an applicant's
credit standing, financial condition, and repayment ability, as well as the
value and adequacy of the mortgaged property and additional collateral, if any,
as collateral for any loan made by MLCC. As part of the loan application
process, the applicant is required to provide information concerning his or her
assets, liabilities, income and expenses (except as described below), along with
an authorization permitting MLCC to obtain any necessary third party
verifications, including a credit report summarizing the applicant's credit
history. Unless prohibited by applicable state law, the applicant is typically
required to pay an application fee to MLCC.
In evaluating the applicant's ability and willingness to repay the
proposed loan, MLCC reviews the applicant's credit history and outstanding
debts, as reported on the credit report. If an existing mortgage or other
significant debt listed on the loan application is not adequately reported on
the credit report, MLCC generally requests a written or oral verification of the
balance and payment history of such debt from the servicer of such debt.
MLCC verifies the applicant's liquid assets to ensure that the client
has adequate liquid assets to apply toward any required down payment, closing
costs, prepaid interest, and at least two months' worth of cash reserves.
Except as described below, MLCC also evaluates the applicant's income to
determine its stability, probability of continuation, and adequacy to service
the proposed MLCC debt payment. MLCC's guidelines for verifying an applicant's
income and employment are generally as follows. For salaried applicants, MLCC
typically requires a written verification of employment from the applicant's
employer, or a copy of the applicant's two most recent IRS forms 1040 or W-2, a
current pay stub, and verbal verification of employment. Verbal verification of
employment is typically obtained directly from the applicant's employer, but in
certain circumstances, may be fulfilled by contacting the applicant at his or
her place of business. For non-salaried applicants, including self-employed
applicants, MLCC requires copies of the applicant's two most recent federal
income tax returns, along with all supporting schedules.
S-20
<PAGE> 23
In some cases, MLCC may waive submission of such supporting schedules if this
income is insignificant in relation to the applicant's overall income, or does
not affect the applicant's ability to qualify for the proposed loan. A self-
employed applicant is generally required to submit a signed profit and loss
statement if the applicant's income shows significant variations from year to
year.
In determining the adequacy of the property as collateral for the loan,
a Fannie Mae/Freddie Mac conforming appraisal of the property is performed by an
independent appraiser selected by MLCC, except as noted below. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction or renovation, if new, has been completed. The appraisal
report indicates a value for the property and provides information concerning
marketability, the neighborhood, the property site, interior and exterior
improvements, and the condition of the property. Most of the aforementioned
appraisals may have been prepared by Lender's Service, Inc., in which MLCC holds
a minority interest.
The applicant has the option of directly obtaining a title report or may
choose to have MLCC obtain the report. Generally, all liens must be satisfied
and removed prior to or upon the closing of any of the Mortgage Loans. Title
insurance is required to be obtained for all Mortgage Loans. Where applicable,
in addition to providing proof of standard hazard insurance on the property, the
applicant is required to obtain, to the extent available, flood insurance when
the subject property is identified as being in a federally designated flood
hazard area.
Once sufficient employment, credit and property information is obtained,
the decision as to whether to approve the loan is based upon the applicant's
income and credit history, the status of title to the mortgaged property, and
the appraised value of the mortgaged property. MLCC also reviews the level of an
applicant's liquid assets as an indication of creditworthiness. The approval
process generally requires that the applicant have a good credit history and a
total debt-service-to-income ratio ("DTI") that generally does not exceed 38%;
however, this limit may be raised to 50% or greater if the borrower demonstrates
satisfactory disposable income and/or other mitigating factors are present. The
DTI ratio is calculated as the ratio of the borrower's total monthly debt
obligations (including the interest-only payment on the proposed loan at an
interest rate that is 2% to 2.50% higher than the original rate), divided by the
borrower's total verified monthly income. In general, it is MLCC's belief that
the DTI ratio is only one of several factors, such as LTV, credit history, and
reserves, that should be considered in making a determination of an applicant's
ability to repay the proposed loan. As part of the underwriting process, MLCC
typically reviews an applicant's credit score. MLCC considers an applicant's
credit score in connection with other factors, including the applicant's overall
credit payment history, level of income, debts, and assets. It is not MLCC's
practice to accept or reject an application based solely on the basis of the
applicant's credit score. See the table captioned "Credit Scores" under "The
Mortgage Pool" herein for a description of these credit scores and how they are
derived. MLCC also requires that the proposed loan have a Loan-to-Value ratio
("LTV") that generally does not exceed 80%, but under certain circumstances may
be up to 100%. MLCC's practice is to continuously review LTV limits and to
adjust such limits where economic conditions dictate that such adjustments are
appropriate. Any negative comments concerning the quality, condition and current
market conditions as noted in the appraisal report may result in a reduction of
the maximum LTV permitted for the loan. In the case of a loan which is a
purchase money mortgage, MLCC computes the loan's LTV as the original loan
balance divided by the appraised value of the property or the contract sales
price, whichever is lower. In certain limited cases, MLCC may accept
verification of borrower assets and/or status of credit history in addition to
or in lieu of income verification, provided that the borrower meets certain
standards with regard to the ratio of liquid assets to the loan amount and other
compensating factors are present.
Certain of the Mortgage Loans originated by MLCC were originated under
loan programs that do not require verification of borrower income. MLCC's loan
origination process allows for expedited processing on certain loans based on
the risk profile of the loan. During the origination process, MLCC
S-21
<PAGE> 24
conducts an assessment of the risk profile of the prospective borrower and
subject property to determine the level of income verification required to
process the loan. MLCC categorizes loans into different processing tracks based
upon the overall risk profile of the loan, as evidenced by the LTV, borrower
credit profile, the liquidity ratio (as described below), type of property,
occupancy status, and proposed loan amount. For loans that demonstrate the
lowest level of risk based upon this categorization, the borrower may not be
required to disclose his or her income in order for MLCC to process the loan.
MLCC uses a "liquidity ratio" as part of its underwriting criteria. The
liquidity ratio is defined as the total amount of a borrower's liquid assets, as
verified by MLCC, divided by the total amount of the proposed loan. For example,
a borrower with $500,000 in verified liquid assets who is requesting a $250,000
loan amount would have a 2.0 liquidity ratio. Liquid assets are generally
defined as cash and cash equivalents, marginable marketable securities, and
retirement accounts. Business assets are generally not considered part of a
borrower's liquid assets unless the business is 100% owned by the borrower. The
liquidity ratio generally excludes all assets that are pledged or margined,
estimated funds required for closing, concentrated equity positions if the share
price is less than $10 and any stock options or unvested shares of stock. MLCC
believes that the accumulation of net worth, particularly in the form of liquid
assets, is a strong indication of creditworthiness. A borrower who accumulates
net worth from earnings and savings demonstrates a strong ability to manage his
or her financial affairs. If the net worth is in liquid form, it can potentially
be used to service the proposed debt, to pay unexpected debts that may occur,
and to protect against short-term interruptions of income.
The level of income documentation required by MLCC is determined by the
combination of the borrower's credit score and overall credit profile, liquidity
ratio, and the LTV of the proposed loan. Using predetermined parameters based
upon the combination of these factors, adjusted for the property type and
occupancy status, MLCC may require the following different levels of income
disclosure and verification:
(1) no income disclosure;
(2) debt-to-income ratio calculated based on stated income from the
borrower, with no verification of income required ("stated
income");
(3) verification of income using streamlined/alternate
documentation; or
(4) full income disclosure and verification.
Approximately 9.44% of the Mortgage Loans were originated with no income
disclosure and approximately 3.27% were originated as stated income loans.
Loans that have a LTV in excess of 80% are, in general, also either (i)
secured by a security interest in additional collateral (normally securities)
owned by the borrower (such loans being referred to as "MORTGAGE 100(SM) LOANS")
or (ii) supported by a third party guarantee (usually a parent of the borrower),
which in turn is secured by a security interest in collateral (normally
securities) or by a lien on residential real estate of the guarantor and/or
supported by the right to draw on a home equity line of credit extended by MLCC
to the guarantor (such loans being referred to as "PARENT POWER(R) LOANS"). Such
loans are also collectively referred to herein as "ADDITIONAL COLLATERAL LOANS",
and the collateral referred to in clauses (i) and (ii) is herein referred to as
"ADDITIONAL COLLATERAL". The amount of such Additional Collateral generally does
not exceed 30% of the loan amount, although the amount of the Additional
Collateral may exceed 30% of the loan amount if the original principal amount of
the loan exceeds $1,000,000. In limited cases, MLCC may require Additional
Collateral in excess of 30% of the loan amount as part of the underwriting
decision. The requirement to maintain Additional Collateral generally terminates
when the principal balance of such Additional Collateral Loan is reduced to a
S-22
<PAGE> 25
predetermined amount set forth in the related pledge agreement or guaranty
agreement, as applicable, or when the LTV for such Additional Collateral Loan is
reduced to MLCC's applicable LTV limit for such loan by virtue of an increase in
the appraised value of the mortgaged property securing such loan as determined
by MLCC. The pledge agreement and the guaranty agreement, as applicable, and the
security interest in such Additional Collateral, if any, provided in the case of
an Additional Collateral Loan will be assigned to the Trustee but will not be
part of the Upper-Tier or Lower-Tier REMICs. To the extent the Mortgage Loans
include any Additional Collateral Loans that are supported by a guarantee that
is secured by a lien on residential real estate, such lien will not be
transferred to the Trustee. MLCC will make all reasonable efforts to realize on
any such security interest if the related Mortgage Loan is liquidated upon
default. No assurance can be given as to the amount of proceeds, if any, that
might be realized from such Additional Collateral. Proceeds from the liquidation
of any such Additional Collateral will be included in net proceeds only when
permitted by applicable state law and by the terms of the related pledge
agreement or guaranty agreement, as applicable. Ambac Assurance Corporation, as
surety bond provider (the "SURETY BOND PROVIDER"), has provided a "LIMITED
PURPOSE SURETY BOND" which is intended to guarantee the receipt by the Trust
Fund of certain shortfalls in the net proceeds realized from the liquidation of
any required Additional Collateral (such amount not to exceed 30% of the
original principal amount of the related Additional Collateral Loan) to the
extent any such shortfall results in a loss of principal on such Additional
Collateral Loan that becomes a Liquidated Mortgage Loan, as more particularly
described in, and as limited by, the terms and provisions of the Limited Purpose
Surety Bond. The Limited Purpose Surety Bond will not cover any payments on the
Class A Certificates that are recoverable or sought to be recovered as a
voidable preference under applicable law.
The Mortgage Loans may include loans made to corporations, partnerships,
and trustees of certain trusts in connection with applications which have been
received from individuals. Such loans are generally structured as follows: (i)
the loan is to the individual and the entity which owns the real property, and
is secured by a mortgage or deed of trust executed solely by the entity; or (ii)
the loan is to the entity, secured by a mortgage from the entity and guaranteed
by the individual applicant; or (iii) the loan is made jointly to the individual
applicant and the entity, and secured by a mortgage from the entity. In such
cases, MLCC applies its standard underwriting criteria to the property and the
individual applicant. Such loans are categorized as owner-occupied in this
Prospectus Supplement if the individual applicant states in the application
that, as of the closing of the related loan, he or she will occupy the property
as his or her primary residence.
Less than 1% of the Mortgage Loans (by Cut-off Date Pool Balance)
represent loans to borrowers who are non-resident aliens in the United States
and/or to foreign personal holding companies. In general, MLCC applies the same
underwriting guidelines to such borrowers as under its standard mortgage
programs. MLCC may limit the LTV on such loans if adequate income and credit
information is not available.
MLCC originates loans through mortgage brokers that are not affiliated
with MLCC under its mortgage broker program. The mortgage brokers solicit the
prospective borrower and process the documentation described above for such
borrower's loan. Personnel of MLCC review such documentation and underwrite the
loan in accordance with the above described underwriting standards. In that
regard, the related appraisals are either conducted or reviewed by appraisers
who are approved by MLCC. Such loans are closed in the name of, and funded by,
MLCC.
In 1995, MLCC began purchasing mortgage loans from mortgage banking
related entities under its correspondent lending program. In order for MLCC to
approve a lender as a seller under its correspondent lending program, a lender
must meet certain qualifying criteria. These criteria include requirements that
the lender must: (a) be a bank, savings and loan, or HUD-approved mortgagee
which is a Fannie Mae or Freddie Mac seller in good standing; (b) demonstrate at
least three years experience in
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<PAGE> 26
mortgage originations; (c) have a quality control plan in place which is
acceptable to MLCC; (d) show profitability for the prior two years; (e)
demonstrate a residential loan portfolio with delinquency rates at or below
national averages, as published by the Mortgage Bankers Association; and (f)
have a corporate net worth of at least $2.5 million and/or a corporate credit
history acceptable to MLCC.
Under MLCC's correspondent lending program, the correspondent lender
processes and closes the mortgage loans in its name and thereafter funds the
mortgage loans from its own funds. Personnel of MLCC, or in certain cases, the
correspondent lender, underwrite the loans in accordance with MLCC's standard
underwriting guidelines, as published in the MLCC Seller Guide. Additionally,
MLCC conducts a post-closing review on each loan prior to purchasing it from the
correspondent lender.
In 1995, MLCC began originating mortgage loans under its construction to
permanent financing program. Such loans have the same terms as other loans under
the PrimeFirst(R) mortgage program but include certain requirements for the
completion of construction, at which time such loans become permanent loans. The
Mortgage Loans may include such loans, all of which are permanent loans as to
which construction is complete, as evidenced by a certificate of occupancy
and/or appraiser's certification of completion.
Upon the approval of a loan, the borrower obtains the loan by paying an
origination fee (employees of ML & Co. and its affiliates generally pay a lower
origination fee) and reimbursing MLCC for all out-of-pocket closing costs
incurred by MLCC, all or part of which fees or costs may be waived by MLCC from
time to time.
The above described underwriting guidelines may be varied in certain
cases, on the basis of compensating factors, as deemed appropriate by MLCC's
underwriting personnel.
DESCRIPTION OF MLCC'S PRIMEFIRST(R) SELF-DIRECTED(SM) MORTGAGE PROGRAM
During the first ten years of a PrimeFirst(R) loan, only interest on the
outstanding loan balance is payable monthly along with any other fees that are
due, including late charges. During the 11th through the 25th year, a
PrimeFirst(R) loan is fully amortizing and, as a result, the borrower must pay a
larger monthly payment than the interest only monthly payment. The borrower
receives a monthly statement that reflects any change in the monthly payment.
The borrower may prepay the principal balance of the PrimeFirst(R) loan at any
time without penalty during the term of the loan. However, certain PrimeFirst(R)
Loans originated under MLCC's correspondent lending program may carry prepayment
penalties.
Upon origination, borrowers under the PrimeFirst(R) program select from
one of several different indices upon which to base their interest rate and
choose whether the interest rate on the loan will adjust monthly or every six
months. A loan with a one-month adjustment frequency generally carries a lower
interest rate and margin than a comparable loan with a six-month adjustment
frequency. Loans originated under the PrimeFirst(R) mortgage program are
convertible to a different Index and related Margin for a specified period
during the life of the loan. Additionally, upon origination, borrowers have the
option to purchase a fixed rate conversion option by adding 0.25% to the
applicable margin on the loan and may also elect to purchase a 1% periodic rate
cap by adding 0.50% to the margin.
Pricing for Six-Month Adjustment Frequency. The interest rate on a
six-month adjustable PrimeFirst(R) loan is equal to either the Prime Index, the
Six-Month LIBOR Index or the Treasury Index (each, an "INDEX"), plus or minus
the appropriate Margin. The interest rate is adjusted every six months based
upon the applicable index rate as of 45 days prior to the Interest Adjustment
Date. The following Margins are generally used in calculating the interest rate
on a PrimeFirst(R) loan with a semi-annual adjustment period. The Margins set
forth below may be higher for borrowers who elect not to pay
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<PAGE> 27
origination fees. Conversely, the Margins may be lower for borrowers who opt to
pay additional points to buy down their Margin. Also, it is MLCC's practice to
increase the applicable Margin for loans with an original principal balance in
excess of $2 million.
<TABLE>
<CAPTION>
INDEX MARGIN
----- ------
<S> <C>
Prime ..................................... -0.125%
Six-Month LIBOR ........................... +1.875%
Treasury .................................. +2.250%
</TABLE>
Pricing for One-Month Adjustment Frequency. The interest rate on a
one-month adjustable PrimeFirst(R) loan is equal to either the Prime Index, the
One-Month LIBOR Index or the Treasury Index plus or minus the appropriate
Margin. The interest rate is adjusted every month based upon the applicable
index rate as of 25 days prior to the Interest Adjustment Date. The following
Margins are generally used in calculating the interest rate on a PrimeFirst(R)
loan with a monthly adjustment period. These Margins may be higher or lower as
described in the last three sentences of the preceding paragraph.
<TABLE>
<CAPTION>
INDEX MARGIN
----- ------
<S> <C>
Prime ..................................... -0.375%
One-Month LIBOR ........................... +1.750%
Treasury .................................. +2.000%
</TABLE>
Loans purchased by MLCC in the correspondent lending program may have
slightly higher Margins than those shown above. Also, loans originated under the
correspondent lending program may have teaser rates that are lower than the
fully indexed rate until the first Interest Adjustment Date.
Periodic and Lifetime Rate Caps. PrimeFirst(R) loans may be originated
with a periodic rate cap of 1% (i.e., the interest rate cannot be increased by
more than 1% from one interest period to the next). The Margin for such a loan
is generally 0.50% greater than it would be without this feature. The periodic
cap is only available with six-month adjustable loans. Generally, loans
originated under the PrimeFirst(R) program have a lifetime rate cap equal to the
greater of (i) its initial interest rate plus 5% or (ii) 12%. None of the
Mortgage Loans has a periodic rate cap.
Fixed Rate Conversion Option and Index Conversion Option. Borrowers
under the PrimeFirst(R) mortgage program may purchase a fixed rate conversion
option by adding 0.25% to the Margin on the loan. The fixed rate conversion
option gives the borrower the option to convert the interest rate on the loan
from an adjustable rate to a fixed rate. The exercise period for such option
begins in the month in which the 12th scheduled monthly payment is due and ends
on the fifth day of the month in which the 60th scheduled monthly payment is
due. The fixed rate becomes effective on the first day of the month after the
conversion notice is given. The new fixed rate is equal to the Fannie Mae net
required yield for 30-year fixed rate mortgages subject to a 60-day mandatory
delivery requirement (as published in The Wall Street Journal) plus 0.875%,
rounded to the nearest 0.125%. Upon a fixed rate conversion, the new scheduled
monthly payment is adjusted to the amount that is sufficient to fully amortize
the loan in substantially equal installments on the original maturity date.
Generally, all loans originated under the PrimeFirst(R) Self-Directed
Mortgage(SM) program allow the borrower to convert the loan to a new Index and
related Margin, provided that such Index has the same frequency of adjustment.
The option is exercisable in respect of a six-month adjustable PrimeFirst(R)
loan from its second change date to its tenth change date, and in respect of a
one-month adjustable PrimeFirst(R) loan, from its twelfth change date to its
sixtieth change date, within a certain 21-day period commencing on the 45th day
prior to each such change date. If the loan also carries the fixed rate
conversion option, such option may be exercised whether or not an Index
conversion has occurred. A
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<PAGE> 28
borrower may not convert the frequency with which the interest rate adjusts on a
PrimeFirst(R) loan and may not add a periodic rate cap to a loan that did not
carry such periodic rate cap upon origination. The Indices and Margins to which
a borrower may convert a PrimeFirst(R) loan are the same as those described
above for PrimeFirst(R) loans for the applicable adjustment frequency.
The exercise of either option is subject to the satisfaction of the
following conditions: (i) the borrower must be the owner and occupant of the
mortgaged property, (ii) the borrower has not been late on any of the 12
scheduled monthly payments immediately preceding the date on which the
conversion notice is given, (iii) the borrower has not been more than 30 days
late on any scheduled monthly payment, (iv) the borrower is not in default under
the mortgage note and (v) the borrower must pay a $500 conversion fee.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The next two tables set forth information relating to the delinquency
and loan loss experience on the loans originated in MLCC's PrimeFirst(R)
mortgage program as of and for each of the five years in the period ended
December 31, 1998, respectively and the eleven-month period ending November 30,
1999. The delinquency and loan loss experience represents the historical
experience of MLCC, and there can be no assurance that the future experience on
the Mortgage Loans in the Trust Fund will be the same as, or more favorable
than, that of the PrimeFirst(R) loans originated by MLCC.
PRIMEFIRST(R) LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1994 1995 1996
---------------------------- --------------------------- ---------------------------
NUMBER OF NUMBER OF NUMBER OF
PRIMEFIRST(R) PRINCIPAL PRIMEFIRST(R) PRINCIPAL PRIMEFIRST(R) PRINCIPAL
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PrimeFirst(R)loans outstanding ... 7,615 $3,351,328 8,272 $3,536,761 11,054 $4,331,131
Delinquency Period:
30-59 Days ................... 121 86,279 127 56,370 180 84,297
60-89 Days ................... 20 18,152 13 7,917 19 6,583
90 Days or More* ............. 17 19,257 44 45,749 29 27,590
----- ---------- ----- ---------- ------ ----------
Total delinquency ........ 158 $ 123,688 184 $ 110,036 228 $ 118,470
===== ========== ===== ========== ====== ==========
Delinquencies as a percent of
number of PrimeFirst(R)loans
and principal amount
outstanding .................. 2.07% 3.69% 2.22% 3.11% 2.06% 2.74%
Foreclosures* ................... 18 $ 15,637 28 $ 38,209 29 $ 39,100
Foreclosure as a percent of
number of PrimeFirst(R)loans
and principal amount
outstanding .................. 0.24% 0.47% 0.34% 1.08% 0.26% 0.90%
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------- ELEVEN MONTHS ENDED
1997 1998 NOVEMBER 30, 1999
--------------------------- --------------------------- ---------------------------
NUMBER OF NUMBER OF NUMBER OF
PRIMEFIRST(R) PRINCIPAL PRIMEFIRST(R) PRINCIPAL PRIMEFIRST(R) PRINCIPAL
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PrimeFirst(R)loans outstanding ... 14,159 $5,302,950 11,456 $4,480,739 11,176 $4,515,753
Delinquency Period:
30-59 Days ................... 183 66,254 184 77,751 196 78,943
60-89 Days ................... 26 18,544 26 9,815 36 10,777
90 Days or More* ............. 24 18,072 34 23,664 25 14,897
------ ---------- ------ ---------- ------ ----------
Total delinquency ........ 233 $ 102,870 244 $ 111,230 253 $ 104,617
====== ========== ====== ========== ====== ==========
Delinquencies as a percent of
number of PrimeFirst(R)loans
and principal amount
outstanding .................. 1.65% 1.94% 2.13% 2.48% 2.26% 2.32%
Foreclosures* ................... 39 $ 47,396 47 $ 43,681 34 $ 29,618
Foreclosure as a percent of
number of PrimeFirst(R)loans
and principal amount
outstanding .................. 0.28% 0.89% 0.41% 0.97% 0.30% 0.66%
</TABLE>
- --------------------------
* Does not include loans subject to bankruptcy proceedings and real estate
owned.
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<PAGE> 29
PRIMEFIRST(R) LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
ELEVEN
YEAR ENDED DECEMBER 31, MONTHS ENDED
-------------------------------------------------------------- NOVEMBER 30,
1994 1995 1996 1997 1998 1999 (1)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average principal balance of PrimeFirst(R)loan
portfolio .................................. $2,807,875 $3,444,045 $3,933,946 $4,817,041 $4,855,906 $4,498,246
Average number of PrimeFirst(R)loans outstanding
during the period .......................... 6,287 7,944 9,663 12,607 12,711 11,316
Gross charge-offs ............................... $ 457 $ 1,840 $ 6,157 $ 5,363 $ 4,030 $ 5,385
Recoveries ...................................... $ 0 $ 0 $ 0 $ 99 $ 2 $ 16
Net charge-offs ................................. $ 457 $ 1,840 $ 6,157 $ 5,264 $ 4,028 $ 5,370
Net charge-offs as a percent of average principal
balance outstanding ........................ 0.02% 0.05% 0.16% 0.11% 0.08% 0.12%
</TABLE>
- --------------
(1) Not annualized.
No assurance can be given that values of the Mortgaged Properties as of
the dates of origination of the related Mortgage Loans have remained or will
remain constant. In certain regions of the country, including regions in which
Mortgaged Properties are located, real estate values have recently increased.
See "The Mortgage Pool" for a listing of the geographic distribution of the
Mortgaged Properties as of the Cut-off Date. If the residential real estate
market in an area should experience an overall decline in property values such
that the outstanding balances of the Mortgage Loans in that area equal or exceed
the value of the related Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those currently
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans. In
addition, primary residences with above average values may experience greater
declines in value during adverse economic conditions than properties with lower
values. To the extent that such losses are not covered by the subordination
feature described under "Description of the Certificates - Subordinated
Certificates," subject to the effect of the Certificate Insurance Policy as
described under "Description of the Certificates - Distributions on the
Certificates," they will be borne by holders of the Class A Certificates.
SERVICING OF THE MORTGAGE LOANS
SERVICING AND COLLECTION PROCEDURES
Servicing functions to be performed by the Master Servicer under the
Master Servicing Agreement (the "MASTER SERVICING AGREEMENT"), dated as of April
1, 1998, as amended, between RWT Holdings and the Master Servicer, include
collection and remittance of principal and interest payments, administration of
mortgage escrow accounts, collection of certain insurance claims and, if
necessary, foreclosure. The Master Servicer may contract with subservicers to
perform some or all of the Master
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<PAGE> 30
Servicer's servicing duties. When used herein with respect to servicing
obligations, the term Master Servicer includes any such subservicer.
The Master Servicer has informed the Depositor and the Seller that the
Master Servicer has entered into a contract with Cendant Mortgage Corporation,
as subservicer, to perform its servicing duties under the Master Servicing
Agreement. The contract with Cendant Mortgage Corporation does not include the
Master Servicer's servicing duties with respect to the Additional Collateral
Loans under the Pledged Asset Mortgage Servicing Agreement. Notwithstanding such
subservicing arrangements entered into by the Master Servicer with Cendant
Mortgage Corporation or any other subservicer, the Master Servicer will not be
released from its obligations under the Master Servicing Agreement and will
remain liable for the servicing of the Mortgage Loans in accordance with the
provisions of the Master Servicing Agreement without diminution of such
liability by virtue of such subservicing arrangements.
Under the Master Servicing Agreement, the Master Servicer will deposit
collections on the Mortgage Loans into one or more custodial accounts
established by it. Such accounts are required to be kept segregated from
operating accounts of the Master Servicer and to meet the eligibility criteria
set forth in the Master Servicing Agreement. Under the Master Servicing
Agreement, amounts on deposit in the custodial account may be invested in
permitted investments as therein defined. Any losses resulting from such
investments are required to be reimbursed to the custodial account by the Master
Servicer out of its own funds.
On or before the Closing Date, the Trustee will establish the
Certificate Account into which the Master Servicer will remit collections on the
Mortgage Loans (net of its related servicing compensation) on the 18th day of
each month or, if not a business day, on the first business day thereafter. Not
later than the 10th calendar day of each month, the Master Servicer will furnish
to the Trustee information with respect to loan level remittance data for such
month's remittance.
Under the Mortgage Loan Purchase Agreement, RWT Holdings will assign to
the Seller and, in turn, the Seller will assign to the Depositor their
respective rights under the Master Servicing Agreement with respect to the
Mortgage Loans. On the Closing Date, the Depositor will assign to the Trustee
its rights under the Master Servicing Agreement with respect to the Mortgage
Loans. In the event of a default by the Master Servicer under the Master
Servicing Agreement, each of the Trustee, the Certificate Insurer and the Seller
will have the right to remove the Master Servicer and will exercise that right
if any such person considers such removal to be in the best interest of the
Certificateholders and the Certificate Insurer. In the event that the Trustee or
the Seller removes the Master Servicer, the Trustee or the Seller, as
applicable, will appoint a successor master servicer acceptable to the
Certificate Insurer and, if applicable, the Seller. In connection with the
removal of the Master Servicer, the Trustee will be entitled to be reimbursed
from the Trust Fund for all of its reasonable costs associated with the transfer
of servicing to the successor master servicer, including without limitation any
reasonable costs or expenses associated with the completion, correction or
manipulation of servicing data as may be required by the Trustee to correct any
errors or insufficiencies in the servicing data or otherwise to enable the
successor master servicer to service the Mortgage Loans properly and
effectively.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee ("SERVICING FEE") payable to the Master Servicer will
be a per annum rate equal to 0.375% of the Principal Balance of the related
Mortgage Loan with respect to 98.14% of the Mortgage Loans (by Cut-off Date
Principal Balance), 0.25% of the Principal Balance of the related Mortgage Loan
with respect to 1.78% of the Mortgage Loans (by Cut-off Date Principal Balance)
or 0.50% of the Principal Balance of the related Mortgage Loan with respect to
the remainder of the Mortgage Loans. The Servicing Fee with respect to the
Mortgage Loans are payable out of the interest
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<PAGE> 31
payments on each Mortgage Loan. Under the Master Servicing Agreement, the amount
of the Servicing Fee is subject to adjustment with respect to prepaid Mortgage
Loans, as described below under "--Adjustment to the Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Master Servicer will also be entitled
to receive late payment fees, assumption fees and other similar charges. As
compensation for its services to the Trust Fund, the Seller will be entitled to
receive any net investment earnings on amounts on deposit in the Certificate
Account. In addition to the payment of the Trustee fee, the Trustee also will be
entitled to receive any net investment earnings on amounts on deposit in the
Distribution Account.
ADJUSTMENT TO THE SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE
LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
calendar month will be distributed to Certificateholders on the Distribution
Date in the month following the month of receipt. Thus less than one month's
interest may have been collected on Mortgage Loans that have prepaid with
respect to any Distribution Date. A "PREPAYMENT INTEREST SHORTFALL" is the
amount by which interest paid by a borrower in connection with a prepayment of
principal on a Mortgage Loan is less than one month's interest at the related
Mortgage Rate on the Principal Balance of such Mortgage Loan. Pursuant to the
Master Servicing Agreement, the related Servicing Fees for any month may be
reduced, but not below zero, by the amount of Prepayment Interest Shortfalls
occurring during such month with respect to the Mortgage Loans serviced pursuant
to the Master Servicing Agreement, but only to the extent of the Servicing Fees
thereunder. If Prepayment Interest Shortfalls in any month occurring with
respect to the Mortgage Loans exceed the aggregate amount of the related
Servicing Fees for such month that is eligible for reduction as described above,
the amount of funds available from collections to be paid to Certificateholders
in respect of interest on the Mortgage Loans on such Distribution Date will be
reduced by the amount of such excess (such excess, the "NET PREPAYMENT INTEREST
SHORTFALL").
ADVANCES
Subject to the following limitations, pursuant to the Master Servicing
Agreement the Master Servicer will be required to advance prior to each
Distribution Date, from its own funds, amounts (net of the applicable Servicing
Fees with respect to the Mortgage Loans) which were due on the related Due Date
on the Mortgage Loans serviced by it and which were delinquent during the
related due period (any such advance, a "MONTHLY ADVANCE"). With respect to any
Distribution Date, such due period will be the calendar month preceding the
month of such Distribution Date.
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the Certificates rather than to guarantee or
insure against losses. The Master Servicer is not obligated to make Monthly
Advances (i) to the extent that such Monthly Advances are, in its reasonable
judgment, non-recoverable from future payments and collections or insurance
payments or proceeds of liquidation of the related Mortgage Loan or (ii) on any
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Trustee through foreclosure or deed-in-lieu of foreclosure. Any failure by
the Master Servicer to advance funds as required under the Master Servicing
Agreement will constitute a default thereunder, and following the termination of
the Master Servicer and the appointment of the successor master servicer under
the Master Servicing Agreement, the successor master servicer will be obligated
to make any such Monthly Advance in accordance with the terms of the Master
Servicing Agreement. If the Master Servicer determines to make a Monthly
Advance, such Monthly Advance will be included in the Available Distribution
Amount for the related Distribution Date. Subject to the terms of the
Certificate Insurance Policy, the Certificate Insurance Policy will provide
protection to the Certificateholders against any shortfall resulting from
delinquencies as to which a required Monthly
S-29
<PAGE> 32
Advance is not made as described above or is determined to be nonrecoverable, to
the extent such shortfall is not otherwise covered by the Available Distribution
Amount.
DESCRIPTION OF THE CERTIFICATES
The Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class R Certificates (consisting of the Class R-UT and
Class R-LT Certificates) (collectively, the "CERTIFICATES") will be issued
pursuant to the Agreement, a copy of which (exclusive of the list of Mortgage
Loans) will be attached as an exhibit to the Current Report on Form 8-K to be
filed with the Securities and Exchange Commission after the date of delivery of
the Certificates. Reference is made to the Prospectus for additional information
regarding the terms and conditions of the Agreement to the extent not revised by
the following description. The approximate original Principal Balance of the
Class A Certificates will be $380,161,000, subject to a permitted variance of
plus or minus 5%. Any difference between the aggregate Principal Balance of the
Class A and Class B Certificates as of the date of issuance of the Certificates
and the approximate aggregate original Principal Balance thereof as of the date
of this Prospectus Supplement will be allocated between the Class A and Class B
Certificates so as to retain materially the characteristics thereof described
herein.
The following summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, the provisions of the
Agreement. When particular provisions or terms used in the Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
GENERAL
Exclusive of the interest of the Class C and Class R Certificates, the
Class A Certificates initially will evidence in the aggregate a beneficial
interest of approximately 99.00% in the pool of Mortgage Loans, and the Class B
Certificates initially will evidence the remaining approximately 1.00%. The
Class C Certificates and the Class R Certificates do not have Principal
Balances.
The Class A Certificates will be issued in fully registered form only,
in denominations of $25,000 and integral multiples of $1,000 in excess thereof.
The "PERCENTAGE INTEREST" of a Class A Certificate is the percentage obtained
from dividing its denomination by the original Class A Principal Balance.
Definitive Class A Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee at its Corporate Trust
Department in Minnesota. As of the Closing Date, the Trustee has designated its
offices with respect to this trust located at Sixth and Marquette Avenue,
Minneapolis, Minnesota 55479, for such purposes. No service charge will be made
for any registration of exchange or transfer, but the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
Distributions of principal and interest on the Class A Certificates to
which it is entitled will be made on the 22nd day of each month, or, if such day
is not a business day, the next succeeding business day (each, a "DISTRIBUTION
DATE") beginning in April 2000, to the persons in whose names the Class A
Certificates are registered at the close of business on the last business day of
the calendar month immediately preceding the calendar month in which the
Distribution Date occurs or on the date of the initial issuance of the
Certificates in the case of the first Distribution Date (the "RECORD DATE"). The
Class A Certificates will initially be represented by certificates registered in
the name of Cede & Co. ("CEDE") as the nominee of The Depository Trust Company
("DTC"). See "--Registration of Class A Certificates" below. If definitive Class
A Certificates are issued, distributions will be made by check mailed to the
address of the person entitled thereto as it appears on the certificate
register, except that a
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<PAGE> 33
Certificateholder who holds Class A Certificates with original denominations
aggregating at least $5 million may request payment by wire transfer of funds
pursuant to written instructions delivered to the Trustee at least ten business
days prior to the Record Date. The final distribution in retirement of Class A
Certificates will be made only upon presentation and surrender of the Class A
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Class A Certificateholders.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of interest and principal to which a holder is entitled
will be made on each Distribution Date, commencing in April 2000, to each holder
of a Class A Certificate in an amount equal to each such holder's respective
Percentage Interest multiplied by the amount distributed in respect of Class A
Certificates. Certain calculations with respect to the Certificates will be made
by the Trustee as of the 15th day of the month (or if such 15th day is not a
business day, then on the next preceding business day) (the "DETERMINATION
DATE"). Distributions on the Class A Certificates will be applied first to
interest and then to principal. All calculations of interest on the Certificates
will be made on the basis of a 360-day year divided into twelve 30-day months.
Interest will accrue with respect to each Distribution Date during the 30-day
period beginning on the preceding Distribution Date (or beginning on March 21,
2000, in the case of the first Distribution Date) (each, an "ACCRUAL PERIOD").
With respect to each Distribution Date, the "AVAILABLE DISTRIBUTION
AMOUNT" will be the amount received in respect of the Mortgage Loans by the
Master Servicer on or prior to the close of business on the related
Determination Date, plus the Monthly Advance deposited in the Certificate
Account for such Distribution Date, less the following amounts:
(a) amounts received on the Mortgage Loans as late payments or
other recoveries of interest or principal (including liquidation
proceeds, Insurance Proceeds and condemnation awards) and with respect
to which the Master Servicer previously made an unreimbursed Monthly
Advance of such amounts;
(b) amounts representing the reimbursement for Nonrecoverable
Advances and other amounts (including the Servicing Fee) permitted to be
withdrawn by the Master Servicer from the custodial account or not
required to be deposited in the Certificate Account;
(c) amounts representing all or part of a monthly payment due
after the immediately preceding Due Date;
(d) all repurchase proceeds, principal prepayments, liquidation
proceeds, Insurance Proceeds and condemnation awards with respect to
Mortgage Loans received after the related Principal Prepayment Period,
and all related payments of interest representing interest for any
period of time after the related Due Date;
(e) the amount as may be necessary to reimburse the Trustee for
certain costs and expenses (including any indemnification expenses) owed
to the Trustee under the Agreement but only up to an amount set forth in
the Agreement (the "CAPPED AMOUNT");
(f) all net income from eligible investments held in the
Certificate Account for the account of the Seller; and
(g) all net income from eligible investments held in the
Distribution Account for the account of the Trustee.
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On the business day prior to each Distribution Date, the Available
Distribution Amount will be transferred from the Certificate Account to the
Distribution Account. In addition, on or before each Distribution Date, the
Trustee will deposit into the Distribution Account the payments, if any, it has
received under the Certificate Insurance Policy and the Limited Purpose Surety
Bond, and any withdrawals from the Carryover Reserve Fund for distribution on
such Distribution Date.
On each Distribution Date the amount in the Distribution Account will be
distributed in the following amounts and order of priority:
(i) to the Trustee, the Trustee fee for such Distribution Date
and to the Certificate Insurer, the monthly premium due on the
Certificate Insurance Policy;
(ii) to the Class A Certificateholders, interest for the related
Accrual Period at the Class A Pass-Through Rate on the Class A Principal
Balance, together with (A) any previously undistributed shortfalls in
required distributions of interest on the Class A Certificates (the
"CLASS A UNPAID INTEREST SHORTFALL"), and (B) any Basis Risk Carryover
Amount allocable to the Class A Certificates (but only to the extent
such carryover amount has been withdrawn from the Carryover Reserve
Fund). Interest distributions are subject to reduction due to Net
Interest Shortfalls as described below;
(iii) to the Class A Certificateholders, in respect of
principal, the sum of (A) the Class A Principal Distribution Amount and
(B) on or after the Distribution Date on which the Class B Principal
Balance has been reduced to $0, the aggregate amount of Realized Losses,
if any, for such Distribution Date with respect to Liquidated Mortgage
Loans;
(iv) to the Certificate Insurer, an amount equal to any
previously unreimbursed payments made under the Certificate Insurance
Policy and certain fees and expenses owed to it under the related
insurance agreement, together with interest thereon (collectively, the
"UNREIMBURSED INSURER AMOUNTS");
(v) to the Class B Certificateholders, interest for the related
Accrual Period at the Class B Pass-Through Rate on the Class B Principal
Balance, together with (A) any previously undistributed shortfalls in
distributions of interest due on the Class B Certificates, (B) interest
on such previously undistributed shortfalls (to the extent legally
permitted) at the Class B Pass-Through Rate, and (C) any Basis Risk
Carryover Amount allocable to the Class B Certificates (but only to the
extent such carryover amount has been withdrawn from the Carryover
Reserve Fund). Interest distributions are subject to reduction due to
Net Interest Shortfalls as described below;
(vi) to the Class B Certificateholders, in respect of principal,
the Class B Principal Distribution Amount;
(vii) to the Class A Certificateholders, in respect of
principal, the Excess Cash Flow Principal Amount (but the aggregate
distributions of Excess Cash Flow Principal Amounts for such
Distribution Date and all prior Distribution Dates will not exceed 0.50%
of the Cut-off Date Pool Balance);
(viii) to the Class B Certificateholders, in respect of
principal, any Class B Loss Amount, together with any previously
undistributed Class B Loss Amounts, together with interest thereon at
the Class B Pass-Through Rate;
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(ix) to the Carryover Reserve Fund, any Carryover Reserve Fund
Deposit;
(x) to the Trustee, such amount as may be necessary to reimburse
the Trustee for any amounts that would otherwise have been payable to
it, but were in excess of the Capped Amount; and
(xi) sequentially, to the Class C Certificateholders and then to
the Class R Certificateholders, in that order, any remaining balance as
specified in the Agreement.
In no event will the aggregate distributions of principal to the holders
of the Class A or Class B Certificates (whether out of Available Distribution
Amounts, payments under the Certificate Insurance Policy or payments under the
Limited Purpose Surety Bond) exceed the original Principal Balance of such
Class.
The interest entitlement above for the Class A and Class B Certificates
with respect to each Distribution Date will be reduced by the amount of Net
Interest Shortfall allocable to each such Class. The Net Interest Shortfall on
any Distribution Date will be allocated pro rata among the Class A and Class B
Certificates based on the amount of interest each such class of Certificates
would otherwise be entitled to receive on such Distribution Date.
Subject to the terms and conditions of the Certificate Insurance Policy,
the Insured Payment for a Distribution Date will include the Insured Amount, if
any, for such Distribution Date. Insured Payments, if any, will be distributed
to the Class A Certificateholders on the related Distribution Date. See "The
Certificate Insurance Policy and the Certificate Insurer" herein.
ADDITIONAL DEFINITIONS
"ADJUSTED CLASS A PRINCIPAL DISTRIBUTION AMOUNT" means, as to any
Distribution Date, an amount (but not less than $0) equal to the lesser of:
(i) the Principal Distribution Amount; and
(ii) the greater of:
(x) the Class A Principal Balance (before giving effect
to the distribution of principal on such Distribution Date)
minus the product of 0.98 and the Pool Principal Balance for
such Distribution Date; and
(y) the Principal Distribution Amount minus the excess,
if any, of the Pool Principal Balance for the immediately
preceding Distribution Date over the sum of (1) the Class A
Principal Balance (before giving effect to the distribution of
principal on such Distribution Date), (2) any Class B Loss
Amount and (3) the Floor Amount.
The "CLASS A PASS-THROUGH RATE" for a Distribution Date will be equal to
the least of (i) LIBOR (as described below under "-Calculation of LIBOR") plus
0.36%; (ii) the Weighted Average Net Mortgage Rate for the Mortgage Loans as of
the Due Date in the preceding month (determined on the basis of the Principal
Balances of the Mortgage Loans after giving effect to the Monthly Payments due
on or prior to such Due Date and unscheduled principal payments received prior
to such Due Date); and (iii) 11.78% per annum. The "CLASS B PASS-THROUGH RATE"
will be similarly calculated, except that the rate corresponding to clause (i)
of the preceding sentence will equal LIBOR plus 1.25%.
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Notwithstanding the foregoing, the 0.36% margin added to the LIBOR formula for
the calculation of the Class A Pass-Through Rate will instead be 0.72% for each
Distribution Date occurring 120 days or more after the first Distribution Date
in respect of which the Pool Principal Balance (less the Principal Distribution
Amount for such Distribution Date) is 10% or less of the Cut-off Date Pool
Balance. The Class A Pass-Through Rate thus calculated will still be subject to
the limitation of the Weighted Average Net Mortgage Rate and the maximum rate of
11.78% per annum as described above. Additional interest for a Distribution Date
in excess of the applicable Weighted Average Net Mortgage Rate may be payable on
the Class A Certificates from the Carryover Reserve Fund to the extent described
below under " -- Carryover Reserve Fund."
The "CLASS A PRINCIPAL BALANCE" at any time is the original Class A
Principal Balance reduced (but not below $0) by all prior distributions to the
Class A Certificateholders with respect to principal.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT" means, as to (i) any
Distribution Date before the Step-Down Date or (ii) any Distribution Date on or
after the Step-Down Date and as to which a Trigger Event exists, the Principal
Distribution Amount; and as to any Distribution Date on or after the Step-Down
Date and as to which no Trigger Event exists, the Adjusted Class A Principal
Distribution Amount.
"CLASS B LOSS AMOUNT" means, as to any Distribution Date, the amount, if
any, by which (i) the sum of (x) the Principal Distribution Amount and (y) the
aggregate amount of Realized Losses, if any, for such Distribution Date with
respect to Liquidated Mortgage Loans, exceeds (ii) the amount distributed with
respect to principal to the holders of the Certificates on such Distribution
Date (exclusive of any Class B Loss Amount).
The "CLASS B PRINCIPAL BALANCE" at any time is the original Class B
Principal Balance reduced (but not below $0) by the sum of (i) all prior
distributions to the Class B Certificateholders with respect to principal and
(ii) all Class B Loss Amounts for prior Distribution Dates (without regard to
whether such Class B Loss Amounts were previously distributed).
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT" means, as to (i) any
Distribution Date before the Step-Down Date or (ii) any Distribution Date on or
after the Step-Down Date and as to which a Trigger Event exists, zero (unless
the Class A Principal Balance has been reduced to zero, in which case an amount
equal to the Principal Distribution Amount less the portion thereof, if any,
distributed to the Class A Certificateholders on such Distribution Date); and as
to any Distribution Date on or after the Step-Down Date and as to which no
Trigger Event exists, an amount equal to the Principal Distribution Amount minus
the Adjusted Class A Principal Distribution Amount.
"EXCESS CASH FLOW PRINCIPAL AMOUNT" means, as to any Distribution Date,
the amount, if any, necessary to be distributed on such Distribution Date so
that the excess of the Pool Principal Balance for such Distribution Date over
the Class A Principal Balance (after giving effect to the distribution on such
Distribution Date of the Class A Principal Distribution Amount) is equal to or
more than, for any Distribution Date before the Step-Down Date, 1.00% of the
Cut-off Date Pool Balance and, for any Distribution Date on or after the
Step-Down Date, 2.00% of the Pool Principal Balance for such Distribution Date.
In no event will the aggregate distributions of Excess Cash Flow Principal
Amounts for any Distribution Date and all prior Distribution Dates exceed 0.50%
of the Cut-off Date Pool Balance.
The "EXPENSE FEE RATE" for a Mortgage Loan is the per annum rate
(generally not to exceed approximately 0.50%) equal to the sum of (i) the
Servicing Fee of 0.25%, 0.375% or 0.50% per annum, as applicable, (ii) the per
annum rate that represents such Mortgage Loan's pro rata share of the
Certificate Insurance Policy premium and (iii) the Trustee fee rate.
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"FLOOR AMOUNT" means, as to any Distribution Date, the greater of:
(i) the lesser of (a) 0.75% of the Cut-off Date Pool Balance and
(b) the aggregate Principal Balance of the three Outstanding Mortgage
Loans with the largest Principal Balances as of the related Due Date;
and
(ii) 0.50% of the Cut-off Date Pool Balance.
Notwithstanding the foregoing, the Floor Amount may be adjusted from time to
time with the prior consent of the Certificate Insurer to be any amount between
0.25% and 0.50% of the Cut-off Date Pool Balance.
A "LIQUIDATED MORTGAGE LOAN" is, generally, a defaulted Mortgage Loan as
to which all amounts that the Master Servicer believes can be recovered with
respect to such Mortgage Loan or the related REO Property have been recovered.
"NET INTEREST SHORTFALL" means, as to any Distribution Date, an amount
equal to the sum of (i) the amount of interest which would otherwise have been
received with respect to any Mortgage Loan that was the subject of a Relief Act
Reduction and (ii) any Net Prepayment Interest Shortfall.
The "NET MORTGAGE RATE" of a Mortgage Loan is its Mortgage Rate minus
the related Expense Fee Rate.
An "OUTSTANDING MORTGAGE LOAN" in respect of a Due Date is a Mortgage
Loan which was not the subject of a principal prepayment in full prior to such
Due Date, which did not become a Liquidated Mortgage Loan prior to such Due Date
and which was not repurchased pursuant to the Agreement on account of certain
breaches of a representation or warranty or conversion or otherwise prior to
such Due Date.
The "POOL PRINCIPAL BALANCE" means, as of any Distribution Date, the
aggregate Principal Balance of the Outstanding Mortgage Loans on the Due Date in
the month of such Distribution Date.
"PRINCIPAL BALANCE" when used in respect of (i) a Class or Classes of
Certificates, refers to the principal balance thereof as calculated in
accordance with its definition; and (ii) a Mortgage Loan, refers to its
principal balance remaining to be paid at the close of business on the Cut-off
Date (after deduction of all principal payments due on or before the Cut-off
Date, whether or not paid, but without deducting Monthly Payments due after the
Cut-off Date and received on or before the Cut-off Date) reduced by all amounts
(including Monthly Advances, if any) distributed to Certificateholders relating
to principal of such Mortgage Loan.
"PRINCIPAL DISTRIBUTION AMOUNT" means, as to any Distribution Date, the
sum of:
(a) the principal portion of all Monthly Payments, whether or
not received, which were due on the related Due Date on Outstanding
Mortgage Loans as of the related Due Date;
(b) with respect to each Mortgage Loan, all principal
prepayments made by the Mortgagor during the month (the "PRINCIPAL
PREPAYMENT PERIOD") preceding the month of such Distribution Date;
(c) with respect to each Mortgage Loan not described in (e)
below, all Insurance Proceeds, condemnation awards and any other cash
proceeds from a source other than the
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Mortgagor, to the extent required to be remitted to the Trustee pursuant
to the Master Servicing Agreement, which are allocable to principal and
were received during the Principal Prepayment Period, net of related
unreimbursed servicing advances and net of any portion thereof that, as
to such Mortgage Loan, constitutes late collections with respect
thereto;
(d) with respect to each Mortgage Loan that has been repurchased
pursuant to the Agreement during the related Principal Prepayment Period
upon the termination of the Trust Fund, an amount equal to the Principal
Balance of such Mortgage Loan as of the date of repurchase;
(e) with respect to each Mortgage Loan that became a Liquidated
Mortgage Loan during the Principal Prepayment Period, the amount
allocable to the principal of such Liquidated Mortgage Loan that was
recovered out of the net liquidation proceeds in respect of such
Liquidated Mortgage Loan in the Principal Prepayment Period; and
(f) with respect to each Mortgage Loan repurchased during the
Principal Prepayment Period on account of a breach of a representation
or warranty that materially and adversely affects the interests of the
Certificateholders, the Certificate Insurer or the Surety Bond Provider,
or on account of its conversion to a fixed rate Mortgage Loan, a
different Index or otherwise, an amount equal to the principal portion
of the Purchase Price (exclusive of any portion thereof included in
clause (a) above).
"REALIZED LOSS" means, as to any Distribution Date and Liquidated
Mortgage Loan, the portion, if any, of the principal of such Liquidated Mortgage
Loan that was not recovered upon the completion of its liquidation during the
related Principal Prepayment Period.
A "RELIEF ACT REDUCTION" is a reduction in the amount of monthly
interest on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended.
An "REO PROPERTY" means a Mortgaged Property acquired by the Trust Fund
through foreclosure or deed-in-lieu of foreclosure in connection with a
defaulted Mortgage Loan.
"SERIOUS DELINQUENCIES" means, as to any Distribution Date, the average
for the immediately preceding six calendar months of, with respect to each such
calendar month, the percentage equivalent of a fraction, the numerator of which
is the sum of the aggregate Principal Balances (without duplication) as of the
Due Date in such calendar month of (i) Mortgage Loans which are 60 or more days
delinquent, (ii) Mortgage Loans in bankruptcy and 60 or more days delinquent,
(iii) Mortgage Loans in foreclosure, plus (iv) Mortgage Loans relating to REO
Properties (exclusive of any REO Properties which have been liquidated as of
such Due Date), and the denominator of which is the Pool Principal Balance for
such Distribution Date.
"STEP-DOWN DATE" means the later of:
(i) the thirty-sixth (36th) Distribution Date (or, with the
prior consent of the Certificate Insurer, any earlier Distribution
Date); and
(ii) the first Distribution Date on which the Pool Principal
Balance for such Distribution Date is less than or equal to 50.00% of
the Cut-off Date Pool Balance.
A "TRIGGER EVENT" is in effect for a Distribution Date if on such date
the excess, if any, of (i) the Pool Principal Balance for the immediately
preceding Distribution Date over (ii) the Class A Principal
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Balance (before giving effect to the distribution of principal on such
Distribution Date) is less than 50.00% of the product of (a) Serious
Delinquencies and (b) the Pool Principal Balance for such Distribution Date.
"WEIGHTED AVERAGE NET MORTGAGE RATE" is the weighted average of the Net
Mortgage Rates for the Mortgage Loans.
CALCULATION OF LIBOR
The London interbank offered rate ("LIBOR") with respect to any
Distribution Date will be determined by the Trustee and will equal the posted
rate for United States dollar deposits for one month which appears on Telerate
Page 3750 (as defined below) as of 11:00 a.m., London time, on the second LIBOR
Business Day prior to the immediately preceding Distribution Date (or, in the
case of the first Distribution Date, March 17, 2000). If no such posted rate
appears, LIBOR will be determined on such date as described in the paragraph
below. "TELERATE PAGE 3750" means the display page designated on the Bridge
Information Systems Telerate Service (or such other page as may replace that
page on that service, or such other service as may be nominated as the
information vendor, for the purpose of displaying London interbank offered rates
of major banks). "LIBOR BUSINESS DAY" for purposes of the Agreement, is a
Business Day (as defined in the Agreement) and a day on which banking
institutions in the City of London, England, are not required or authorized by
law to be closed.
If on such date no posted rate appears on the Telerate Page 3750 as
described above, the Trustee will request the principal London office of each of
the reference banks (which shall be four major banks specified in the Agreement
that are engaged in transactions in the London interbank market) ("REFERENCE
BANKS") to provide the Trustee with such bank's offered quotation for United
States dollar deposits for one month to prime banks in the London interbank
market as of 11:00 a.m., London time, on such date. If at least two Reference
Banks provide the Trustee with such offered quotations, then LIBOR on such date
will be the arithmetic mean (rounded, if necessary, to the nearest 1/100th of a
percent (0.0001), with a 5/1,000th of a percent (0.00005) rounded upwards) of
all such quotations. If on such date fewer than two of the Reference Banks
provide the Trustee with such an offered quotation, LIBOR on such date will be
the arithmetic mean (rounded, if necessary, to the nearest 1/100th of a percent
(0.0001), with a 5/1,000th of a percent (0.00005) rounded upwards) of the
offered per annum rates which one or more leading banks in The City of New York
selected by the Trustee (after consultation with the Seller and the Certificate
Insurer) are quoting as of 11:00 a.m., New York City time, on such date to
leading European banks for United States dollar deposits for one month;
provided, however, that if such banks are not quoting as described above, LIBOR
will be the LIBOR applicable to the immediately preceding Distribution Date.
SUBORDINATED CERTIFICATES
The rights of the Class C Certificateholders and the Class R
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the holders of the Class A and Class B
Certificates to the extent described herein. The rights of the Class B
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the holders of the Class A Certificates to
the extent described herein. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates of the
full amount of monthly distributions due them and to protect the holders of the
Class A Certificates against losses. The protection afforded to the holders of
the Class A Certificates by means of the subordination, to the extent provided
herein, of the Class B, Class C and Class R Certificates as described above will
be accomplished by the application of the Available Distribution Amount in the
order specified under "--Distributions on the Certificates" above.
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If, due to losses and delinquencies, the Available Distribution Amount
for any Distribution Date is not sufficient to cover, in addition to interest
distributable to the holders of the Class A Certificates, the Class A Principal
Distribution Amount distributable to the holders of the Class A Certificates on
such Distribution Date, then the amount of the Pool Principal Balance available
to the Class B Certificates (i.e., the Pool Principal Balance less the Class A
Principal Balance) on future Distribution Dates will be reduced. If, because of
liquidation losses, the Pool Principal Balance were to decrease
disproportionately faster than distributions to the Class A Certificateholders
reduce the Class A Principal Balance, the level of protection afforded to the
Class A Certificateholders by the subordination of the Class B Certificates
(i.e., the percentage of the Pool Principal Balance available to the Class B
Certificates) would be reduced. But for the application of Excess Cash Flow
Principal Amounts and the effect of the Certificate Insurance Policy, the
holders of Class A Certificates will bear all losses and delinquencies on the
Mortgage Loans, and could incur losses on their investment, if the Pool
Principal Balance becomes equal to or less than the outstanding Class A
Principal Balance.
APPLICATION OF EXCESS CASH FLOW
Excess Cash Flow Principal Amounts may be available to be distributed to
Class A Certificateholders on any Distribution Date only if there is "excess
cash flow" for such Distribution Date (i.e., a positive spread between the
Weighted Average Net Mortgage Rate for such Distribution Date on the one hand,
and the weighted average of the Class A Pass-Through Rate and the Class B
Pass-Through Rate on the other). Whether at any time any such positive spread
exists will depend on a variety of factors, including the relationship of the
movements in the indices applicable to the Mortgage Loans and the LIBOR index
applicable to the Certificates, over which no prediction can be made or
assurance given.
The Agreement provides that, on any Distribution Date, all or a portion
of the unscheduled collections on account of principal with respect to the
Mortgage Loans during the calendar month preceding the calendar month in which
such Distribution Date occurs will be distributed to the Class A Certificates as
part of the Class A Principal Distribution Amount. If any Mortgage Loan becomes
a Liquidated Mortgage Loan, the net liquidation proceeds related thereto and
allocated to principal may be less than the Principal Balance of the related
Mortgage Loan and therefore give rise to a Realized Loss. Although the Agreement
requires the distribution of Class B Loss Amounts to the Class B
Certificateholders, the Agreement does not contain any rule which requires that
the amount of any Realized Loss be distributed to the Class A Certificateholders
on the Distribution Date which immediately follows the event of loss; i.e., the
Agreement does not require the current recovery of losses by Class A
Certificateholders. However, the occurrence of a Realized Loss may reduce any
excess of the Pool Principal Balance over the Class A Principal Balance and may
result in a distribution of Excess Cash Flow Principal Amounts to the Class A
Certificateholders on subsequent Distribution Dates. The aggregate distributions
of Excess Cash Flow Principal Amounts for any Distribution Date and all prior
Distribution Dates, however, may not exceed 0.50% of the Cut-off Date Pool
Balance.
CARRYOVER RESERVE FUND
The Agreement also establishes an account (the "CARRYOVER RESERVE
FUND"), which is held in trust by the Trustee on behalf of the Class A and Class
B Certificateholders. The Carryover Reserve Fund will not be an asset of either
the Upper-Tier REMIC or Lower-Tier REMIC. On any Distribution Date on which the
Class A Pass-Through Rate or the Class B Pass-Through Rate is based upon the
applicable Weighted Average Net Mortgage Rate for the Mortgage Loans (the "NET
WAC CAP"), the Class A and Class B Certificateholders will be entitled to
receive payments from the Carryover Reserve Fund in an amount (the "BASIS RISK
CARRYOVER AMOUNT") equal to the excess of:
(1) the amount of interest that the Class A Certificates or
Class B Certificates would have been entitled to receive on such
Distribution Date (but not in excess of 11.78% per annum)
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had the Class A Pass-Through Rate or the Class B Pass-Through Rate not
been calculated based on the Net WAC Cap, over
(2) the amount of interest that the Class A and Class B
Certificates received on such Distribution Date based on the Net WAC
Cap( but not in excess of 11.78% per annum),
together with any unpaid Basis Risk Carryover Amount from prior Distribution
Dates, plus interest thereon (to the extent legally permitted) at the then
applicable Class A Pass-Through Rate or Class B Pass-Through Rate (without
giving effect to the Net WAC Cap, but not in excess of 11.78% per annum) to the
extent not previously reimbursed from amounts withdrawn from the Carryover
Reserve Fund.
The amount (the "CARRYOVER RESERVE FUND DEPOSIT") required to be
deposited in the Carryover Reserve Fund on any Distribution Date will equal the
greater of:
(1) any Basis Risk Carryover Amount for such Distribution Date,
and
(2) the amount, if any, necessary to be deposited so that the
amount on deposit in the Carryover Reserve Fund is at least $10,000
(after taking into account any other amount already on deposit therein).
The Basis Risk Carryover Amount for any Distribution Date will be
allocated pro rata among the Class A and Class B Certificates based on the
amount of shortfall for each such Class of Certificates. To the extent of any
unpaid Basis Risk Carryover Amount on a Distribution Date, such amount will also
be distributable on such date even if the Class A Pass-Through Rate or Class B
Pass-Through Rate is not based on the Net WAC Cap. Any investment earnings on
amounts on deposit in the Carryover Reserve Fund will be paid to (and for the
benefit of) the holders of the Class C Certificates and will not be available to
pay any Basis Risk Carryover Amount.
OPTIONAL TERMINATION
On any Distribution Date on or after the Distribution Date on which the
Pool Principal Balance (less the Principal Distribution Amount for such
Distribution Date) is 20% or less of the Cut-off Date Pool Balance, the Class
R-LT Certificateholder may, at its option, either (1) purchase from the Trust
Fund all Mortgage Loans remaining outstanding (and thereby effect the early
retirement of the Certificates) or (2) purchase all Certificates remaining
outstanding. In the absence of the exercise of such purchase options by the
Class R-LT Certificateholder, the Certificate Insurer or the Surety Bond
Provider may, at its option, purchase from the Trust Fund all Mortgage Loans
remaining outstanding (and thereby effect the early retirement of the
Certificates) on any Distribution Date on or after the Distribution Date on
which the Pool Principal Balance (less the Principal Distribution Amount for
such Distribution Date) is 10% or less of the Cut-off Date Pool Balance.
The purchase price to be paid to the Trust Fund for purchase of all of
the Mortgage Loans will generally equal the sum of (i) 100% of the outstanding
Principal Balance of each Mortgage Loan (other than in respect of any REO
Property), together with accrued and unpaid interest thereon at the Weighted
Average Net Mortgage Rate, (ii) the appraised value of any REO Property (up to
the outstanding Principal Balance of the related Mortgage Loan), and (iii) any
amounts due and owing the Certificate Insurer.
The price to be paid to Class A and Class B Certificateholders for
purchase of all of their Certificates outstanding will generally equal the sum
of (a) the aggregate of the Class A Principal Balance together with accrued and
unpaid interest thereon at the Class A Pass-Through Rate and any Class A
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Unpaid Interest Shortfall; and (b) the aggregate of the Class B Principal
Balance together with accrued and unpaid interest thereon at the Class B
Pass-Through Rate and any previously undistributed shortfall in interest due on
the Class B Certificates on prior Distribution Dates. If the Trust Fund is
terminated in connection with the purchase of all outstanding Certificates, the
purchase price to be paid for the Certificates will also include any amounts due
and owing the Certificate Insurer. The purchase price will be distributed to
Certificateholders in the month of purchase, first to the Class A
Certificateholders to the extent of the amount in clause (a) and then in
accordance with the Agreement.
MISCELLANEOUS
In determining the percentage of the Trust Fund evidenced by a
Certificate for purposes of determining the consent of Certificateholders or
other action by Certificateholders as discussed under "Description of the
Agreements-Amendment" in the Prospectus, such percentage shall be based upon the
relative outstanding Principal Balances of the Certificates. Amendments to the
Agreement requiring the consent of Certificateholders shall require only the
consent of the holders of Certificates of each Class affected thereby,
evidencing, as to such Class, Percentage Interests aggregating at least 66%.
Amendments to the Agreement may be made only with the prior written consent of
the Certificate Insurer and the Surety Bond Provider. Certain other actions
under the Agreement also require the prior written consent of the Certificate
Insurer and the Surety Bond Provider. The Certificate Insurer and the Surety
Bond Provider may direct the Trustee to waive any default under the Agreement,
except that a default in making any required distribution on any Certificate may
only be waived by the affected Certificateholder. Upon any default by the Master
Servicer under the Agreement, either the Trustee or the Seller may terminate the
rights of the Master Servicer only with the consent of the Certificate Insurer
and the Surety Bond Provider, and the Trustee shall terminate the Master
Servicer at the direction of the Certificate Insurer and the Surety Bond
Provider. So long as there does not exist a default by the Certificate Insurer,
the Certificate Insurer will have the right to exercise all rights of the Class
A Certificateholders under the Agreement without any consent of those holders,
and those holders may exercise their rights only with the prior written consent
of the Certificate Insurer except as provided in the Agreement.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, will act as Trustee of the Trust Fund. The offices of the Trustee's
corporate trust office with respect to this trust are located at Sixth Street
and Marquette, Minneapolis, Minnesota 55479, Attention: Corporate Trust
Services-Sequoia Mortgage Trust 4 and the telephone number for inquires is (410)
884-2000.
The Trustee may resign at any time, in which event the Seller will be
obligated to appoint a successor Trustee. The Seller may also remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement or
if the Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Seller will be obligated to appoint a successor Trustee. If a downgrading in the
credit rating of the Trustee would materially and adversely affect the rating of
the Class A Certificates (without regard to the Certificate Insurance Policy),
the Seller, under certain circumstances, may remove the Trustee and appoint a
successor Trustee. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment of the successor Trustee.
REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates will initially be registered in the name of
Cede, the nominee of DTC. Certificateholders may hold their Certificates through
DTC (in the United States) or Clearstream or Euroclear (each as defined below)
(in Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
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<PAGE> 43
Cede, as nominee for DTC, will hold the global Class A Certificates.
Clearstream and Euroclear will hold omnibus positions on behalf of the
Clearstream Participants and the Euroclear Participants (each as defined below),
respectively, through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries (collectively,
the "DEPOSITARIES") which in turn will hold such positions in customers'
securities accounts in the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "1934 ACT"). DTC accepts
securities for deposit from its participating organizations ("PARTICIPANTS") and
facilitates the clearance and settlement of securities transactions between
Participants in such securities through electronic book-entry changes in
accounts of Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
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 Clearstream
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. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in Clearstream
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
Clearstream Participant or Euroclear Participant on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream 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 Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Owners of the Class A Certificates ("CERTIFICATE OWNERS") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
Class A Certificates may do so only through Participants (unless and until
Definitive Class A Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of and interest
on the Class A Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below.
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<PAGE> 44
Unless and until Definitive Class A Certificates (as defined below) are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede, as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise the rights of Certificateholders indirectly through
Participants and DTC.
While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Class A Certificates and is required to receive and transmit distributions
of principal of, and interest on, the Class A Certificates. Unless and until
Definitive Class A Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants by instructing such Participants to transfer Class A Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the DTC rules and in accordance with DTC's normal procedures, transfers of
ownership of Class A Certificates will be executed through DTC and the accounts
of the respective Participants at DTC will be debited and credited.
Class A Certificates will be issued in registered and certificated form
to Certificate Owners, or their nominees, rather than to DTC (such Certificates
being referred to herein as "DEFINITIVE CLASS A CERTIFICATES"), only if (i) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Class A Certificates and the Depositor or the Trustee is unable
to locate a qualified successor, (ii) the Depositor, at its sole option and with
the consent of the Trustee, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default (as defined in the
Agreement), DTC, at the direction of Certificate Owners having a majority in
Percentage Interests of the Class A Certificates together, advises the Trustee
in writing that the continuation of a book-entry system through DTC (or a
successor thereto) to the exclusion of any physical certificates being issued to
Certificate Owners is no longer in the best interest of Certificate Owners. Upon
issuance of Definitive Class A Certificates to Certificate Owners, such
Certificates will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee with respect
to transfers, notices and distributions.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a holder of Class A Certificates under the Agreement only at the
direction of one or more Participants to whose DTC account the Class A
Certificates are credited. DTC has advised the Depositor that DTC will take such
action with respect to any Percentage Interests of the Class A Certificates only
at the direction of and on behalf of such Participants with respect to such
Percentage Interests of the Class A Certificates. DTC may take actions, at the
direction of the related Participants, with respect to some Class A Certificates
which conflict with actions taken with respect to other Class A Certificates.
Clearstream, Luxembourg ("CLEARSTREAM") is incorporated under the laws
of Luxembourg as a professional depository. Clearstream holds securities for its
participating organizations ("CLEARSTREAM PARTICIPANTS") and facilitates the
clearance and settlement of securities transactions between Clearstream
Participants through electronic book-entry changes in accounts of Clearstream
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 28
currencies, including United States dollars. Clearstream provides to its
Clearstream Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depository, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Participants are recognized financial institutions around the world,
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<PAGE> 45
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations and may include the
underwriters of any class of Certificates. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("EUROCLEAR PARTICIPANTS") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "EUROCLEAR OPERATOR" or "EUROCLEAR"), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"EUROCLEAR COOPERATIVE"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Euroclear
Cooperative. The Euroclear Cooperative establishes policy for the Euroclear
System on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" herein. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificate Owner under the Agreement on behalf of a
Clearstream Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to its Depositary's ability to effect
such actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
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<PAGE> 46
In the event that any of DTC, Clearstream or Euroclear should
discontinue its services, the Depositor would seek an alternative depositary (if
available) or cause the issuance of Definitive Class A Certificates to
Certificate Owners or their nominees in the manner described above.
Issuance of the Class A Certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Class A
Certificates in the secondary market and the ability of Certificate Owners to
pledge them. In addition, since distributions on the Class A Certificates will
be made by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants, which will further credit them to the accounts of
indirect participants of Certificate Owners, Certificate Owners may experience
delays in the receipt of such distributions.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the
aggregate amount of each interest payment on the Class A Certificates and the
yields to maturity of the Class A Certificates are related to and affected by
the rate and timing of payments of principal on the underlying Mortgage Loans.
The principal payments on the Mortgage Loans may be in the form of scheduled
principal payments, prepayments or liquidation proceeds due to default,
casualty, condemnation and the like. Any such payments will result in
distributions to the Certificateholders of amounts attributable to principal
which would otherwise be distributed over the remaining term of the Mortgage
Loans. In addition, because the Class A Certificates will be entitled to
receive, at least during the early years of their life, all or a
disproportionate percentage of unscheduled principal payments on the Mortgage
Loans (including liquidations due to default) on each Distribution Date until
the Class A Principal Balance is reduced to zero, rather than the portion
thereof proportionate to their interest in the Mortgage Loans, the rate of
principal payments on the Mortgage Loans will, unless offset by cash flow
insufficiencies due to delinquencies and liquidation losses, have a greater
effect on the rate of principal payments and the amount of interest payments on,
and the yields to maturity of, the Class A Certificates than if the Class A
Certificates were entitled only to their proportionate interest in the Principal
Distribution Amounts for the Mortgage Loans. See "Description of the
Certificates - Distributions on the Certificates" herein. In general, the
prepayment rate may be influenced by a number of factors, including general
economic conditions, homeowner mobility and the level of mortgage market
interest rates. Mortgagors are generally permitted to prepay the Mortgage Loans,
in whole or in part, at any time without penalty. If a Mortgagor makes a partial
prepayment of a Mortgage Loan, the Master Servicer will adjust the monthly
payment of such Mortgage Loan in the following month to reflect the reduced loan
amount.
The rate of payment of principal may also be affected by any repurchase
of the Mortgage Loans or the Certificates by the Class R-LT Certificateholder,
the Seller, RWT Holdings, MLCC or the Certificate Insurer as described herein.
See "The Mortgage Pool - General," "- Assignment of the Mortgage Loans" and
"Description of the Certificates - Optional Termination" herein. In such event,
the repurchase price will be passed through to the Class A Certificateholders as
a prepayment of principal in the month following the month of such repurchase.
All of the Mortgage Loans are adjustable rate loans for which only
interest is due during the first ten years of their terms. Substantially all of
the Mortgage Loans are Index Convertible Mortgage Loans, in respect of which the
Mortgagor, during the related conversion period, may convert to a different
Index. Except for 0.41% of the Mortgage Loans (by Cut-off Date Pool Balance),
the Index Convertible Loans may not be converted to a fixed rate. Neither the
Depositor nor the Seller is aware of any publicly available statistics that set
forth principal prepayment or conversion experience or prepayment or conversion
forecasts of adjustable rate mortgage loans over an extended period of time, and
the experience of MLCC is insufficient to draw any conclusions with respect to
the expected prepayment or conversion rates on the Mortgage Loans. The rate of
principal prepayments and conversions with respect
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<PAGE> 47
to adjustable rate mortgage loans has fluctuated in recent years. As is the case
with conventional fixed rate mortgage loans, adjustable rate mortgage loans may
be subject to a greater rate of principal prepayments and conversions in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate or other adjustable rate mortgage loans at
competitive interest rates may encourage borrowers to refinance their adjustable
rate loans, or convert them to another adjustable rate or to a fixed rate, or to
"lock in" a lower adjustable or fixed interest rate. The fixed rate conversion
option may also be exercised in a rising interest rate environment as Mortgagors
avoid the risk of higher rates. No prediction can be made as to the rate of
prepayments or conversions on the Mortgage Loans in stable or changing interest
rate environments.
Under the terms of the Master Mortgage Loan Purchase Agreement, MLCC has
the obligation to repurchase any Mortgage Loan from the Trust Fund on or after
the conversion of the Mortgage Loan's interest rate to a fixed rate. In
addition, the Class R-LT Certificateholder will have the option, but not the
obligation, to purchase any Mortgage Loan from the Trust Fund on or after the
conversion of the Mortgage Loan's interest rate to a different Index.
Consequently, if MLCC fails to repurchase any Mortgage Loan whose interest rate
has converted to a fixed rate or in the absence of the exercise by the Class
R-LT Certificateholder of its option to purchase any Mortgage Loan whose
interest rate has converted to a different Index, the Mortgage Loans in the
Trust Fund will include any such Mortgage Loan with a fixed rate or a different
Index, respectively. This may have an adverse effect on the level of the Class A
Pass-Through Rate. See "Yield Considerations" in the Prospectus.
To the extent that amounts paid to the holders of the Class A
Certificates on any Distribution Date are less than the amount due to the
holders of the Class A Certificates on such date, the weighted average life of
the Class A Certificates will be longer than if shortfalls had not occurred.
In the case of any Class A Certificates purchased at a discount to their
original principal amounts, a slower than anticipated rate of principal payments
is likely to result in a lower than anticipated yield. In the case of Class A
Certificates purchased at a premium to their original principal amounts, a
faster than anticipated rate of principal payments is likely to result in a
lower than anticipated yield.
In the event of the acceleration of Mortgage Loans as a result of
enforcement of "due-on-sale" provisions in connection with transfers of the
related Mortgaged Properties or the occurrence of certain other events resulting
in acceleration, the level of prepayments on the Mortgage Loans will be
affected, thereby shortening the weighted average life of the Class A
Certificates. If the Master Servicer acquires actual knowledge that a Mortgagor
has transferred or proposes to transfer the related Mortgaged Property, the
Master Servicer is obligated to enforce any due-on-sale clause contained in the
Mortgage Loan consistent with its practices for mortgage loans it services for
its own account. If the Master Servicer elects not to enforce any due-on-sale
clause, the Master Servicer is authorized to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Loan.
Any refinancing of a Mortgage Loan by a Mortgagor would have the effect
of a prepayment in full. Any such prepayments would be passed through to holders
of the Certificates and may affect the weighted average life of the Class A
Certificates.
If a Mortgage Loan is prepaid in full, interest thereon will cease to
accrue on the date of the prepayment. Consequently, the timing of prepayments in
full on Mortgage Loans will affect the amount of the Available Distribution
Amount available to make distributions of interest on the Certificates and will
therefore affect the ability of the Trust Fund to make a full distribution of
interest on the Class A Certificates and the Class A Principal Distribution
Amount. The Master Servicer's Servicing Fees in
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<PAGE> 48
respect of the month of prepayment will be applied to make up for any reduced
amount of interest collections on account of the timing of the receipt of
principal prepayments, but no assurance can be given that the amount of the
Servicing Fees will be sufficient for such purpose. Net Interest Shortfalls will
be borne by the Class A Certificateholders as described under "Description of
the Certificates - Distributions on the Certificates" and will result in a lower
than anticipated yield.
No prediction can be made as to future levels of LIBOR, the One-Month
LIBOR Index, the Six-Month LIBOR Index, the Prime Index or the Treasury Index or
as to the timing of any changes therein, each of which could directly affect the
yields of the Class A Certificates. In addition, except for any payments from
the Carryover Reserve Fund, the holders of the Class A Certificates will absorb
the yield risk associated with a possible elimination or inversion of the spread
between the Class A Pass-Through Rate (which rate, except as otherwise provided,
is based on LIBOR) and the Weighted Average Net Mortgage Rate. The Mortgage
Rates reset at different times and are subject to lifetime interest rate caps.
The conversions of eligible Mortgage Loans to a fixed rate might, if MLCC were
unable to purchase such converting Mortgage Loans, have the effect of narrowing
the spread between the Class A Pass-Through Rate calculated on the basis of
LIBOR and the Weighted Average Net Mortgage Rate. If such spread disappears
(i.e., if LIBOR plus 0.36% exceeds the related Weighted Average Net Mortgage
Rate), then the Class A Pass-Through Rate for such Distribution Date will be
limited to such lower Weighted Average Net Mortgage Rate.
The Maximum Mortgage Rates on the Mortgage Loans range from 12.000% to
13.750% per annum and the weighted average Maximum Mortgage Rate for the
Mortgage Loans (by Cut-off Date Pool Balance) is equal to 12.280%. None of the
Mortgage Loans will be subject to a periodic interest rate cap.
WEIGHTED AVERAGE LIFE OF THE CLASS A CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average life of the Class A
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Mortgage Loans.
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average life of the Class A Certificates
will be affected by the rate at which principal on the Mortgage Loans is paid.
Principal payments on Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to default or other dispositions of Mortgage
Loans). Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is a Constant Prepayment
Rate ("CPR"). The CPR represents an assumed constant rate of prepayment each
month, expressed as a per annum percentage of the scheduled principal balance of
the pool of mortgage loans for that month. As used in the following table, the
column headed "0%" assumes that none of the Mortgage Loans is prepaid before
maturity. The columns headed "5%", "10%", "15%", "20%", "25%" and "30%" assume
that prepayments on the Mortgage Loans are made at CPRs of "5%", "10%", "15%",
"20%", "25%" and "30%", respectively. THE CPR DOES NOT PURPORT TO BE A
HISTORICAL DESCRIPTION OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE
ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE
MORTGAGE LOANS.
There is no assurance, however, that prepayments of the Mortgage Loans
will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the CPRs shown or any other prepayment rate. The
rate of principal payments on pools of mortgage loans is influenced by a variety
of economic, geographic, social and other factors, including the level of
interest rates and the rate at which homeowners sell their homes or default on
their mortgage loans. Other factors affecting
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<PAGE> 49
prepayment of mortgage loans include changes in borrowers' housing needs, job
transfers, unemployment and obligors' net equity in their homes.
The percentages and weighted average lives in the following table were
determined assuming that (i) scheduled interest and principal payments on the
Mortgage Loans are received in a timely manner and prepayments are made at the
indicated constant percentages of CPR; (ii) principal prepayments on the
Mortgage Loans will be received on the last day of each month commencing in
March 2000 at the respective constant percentages of CPR set forth in such table
and there are no Prepayment Interest Shortfalls; (iii) except as indicated with
respect to the weighted average lives, neither the Class R-LT Certificateholder
nor the Certificate Insurer nor the Surety Bond Provider exercises its right of
optional termination described above; (iv) each Mortgage Loan will pay interest
only for the first ten years from origination and will fully amortize thereafter
until maturity; (v) each Mortgage Loan will, as of the Cut-off Date, have the
applicable original term to maturity and the applicable remaining term to
maturity specified below; (vi) each Mortgage Loan bears interest at the
applicable current Mortgage Rate specified in the table below until the next
applicable Interest Adjustment Date and thereafter bears interest at the sum of
the applicable Index and Margin specified in the table below; (vii) there are no
losses or delinquencies on the Mortgage Loans; (viii) the Class A Certificates
are issued on March 21, 2000; (ix) the Distribution Date is the 22nd day of each
month commencing in April 2000; and (x) no Mortgage Loans are converted to fixed
rate Mortgage Loans and no Index Convertible Mortgage Loan is converted into a
new Index. No representation is made that the actual losses and delinquencies on
the Mortgage Loans will be experienced at the assumed rate or at any other rate.
In addition, the Mortgage Loans are assumed to have the following
characteristics:
<TABLE>
<CAPTION>
MONTHS TO
CUT-OFF DATE CURRENT NEXT INTEREST LEVEL OF INDEX ORIG.
INDEX AND FREQUENCY PRINCIPAL MORTGAGE ADJUSTMENT AFTER CURRENT REMAINING TERM
OF ADJUSTMENT BALANCE RATE DATE MORTGAGE RATE MARGIN TERM (MONTHS) (MONTHS)
- --------------------- ------------ -------- ------------- ------------- ------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
One-Month LIBOR Index $263,658,205 7.486% 1 5.99625% 1.731% 289 300
Six-Month LIBOR Index 21,949,679 7.745 1 6.35625 2.002 286 300
Six-Month LIBOR Index 21,551,919 7.823 2 6.35625 1.861 284 300
Six-Month LIBOR Index 13,603,214 8.068 3 6.35625 1.943 284 300
Six-Month LIBOR Index 28,588,841 7.841 4 6.35625 1.902 285 300
Six-Month LIBOR Index 19,275,163 7.842 5 6.35625 1.895 288 300
Six-Month LIBOR Index 15,374,219 7.501 6 6.35625 1.810 287 300
</TABLE>
Since the table was prepared on the basis of the assumptions in the
preceding paragraph, there will be discrepancies between the characteristics of
the actual Mortgage Loans and the characteristics of the Mortgage Loans assumed
in preparing the table. Any such discrepancy may have an effect upon the
percentages of the original Class A Principal Balance outstanding and the
weighted average life of the Class A Certificates set forth in the tables. In
particular, the Mortgage Rates are adjustable and will most likely vary from the
assumed interest rates, which may have a significant effect on the percentages
of the original Class A Principal Balance outstanding and the weighted average
life. In addition, since the actual Mortgage Loans in the Trust Fund have
characteristics which differ from those assumed in preparing the table set forth
below, the distributions of principal on the Class A Certificates may be made
earlier or later than as indicated in the table.
It is not likely that the Mortgage Loans will prepay at any constant CPR
to maturity or that all Mortgage Loans will prepay at the same rate. In
addition, the diverse remaining terms to maturity of the Mortgage Loans could
produce slower or faster distributions of principal than as indicated in the
related table at the various CPRs specified even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed above.
Investors are urged to make their investment decisions on a basis that
includes their determination of anticipated prepayment rates under a variety of
the assumptions discussed herein.
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<PAGE> 50
Based on the foregoing assumptions, the following table indicates the
resulting weighted average life of the Class A Certificates and sets forth the
percentage of the original Class A Principal Balance that would be outstanding
after each of the dates shown at the indicated CPR.
<TABLE>
<CAPTION>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE
OF THE CLASS A CERTIFICATES OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------------------------
DISTRIBUTION DATE 0% 5% 10% 15% 20% 25% 30%
- ----------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage .................. 100% 100% 100% 100% 100% 100% 100%
March 22, 2001 ...................... 100 95 90 85 80 75 70
March 22, 2002 ...................... 100 90 81 72 64 56 48
March 22, 2003 ...................... 100 86 73 61 51 42 34
March 22, 2004 ...................... 100 81 65 52 41 31 23
March 22, 2005 ...................... 100 77 59 44 32 23 16
March 22, 2006 ...................... 100 73 53 37 26 17 11
March 22, 2007 ...................... 100 70 47 32 20 13 8
March 22, 2008 ...................... 100 66 43 27 16 9 5
March 22, 2009 ...................... 100 63 38 23 13 7 3
March 22, 2010 ...................... 96 57 33 18 10 5 2
March 22, 2011 ...................... 92 52 29 15 7 3 1
March 22, 2012 ...................... 88 47 24 12 5 2 0
March 22, 2013 ...................... 83 42 21 9 4 1 0
March 22, 2014 ...................... 78 38 17 7 3 1 0
March 22, 2015 ...................... 73 34 14 6 2 0 0
March 22, 2016 ...................... 67 29 12 4 1 0 0
March 22, 2017 ...................... 61 25 10 3 1 0 0
March 22, 2018 ...................... 54 21 7 2 0 0 0
March 22, 2019 ...................... 46 17 6 1 0 0 0
March 22, 2020 ...................... 39 13 4 1 0 0 0
March 22, 2021 ...................... 30 10 3 0 0 0 0
March 22, 2022 ...................... 20 6 1 0 0 0 0
March 22, 2023 ...................... 10 3 0 0 0 0 0
March 22, 2024 ...................... 0 0 0 0 0 0 0
Weighted Average Life without
exercise of optional termination
(years)(1) ..................... 17.9 11.5 7.8 5.6 4.3 3.4 2.7
Weighted Average Life with exercise
of optional termination
(years)(1)(2) .................. 17.9 11.4 7.6 5.4 4.0 3.1 2.5
</TABLE>
- --------------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each net reduction by the number of years from
the date of the issuance of such Certificate to the related distribution
Date, (ii) adding the results and (iii) dividing the sum by the original
Principal Balance of such Certificate.
(2) The right of the Class R-LT Certificateholder to purchase the Mortgage
Loans or the Certificates, and of the Certificate Insurer or the Surety
Bond Provider to purchase the Mortgage Loans, when the Pool Principal
Balance (less the Principal Distribution Amount for the related
Distribution Date) is less than 20% (in the case of the Class R-LT
Certificateholder) or 10% (in the case of the Certificate Insurer or the
Surety Bond Provider) of the Cut-off Date Pool Balance as described
under "Description of the Certificates--Optional Termination". The
weighted average lives that assume the exercise of such option assume
that the option is exercised at the 10% threshold when it first becomes
exercisable by the Certificate Insurer or the Surety Bond Provider.
S-48
<PAGE> 51
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. No representation is made by any of
the Underwriters, the Depositor, the Seller, the Trustee, MLCC or any of their
affiliates as to the accuracy or completeness of any such information.
Ambac Assurance Corporation (the "CERTIFICATE INSURER"), in
consideration of the payment of the premium and subject to the terms of the
certificate guarantee insurance policy relating to the Class A Certificates (the
"CERTIFICATE INSURANCE POLICY"), unconditionally and irrevocably agrees to pay
to the Trustee for distribution to holders of the Class A Certificates in
accordance with the terms of the Agreement (as defined below) that portion of
Insured Amounts which shall become Due for Payment but shall be unpaid by reason
of Nonpayment. The Certificate Insurer's obligations under the Certificate
Insurance Policy with respect to a particular Insured Amount shall be finally
and completely discharged to the extent funds equal to the applicable Insured
Amount are received from the Certificate Insurer by the Trustee. The Certificate
Insurer is not responsible for the application of any Insured Amount subsequent
to the receipt thereof by the Trustee. Insured Amounts shall be paid only at the
time set forth in the Certificate Insurance Policy.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust Fund, the Upper-Tier REMIC, the Lower-Tier REMIC or the Trustee for
withholding taxes, if any (including interest and penalties in respect of any
such liability). The Certificate Insurance Policy does not protect against the
adverse consequences of, and does not guarantee, any specified rate of
prepayments nor protect against any risk other than Nonpayment, including
failure of the Trustee to make any Insured Payment due to holders of the Class A
Certificates. In addition, the Certificate Insurance Policy does not cover any
Net Interest Shortfalls in respect of the Class A Certificates or any Basis Risk
Carryover Amount.
The Certificate Insurer will pay in immediately available funds any
amount payable under the Certificate Insurance Policy (other than Preference
Amounts) from its own funds on the later of (a) the Business Day next following
the Business Day on which the Certificate Insurer receives a notice of
Nonpayment or (b) the applicable Distribution Date. Such payments shall be made
only upon presentation of an instrument in form and substance satisfactory to
the Certificate Insurer who shall be subrogated to all rights of the holders of
the Class A Certificates to payment on the Class A Certificates to the extent of
the Insured Payments so made. Once payments of the Insured Amounts have been
made to the Trustee, the Certificate Insurer shall have no further obligation in
respect of such Insured Amounts. Payment of Insured Amounts shall be made only
at the time set forth in the Certificate Insurance Policy and no acceleration of
Insured Amounts shall be made regardless of any acceleration of any of the Class
A Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Certificate Insurer of a certified copy of the order requiring the return of a
preference payment, and other documentation as is reasonably required by the
Certificate Insurer. This documentation shall be in a form satisfactory to the
Certificate Insurer, provided that if the documents are received after 12:00
noon New York City time on that Business Day, they will be deemed to be received
on the following Business Day.
As used in the Certificate Insurance Policy, the following terms have
the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of March
1, 2000, by and among the Depositor, the Master Servicer, the Seller and the
Trustee without regard to any amendment or supplement thereto without the prior
consent of the Certificate Insurer.
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<PAGE> 52
"BUSINESS DAY" means any day other than (i) a Saturday or a Sunday, (ii)
a legal holiday in the States of Florida, Maryland, Minnesota or New York or
(iii) any day on which banking or savings and loan institutions in the State of
Florida, the State of New York or the State in which the corporate trust office
of the Trustee is located are authorized or obligated by law or executive order
to be closed.
"DUE FOR PAYMENT" means, with respect to any Insured Amounts, such
amount that is due and payable under the Agreement on the related Distribution
Date.
"INSURED AMOUNT" means with respect to any Distribution Date, the
Required Payment for such Distribution Date (exclusive of any Net Interest
Shortfalls and Basis Risk Carryover Amounts).
"INSURED PAYMENT" means the aggregate amount actually paid by the
Certificate Insurer to the Trustee in respect of (i) Insured Amounts for a
Distribution Date and (ii) Preference Amounts for any given Business Day.
"NONPAYMENT" means, with respect to any Distribution Date, an Insured
Amount which is Due for Payment but has not and will not be paid in respect of
such Distribution Date pursuant to the Agreement.
"PREFERENCE AMOUNT" means any payment of principal or interest on any
Class A Certificate which has become Due for Payment, the nonpayment of which
would have been covered by the Certificate Insurance Policy, and that has been
made to a holder of the Class A Certificates, by or on behalf of the Trustee
which has been deemed a preferential transfer and theretofore recovered from its
registered owner pursuant to the United States Bankruptcy Code in accordance
with a final, nonappealable order of a court of competent jurisdiction.
"REQUIRED PAYMENT" means, with respect to the Class A Certificates and
any Distribution Date, the sum of:
(a) the amount, if any, by which (x) the aggregate of the full
amounts (exclusive of any Net Interest Shortfall or Basis Risk Carryover
Amount for such Distribution Date) due to be distributed to the Class A
Certificateholders pursuant to clauses (ii) and (iii) in the fourth
paragraph under "Description of the Certificates - Distributions on the
Certificates" above exceeds (y) the amount of funds (exclusive of funds
representing the Insured Payment in respect of such Distribution Date)
that will be on deposit in the Distribution Account in respect of such
Distribution Date and available to be distributed on the Class A
Certificates, after taking into account all deposits to be made to the
Distribution Account on or prior to such Distribution Date, including
without limitation all Monthly Advances and payments under the Limited
Purpose Surety Bond; and
(b) on the Distribution Date in April 2025, the amount, if any,
necessary to reduce the Class A Principal Balance to zero (after giving
effect to all other distributions of principal to be made on such
Distribution Date in respect of the Class A Certificates).
The Certificate Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
S-50
<PAGE> 53
The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly AMBAC, Inc.), a 100% publicly-held
company. Moody's, Standard & Poor's and Fitch IBCA, Inc. have each assigned a
triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 1998 and December 31, 1997, and for each of the
years in the three-year period ended December 31, 1998, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. (which was filed with the Securities
and Exchange Commission (the "COMMISSION") on March 30, 1999; Commission File
No. 1-10777), the unaudited consolidated financial statements of the Certificate
Insurer and subsidiaries as of December 31, 1999 and for the periods ending
September 30, 1999 and September 30, 1998, included in the Quarterly Report on
Form 10-Q of Ambac Financial Group, Inc. for the period ended September 30, 1999
(which was filed with the Commission on November 12, 1999) and the unaudited
interim financial statements and accompanying discussion of Ambac Financial
Group, Inc. as of December 31, 1999 and for the periods ending December 31, 1999
and December 31, 1998 contained in the press release issued on January 26, 2000
included in the Form 8-K of Ambac Financial Group, Inc. (which was filed with
the Commission on January 27, 2000), are hereby incorporated by reference into
this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated herein by reference shall be
modified or superseded for the purposes of this Prospectus Supplement to the
extent that a statement contained herein by reference herein also modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the
date of this Prospectus Supplement and prior to the termination of the offering
of the Class A Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and
September 30, 1999, respectively, in conformity with generally accepted
accounting principles.
S-51
<PAGE> 54
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums .................................... $ 995 $ 1,184 $ 1,303 $ 1,376
Other liabilities .................................... 259 562 548 465
------- ------- ------- -------
$ 1,254 $ 1,746 $ 1,851 $ 1,841
------- ------- ------- -------
Stockholder's equity (1)
Common stock ................................ $ 82 $ 82 $ 82 $ 82
Additional paid-in capital .................. 515 521 541 643
Accumulated other comprehensive income (loss) 66 118 138 (23)
Retained earnings ........................... 992 1,180 1,405 1,600
------- ------- ------- -------
Total stockholder's equity ........................... 1,655 1,901 2,166 2,302
------- ------- ------- -------
Total liabilities and stockholder's equity ........... $ 2,909 $ 3,647 $ 4,017 $ 4,143
======= ======= ======= =======
</TABLE>
- -------------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Certificate Insurer
effective January 1, 1998. As this new standard only requires additional
information in the financial statements, it does not affect the
Certificate Insurer's financial position or results of operations.
For additional financial information concerning the Certificate Insurer,
see the audited and unaudited financial statements of the Certificate Insurer
incorporated by reference herein. Copies of the financial statements of the
Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1998
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the insurer's
administrative offices and its telephone number are One State Street Plaza, 19th
Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the
Certificates or the advisability of investing in the Certificates and makes no
representation regarding, nor has it participated in the preparation of, the
Prospectus or the Prospectus Supplement other than the information supplied by
the Certificate Insurer and presented under the heading "The Certificate
Insurance Policy and the Certificate Insurer" and in the financial statements
incorporated herein by reference.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Fund (exclusive of the rights
in respect of the Additional Collateral and the Carryover Reserve Fund) will
consist of two segregated asset pools (the "UPPER-TIER REMIC" and the
"LOWER-TIER REMIC"), the first of which shall consist of the Mortgage Loans and
the second of which shall consist of the regular interests in the Lower-Tier
REMIC. Elections will be made to treat each pool as a separate "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. The
Class A Certificates, Class B Certificates and Class C Certificates will be
designated as "regular interests" in the Upper-Tier REMIC, the Class R-UT
Certificates will represent the "residual interest" in the Upper-Tier REMIC and
the Class R-LT Certificates will represent the "residual interest" in the
Lower-Tier REMIC.
S-52
<PAGE> 55
In addition, the Class A Certificates and Class B Certificates will
represent a beneficial interest in the right to receive payments from the
Carryover Reserve Fund pursuant to the provisions of the Agreement. Due to their
entitlement to such payments, the Class A Certificates and Class B Certificates
will be treated as also representing beneficial interests in contractual rights
that would either be treated for United States federal income tax purposes as an
interest rate cap agreement (the "INTEREST RATE CAP AGREEMENT") as a notional
principal contract or as an interest in an entity taxable as a partnership with
the Class C Certificates in respect of each Class C Certificates' entitlement to
interest for federal income tax purposes. In the event that the rights of the
Class A Certificates and Class B Certificates to Basis Risk Carryover Amounts
are treated as representing beneficial interests in an entity taxable as a
partnership for federal income tax purposes, such Certificateholders may be
subject to different tax timing consequences and withholding on such amounts
with respect to holders of the Class A Certificates and Class B Certificates who
are non-U.S. Persons. Prospective investors in the Class A and Class B
Certificates should consult their tax advisors regarding the tax treatment of
the rights of the holders of such Certificates to Basis Risk Carryover Amounts.
A holder of a Class A or Class B Certificate must allocate its purchase
price for such Certificate between its two components - the REMIC regular
interest component and the Interest Rate Cap Agreement component or the
partnership interest component, as applicable. For information reporting
purposes, the Trustee will assume that, with respect to any Class A or Class B
Certificate, the Interest Rate Cap Agreement component or the partnership
interest component, as applicable, will have only nominal value relative to the
value of the regular interest component. The IRS could argue, however, that the
Interest Rate Cap Agreement component or the partnership interest component, as
applicable, has significant value, and if that argument were to be sustained,
the regular interest component could be viewed as having been issued with an
additional amount of original issue discount ("OID") (which could cause the
total amount of discount to exceed a statutorily defined de minimis amount). See
"Material Federal Income Tax Consequences - REMICs" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class A or Class B
Certificate, the holder must allocate the amount realized between the two
components of the Class A or Class B Certificate based on the relative fair
market values of those components at the time of sale. Assuming that a Class A
or Class B Certificate is held as a "capital asset" within the meaning of
section 1221 of the Code, gain or loss on the disposition of an interest in the
Interest Rate Cap Agreement component or the partnership interest component, as
applicable, should be capital gain or loss, and, gain or loss on the disposition
of the regular interest component should, subject to the limitation described
below, be capital gain or loss. Except as described above with respect to market
discount, and except as provided in this paragraph, any gain or loss on the sale
or exchange of a Class A or Class B Certificate realized by an investor who
holds such Certificate as a capital asset will be gain or loss and will be
long-term or short-term depending on whether the Certificate has been held for
the long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if the Certificate is held as part
of a "conversion transaction" as described in Code Section 1258(c), up to the
amount of interest that would have accrued on the holder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate under
Code Section 1274(d) in effect at the time the holder entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount that
would have been includable in the gross income of the holder if its yield on
such Certificate were 110% of the applicable Federal rate as of the date of
purchase, over (b) the amount of income actually includable in the gross income
of such holder with respect to such Certificate. In addition, gain or loss
recognized from the sale of a Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Long-term capital gains of certain non-
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<PAGE> 56
corporate taxpayers are subject to a lower minimum tax rate than ordinary income
of such taxpayers for property held for more than one year. The maximum tax rate
for corporations is the same with respect to both ordinary income and capital
gains.
The following discussion assumes that the right of each of the holders
of the Class A and Class B Certificates to receive payments from the Carryover
Reserve Fund will be treated as an interest rate cap agreement for federal
income tax purposes. As indicated above, a portion of the purchase price paid by
a holder to acquire a Class A or Class B Certificate will be attributable to the
Interest Rate Cap Agreement component of such Certificate. The portion of the
overall purchase price attributable to the Interest Rate Cap Agreement component
must be amortized over the life of a Class A or Class B Certificate, taking into
account the declining balance of the related Regular Interest component.
Treasury regulations concerning notional principal contracts provide alternative
methods for amortizing the purchase price of an interest rate cap contract.
Under one method - the level yield constant interest method - the price paid for
an interest rate cap agreement is amortized over the life of the cap as though
it were the principal amount of a loan bearing interest at a reasonable rate.
Holders are urged to consult their tax advisors concerning the methods that can
be employed to amortize the portion of the purchase price paid for the Interest
Rate Cap Agreement component of a Class A or Class B Certificate.
Any payments made to a holder of a Class A or Class B Certificate from
the Carryover Reserve Fund, will be treated as periodic payments on an interest
rate cap agreement. To the extent the sum of such periodic payments for any year
exceed that year's amortized cost of the Interest Rate Cap Agreement component,
such excess is ordinary income. If for any year the amount of that year's
amortized cost exceeds the sum of the periodic payments, such excess is
allowable as an ordinary deduction.
In general, as a result of the qualification of the Class A and Class B
Certificates as regular interests in a REMIC, the regular interest component of
the Class A and Class B Certificates will be treated as (i) assets described in
Section 7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the
"CODE") and (ii) "real estate assets" under Section 856(c)(4)(A) of the Code, in
the same proportion that the assets of the Trust Fund, exclusive of the
Carryover Reserve Fund, would be so treated. The Interest Rate Cap Agreement
component or the partnership interest component, as applicable, of the Class A
and Class B Certificates will not be treated as assets described in Section
7701(a)(19)(C) of the Code or "real estate assets" under Section 856(c)(4)(A) of
the Code.
The Class A and Class B Certificates may be treated as having been
issued with original issue discount. The prepayment assumption that will be used
for purposes of computing original issue discount, if any, for federal income
tax purposes is a CPR of 20%. No representation is made that the Mortgage Loans
will, in fact, prepay at this or any other rate.
President Clinton's Fiscal Year 2001 Budget Proposal contains a
provision under which a REMIC would be secondarily liable for the tax liability
of its residual interest holders with respect to such residual interest. The
proposal would be effective for REMICs created after the date of enactment. It
is unknown whether this provision will be included in any bill introduced to
Congress this year or, if introduced, whether it will be enacted. Prospective
investors in REMIC residual interests should consult their tax advisors
regarding the Fiscal Year 2001 Budget Proposal.
See "Material Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes requirements on employee benefit plans subject to ERISA (and
on certain other retirement plans and
S-54
<PAGE> 57
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds, separate accounts and other entities in
which such plans, accounts or arrangements are invested subject to the
requirements of ERISA and/or the Code) (collectively, "PLANS") and on persons
who are fiduciaries with respect to such Plans. See "ERISA Considerations" in
the Prospectus.
The U.S. Department of Labor (the "DOL") has granted to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, one of the Underwriters, an administrative
exemption (Prohibited Transaction Exemption 90-29, Exemption Application No.
D-8012, Fed. Reg. 21459 (1990)) (the "EXEMPTION") from certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption.
The receivables covered by the Exemption apply to mortgage loans such as the
Mortgage Loans in the Trust Fund. The Exemption will apply to the acquisition,
holding and resale of the Class A Certificates by a Plan, provided that specific
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
to the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinate to the rights and
interests evidenced by other certificates of the Trust Fund;
(3) The Class A 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 either Standard & Poor's,
Moody's, Duff & Phelps Inc. or Fitch IBCA, Inc. (each, a "RATING
AGENCY");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in
connection with the distribution of the Class A Certificates represents
not more than reasonable compensation for underwriting the Class A
Certificates. The sum of all payments made to and retained by the
Depositor pursuant to the sale of the Class A Certificates to the Trust
Fund represents not more than the fair market value of such Mortgage
Loans. The sum of all payments made to and retained by the Master
Servicer represents 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 Class A 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.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest prohibited transactions that may arise when a
Plan fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which the fiduciary (or its affiliate) is an obligor only if,
among other requirements, (i) in the case of the acquisition of Class A
Certificates in connection with the initial
S-55
<PAGE> 58
issuance, at least fifty (50) percent of the Class A Certificates are acquired
by persons independent of the Restricted Group (as defined below), (ii) the
Plan's investment in Class A Certificates does not exceed twenty-five (25)
percent of all of the Class A Certificates outstanding at the time of the
acquisition, (iii) immediately after the acquisition, no more than twenty-five
(25) percent of the assets of any Plan for which the fiduciary has discretionary
authority or renders investment advice are invested in certificates representing
an interest in one or more trusts containing assets sold or serviced by the same
entity, and (iv) the fiduciary or its affiliate is an obligor with respect to
obligors representing five (5) percent or less of the fair market value of the
obligations in the trust. The Exemption does not apply to Plans sponsored by the
Depositor, any Underwriter, the Trustee, the Master Servicer, any obligor with
respect to Mortgage Loans included in the Trust Fund constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Trust Fund, or any affiliate of such parties (the "RESTRICTED GROUP").
The Depositor believes that the Exemption will apply to the acquisition
and holding by Plans of the Class A Certificates sold by the Underwriters and
that all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, there is no obligor
with respect to Mortgage Loans included in the Trust Fund constituting more than
five percent of the aggregate unamortized principal balance of the assets of the
Trust Fund.
Employee benefit plans that are governmental plans (as defined in
section 3(32) of ERISA) and certain church plans (as defined in section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such plans
may be invested in the Class A Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other federal
and state laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
Class A Certificates. Assets of a Plan or individual retirement account should
not be invested in the Class A Certificates unless it is clear that the assets
of the Trust Fund will not be plan assets or unless it is clear that the
Exemption or another applicable prohibited transaction exemption will apply and
exempt all potential prohibited transactions.
LEGAL INVESTMENT CONSIDERATIONS
So long as the Class A Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
agency, the Class A Certificates will constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as
such, will be "legal investments" for certain types of institutional investors
to the extent provided in SMMEA. See "Legal Investment" in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Class A Certificates will be applied by the Depositor to the purchase price
of the Mortgage Loans from the Seller and expenses connected with pooling the
Mortgage Loans and issuing the Certificates.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "UNDERWRITING AGREEMENT") relating to the Class A Certificates,
the Depositor has agreed to cause the Trust Fund to sell the Class A
Certificates to the underwriters named below (the "UNDERWRITERS"), and the
Underwriters
S-56
<PAGE> 59
have severally agreed to purchase the following principal amounts of Class A
Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITERS PRINCIPAL AMOUNT OF CERTIFICATES
------------ --------------------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated .. $ 95,161,000
Bear, Stearns & Co. Inc. ............................ $ 95,000,000
Greenwich Capital Markets, Inc. ..................... $ 95,000,000
Morgan Stanley & Co. Incorporated ................... $ 95,000,000
------------
Total $380,161,000
</TABLE>
The Class A Certificates may be distributed from time to time in one or
more negotiated transactions or otherwise at varying prices to be determined, in
each case, at the time of sale. Proceeds to the Depositor from the sale of the
Class A Certificates are expected to be approximately 99.8125% of the initial
principal amount of the Class A Certificates, before deducting expenses payable
by the Depositor. The Underwriters may effect such transactions by selling the
Class A Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriters. In connection with the sale of the Class A Certificates,
each Underwriter may be deemed to have received compensation from the Depositor
in the form of underwriting compensation. Each Underwriter and any dealers that
participate with any Underwriter in the distribution of the Class A Certificates
may be deemed to be underwriters and any commissions received by them and any
profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement and certain indemnity letters provide that
the Depositor, the Seller, RWT Holdings and Redwood Trust, Inc. will indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriters may be
required to make in respect thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
Underwriters have no obligation to make a secondary market in the Class A
Certificates. Any such market-making by an Underwriter may be discontinued by it
at any time without notice, in its sole discretion. The Class A Certificates
will not be listed on any securities exchange.
Immediately prior to the sale of the Mortgage Loans to the Depositor,
certain of the Mortgage Loans were subject to financing provided by an affiliate
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the Underwriters.
A portion of the proceeds from the sale of the Mortgage Loans to the Depositor
will be applied to repay the financing.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the
Underwriters, is an affiliate of the Depositor and MLCC.
After the initial distribution of the Class A Certificates by the
Underwriters, this Prospectus Supplement and Prospectus may be used by Merrill
Lynch, Pierce, Fenner & Smith Incorporated in connection with offers and sales
relating to market-making transactions in the Class A Certificates. Merrill
Lynch, Pierce, Fenner & Smith Incorporated may act as principal or agent in such
transactions. Such sales will be made at prices related to prevailing market
prices at the time of sale.
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EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation and subsidiaries, as of December 31, 1998 and 1997 and for
each of the years in the three year period ended December 31, 1998 have been
incorporated by reference herein and in the Depositor's registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Brown &
Wood LLP, New York, New York and for the Underwriters by Thacher Proffitt &
Wood, New York, New York. The material federal income tax consequences of the
Certificates will be passed upon for the Depositor by Giancarlo and Gnazzo, A
Professional Corporation, San Francisco, California. Certain legal matters will
be passed upon for the Seller by Tobin & Tobin, a professional corporation, San
Francisco, California.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated AAAr by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("STANDARD & POOR'S") and Aaa by Moody's Investors Service, Inc.
("MOODY'S"). Standard & Poor's assigns the additional symbol of "r" to highlight
classes of securities that Standard & Poor's believes may experience high
volatility or high variability in expected returns due to non-credit risks;
however, the absence of an "r" symbol should not be taken as an indication that
a class will exhibit no volatility or variability in total return. The "r"
component of a Standard & Poor's' rating indicates that the rating of the
securities does not represent any assessment of MLCC's (or other repurchasing
obligor's) ability to repurchase Mortgage Loans that convert to a fixed rate.
The ratings of Standard & Poor's and Moody's do not represent any
assessment of the ability of the Class R-LT Certificateholder or MLCC to
purchase any converting Mortgage Loan. If MLCC fails to purchase a converting
Mortgage Loan that has converted to a fixed interest rate pursuant to the Master
Mortgage Loan Purchase Agreement, investors in the Class A Certificates might
experience a lower than anticipated yield. 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 rating agency. The ratings assigned to the Class A
Certificates address the likelihood of the receipt of distributions due on the
Class A Certificates according to their terms. The ratings take into
consideration, among other things, the credit quality of the Mortgage Loans, the
structural and legal aspects associated with the Class A Certificates, and the
financial strength of the Certificate Insurer. An adverse change in any of such
factors or in other factors may be a basis for the downward revision or
withdrawal of the rating of the Class A Certificates. The ratings assigned to
the Class A Certificates do not represent any assessment of the likelihood that
principal prepayments might differ from those originally anticipated. The rating
does not address the possibility that the holders of the Class A Certificates
might suffer a lower than anticipated yield or the likelihood or frequency of
payment of any Basis Risk Carryover Amounts. There can be no assurance as to
whether any other rating agency will rate the Class A Certificates, or if it
does, what rating it will assign to the Class A Certificates.
S-58
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INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1934 Act................................................................................................S-41
Accrual Period..........................................................................................S-31
Additional Collateral...................................................................................S-22
Additional Collateral Loans.......................................................................S-13, S-22
Adjusted Class A Principal Distribution Amount..........................................................S-33
Agreement.........................................................................................S-11, S-49
Available Distribution Amount...........................................................................S-31
Basis Risk Carryover Amount.............................................................................S-38
Business Day............................................................................................S-50
Capped Amount...........................................................................................S-31
Carryover Reserve Fund..................................................................................S-38
Carryover Reserve Fund Deposit..........................................................................S-39
Cede ...................................................................................................S-30
Certificate Account.....................................................................................S-11
Certificate Insurance Policy............................................................................S-49
Certificate Insurer.....................................................................................S-49
Certificate Owners......................................................................................S-41
Certificates............................................................................................S-30
Class A Pass-Through Rate...............................................................................S-33
Class A Principal Balance...............................................................................S-34
Class A Principal Distribution Amount...................................................................S-34
Class A Unpaid Interest Shortfall.......................................................................S-32
Class B Loss Amount.....................................................................................S-34
Class B Pass-Through Rate...............................................................................S-33
Class B Principal Balance...............................................................................S-34
Class B Principal Distribution Amount...................................................................S-34
Clearstream.............................................................................................S-42
Clearstream Participants................................................................................S-42
Closing Date............................................................................................S-13
Code ...................................................................................................S-54
Commission..............................................................................................S-51
Constructive Loan-to-Value Ratio........................................................................S-19
Cooperatives............................................................................................S-11
CPR ....................................................................................................S-46
Cut-off Date............................................................................................S-13
Cut-off Date Pool Balance...............................................................................S-13
Defective Mortgage Loan.................................................................................S-18
Definitive Class A Certificates.........................................................................S-42
Deleted Mortgage Loan...................................................................................S-19
Depositaries............................................................................................S-41
Determination Date......................................................................................S-31
Distribution Account....................................................................................S-11
Distribution Date.......................................................................................S-30
DOL ....................................................................................................S-55
DTC ....................................................................................................S-30
DTI ....................................................................................................S-21
Due Date................................................................................................S-11
Due for Payment.........................................................................................S-50
ERISA ..................................................................................................S-54
Euroclear...............................................................................................S-43
Euroclear Cooperative...................................................................................S-43
Euroclear Operator......................................................................................S-43
Euroclear Participants..................................................................................S-43
Excess Cash Flow Principal Amount.......................................................................S-34
Exemption...............................................................................................S-55
Expense Fee Rate........................................................................................S-34
Floor Amount............................................................................................S-35
Global Securities........................................................................................I-1
Index ..................................................................................................S-24
Index Convertible Mortgage Loans........................................................................S-12
Insured Amount..........................................................................................S-50
Insured Payment.........................................................................................S-50
Interest Adjustment Date................................................................................S-11
Interest Rate Cap Agreement.............................................................................S-53
LIBOR ..................................................................................................S-37
LIBOR Business Day......................................................................................S-37
Limited Purpose Surety Bond.............................................................................S-23
Liquidated Mortgage Loan................................................................................S-35
Lower-Tier REMIC........................................................................................S-52
LTV ....................................................................................................S-21
Margin..................................................................................................S-11
Master Mortgage Loan Purchase Agreement.................................................................S-12
Master Servicer.........................................................................................S-11
Master Servicing Agreement..............................................................................S-27
Maximum Mortgage Rate...................................................................................S-12
ML & Co.................................................................................................S-19
MLCC ...................................................................................................S-11
Monthly Advance.........................................................................................S-29
Monthly Payments........................................................................................S-11
Moody's.................................................................................................S-58
Mortgage................................................................................................S-18
Mortgage 100SM Loans....................................................................................S-22
Mortgage File...........................................................................................S-18
Mortgage Loan Purchase Agreement........................................................................S-18
Mortgage Loans..........................................................................................S-11
Mortgage Note...........................................................................................S-11
Mortgage Pool...........................................................................................S-11
Mortgage Rate...........................................................................................S-11
</TABLE>
S-59
<PAGE> 62
<TABLE>
<S> <C>
Mortgaged Properties....................................................................................S-11
Mortgagor...............................................................................................S-12
Net Interest Shortfall..................................................................................S-35
Net Mortgage Rate.......................................................................................S-35
Net Prepayment Interest Shortfall.......................................................................S-29
Net WAC Cap.............................................................................................S-38
Nonpayment..............................................................................................S-50
OID ....................................................................................................S-53
One-Month LIBOR Index..............................................................................S-2, S-11
Outstanding Mortgage Loan...............................................................................S-35
Parent Power(R)Loans....................................................................................S-22
Participants............................................................................................S-41
Percentage Interest.....................................................................................S-30
Plans ..................................................................................................S-55
Pool Principal Balance..................................................................................S-35
Preference Amount.......................................................................................S-50
Prepayment Interest Shortfall...........................................................................S-29
Prime Index........................................................................................S-2, S-12
Principal Balance.......................................................................................S-35
Principal Distribution Amount...........................................................................S-35
Principal Prepayment Period.............................................................................S-35
Purchase Price..........................................................................................S-19
Rating Agency...........................................................................................S-55
Realized Loss...........................................................................................S-36
Record Date.............................................................................................S-30
Reference Banks.........................................................................................S-37
Relief Act Reduction....................................................................................S-36
REMIC ..................................................................................................S-52
REO Property............................................................................................S-36
Replacement Mortgage Loan...............................................................................S-19
Required Payment........................................................................................S-50
Restricted Group........................................................................................S-56
RWT Holdings............................................................................................S-18
Seller..................................................................................................S-11
Serious Delinquencies...................................................................................S-36
Servicing Fee...........................................................................................S-28
Six-Month LIBOR Index..............................................................................S-2, S-11
SMMEA ..................................................................................................S-56
Standard & Poor's.......................................................................................S-58
Step-Down Date..........................................................................................S-36
Surety Bond Provider....................................................................................S-23
Telerate Page 3750......................................................................................S-37
Terms and Conditions....................................................................................S-43
Treasury Index.....................................................................................S-2, S-12
Trigger Event...........................................................................................S-36
Trust Fund..............................................................................................S-11
Trustee.................................................................................................S-11
U.S. Person..............................................................................................I-4
Underwriters............................................................................................S-56
Underwriting Agreement..................................................................................S-56
Unreimbursed Insurer Amounts............................................................................S-32
Upper-Tier REMIC........................................................................................S-52
Weighted Average Net Mortgage Rate......................................................................S-37
</TABLE>
S-60
<PAGE> 63
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust 4, Mortgage Loan Asset Backed Pass-Through Certificates, Class A
(the "GLOBAL SECURITIES") will be available only in book entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
Clearstream, 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. Capitalized terms used
but not defined in this Annex I have the meanings assigned to them in the
Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice. Secondary market trading between investors
holding interests in 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 investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC Participants will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear (in such capacity) and other DTC Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Trustee
will have any responsibility for the performance by DTC, Euroclear and
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
obligations.
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
The Global Securities will be registered 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. Clearstream and Euroclear will hold positions on
behalf of their participants through their respective depositories, which in
turn will hold such positions in accounts as DTC Participants.
Investors electing to hold interests in Global Securities through DTC
Participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in Global Securities through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there
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<PAGE> 64
will be no temporary global security and no "lock-up" or restricted period.
Interests in 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.
Transfers between DTC Participants. Secondary market trading between DTC
Participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
Transfers between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants and/or
investors holding interests in Global Securities through them will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Transfers between DTC seller and Clearstream or Euroclear purchaser.
When interests in Global Securities are to be transferred on behalf of a seller
from the account of a DTC Participant to the account of a Clearstream
Participant or a Euroclear Participant for a purchaser, the purchaser will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
or the Euroclear Operator will instruct its respective depository to receive an
interest in the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last distribution date
to but excluding the settlement date. Payment will then be made by the
respective depository to the DTC Participant's account against delivery of an
interest in the Global Securities. After such settlement has been completed,
such interest will be credited to the respective clearing system, and by the
clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The credit of such interest
will appear on the next business day and the cash debit will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed through DTC on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debit will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement from cash on hand, in which case such Clearstream
Participants or Euroclear Participants will take on credit exposure to
Clearstream or the Euroclear Operator until interests in the Global Securities
are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear Operator has extended
a line of credit to them, Clearstream Participants or Euroclear Participants can
elect not to pre-position funds and allow that credit line to be drawn upon.
Under this procedure, Clearstream Participants or Euroclear Participants
receiving interests in Global Securities for purchasers would incur overdraft
charges for one day, to the extent they cleared the overdraft when interests in
the Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, the investment
income on the interest in the Global Securities earned during that one-day
period would tend to offset the amount of such overdraft charges, although this
result will depend on each Clearstream Participant's or Euroclear Participant's
particular cost of funds.
I-2
<PAGE> 65
Since the settlement through DTC will take place during New York
business hours, DTC Participants are subject to DTC procedures for transferring
interests in Global Securities to the respective depository of Clearstream or
Euroclear for the benefit of Clearstream Participants or Euroclear Participants.
The sale proceeds will be available to the DTC seller on the settlement date.
Thus, to the seller settling the sale through a DTC Participant, a cross-market
transaction will settle no differently than a sale to a purchaser settling
through a DTC Participant.
Finally, intra-day traders that use Clearstream Participants or
Euroclear Participants to purchase interests in Global Securities from DTC
Participants or sellers settling through them for delivery to Clearstream
Participants or Euroclear Participants should note that these trades will
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be available to eliminate this potential condition:
(a) borrowing interests in Global Securities through Clearstream or
Euroclear for one day (until the purchase side of the intra-day trade is
reflected in the relevant Clearstream or Euroclear accounts) in accordance with
the clearing system's customary procedures;
(b) borrowing interests in Global Securities in the United States from a
DTC Participant no later than one day prior to settlement, which would give
sufficient time for such interests, to be reflected in the relevant Clearstream
or Euroclear accounts 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 Clearstream Participant or
Euroclear Participant.
Transfers between Clearstream or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
interests in Global Securities are to be transferred by the respective clearing
system, through the respective depository, to a DTC Participant. The seller will
send instructions to Clearstream or the Euroclear Operator through a Clearstream
Participant or Euroclear Participant at least one business day prior to
settlement. Clearstream or Euroclear will instruct its respective depository, to
credit an interest in 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 distribution date to but excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Participant or Euroclear Participant the following business day, and receipt of
the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred through DTC in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), receipt of the
cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the United States) 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:
I-3
<PAGE> 66
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
Owners of Certificates that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on Form W-8 changes, a
new Form W-8 or Form W-8BEN must be filed within 30 days of such change. After
December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form
4224 or Form W-8ECI). 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) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding 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 or Form W-8BEN). Non-U.S. Persons that are Beneficial
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) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If Form 1001 is provided and 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 Beneficial Owner or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
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 Beneficial 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, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
The term "U.S. PERSON" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership or other entity treated as a
corporation or partnership for federal income tax purposes created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia or (iii) an estate the income of which is includable in gross income
for United States tax purposes, regardless of its source or (iv) a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. This summary does
not deal with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
I-4
<PAGE> 67
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
The securities of each series will not represent an obligation of or interest in
the depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, any master
servicer, any sub-servicer or any of their respective affiliates, except to the
limited extent described herein and in the related prospectus supplement.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
THE SECURITIES
Merrill Lynch Mortgage Investors, Inc., as depositor, will sell the
securities, which may be in the form of asset backed certificates or asset
backed notes. Each issue of securities will have its own series designation and
will evidence either:
- - ownership interests in certain assets in a trust fund or
- - debt obligations secured by certain assets in a trust fund.
- - Each series of securities will consist of one or more classes. Each class of
securities will represent the entitlement to a specified portion of future
interest payments and a specified portion of future principal payments on the
assets in the related trust fund. In each case, the specified portion may equal
from 0% to 100%. A series may include one or more classes of securities that are
senior in right of payment to one or more other classes. One or more classes of
securities may be entitled to receive distributions of principal, interest or
both prior to one or more other classes, or before or after certain specified
events have occurred. The related prospectus supplement will specify each of
these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
- - one or more segregated pools of various types of mortgage loans and/or
closed-end and/or revolving home equity loans (or certain balances of these
loans), in each case secured by first and/or junior liens on one- to five-family
residential properties, or security interests in shares issued by cooperative
housing corporations, including mixed residential and commercial structures;
- - home improvement installment sales contracts or installment loan agreements
originated by a home improvement contractor and secured by a mortgage on the
related mortgaged property that is junior to other liens on the mortgaged
property; and
- - mortgage pass-through certificates or mortgage-backed securities evidencing
interests in mortgage loans or secured thereby or certain direct obligations of
the United States, agencies thereof or agencies created thereby.
Each trust fund may be subject to early termination in certain
circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities are made through Merrill Lynch, Pierce, Fenner
& Smith Incorporated and the other underwriters listed in the related prospectus
supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MERRILL LYNCH & CO.
The date of this Prospectus is January 27, 2000.
<PAGE> 68
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the
following documents:
- this prospectus, which provides general information, some of
which may not apply to a particular series; and
- the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that
series. If the prospectus supplement contains information about
a particular series that differs from the information contained
in this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
- the principal amount, interest rate and authorized denominations
of each class of securities;
- information concerning the mortgage loans, home improvement
contracts and/or securities in the related trust fund;
- information concerning the seller or sellers of the mortgage
loans, home improvement contracts and/or securities and
information concerning any servicer;
- the terms of any credit enhancement with respect to particular
classes of the securities;
- information concerning other trust fund assets, including any
reserve fund;
- the final scheduled distribution date for each class of
securities;
- the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority
of principal payments;
- information about any REMIC or FASIT tax elections for some or
all of the trust fund assets; and
- particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, and our telephone number is (212) 449-0357.
For other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 93 of this prospectus.
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RISK FACTORS
You should consider the following information carefully, since it identifies
certain significant sources of risk associated with an investment in the
securities.
THERE IS A RISK THAT THE SECURITIES WILL HAVE LIMITED LIQUIDITY.
At the time a series of securities is issued, there will not be a
secondary market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated
currently expects to make a secondary market in the offered securities, but it
is not required to. We cannot assure you that a secondary market for the
securities of any series will develop or, if it does develop, that it will
provide holders of those securities with liquidity of investment or will
continue while those securities remain outstanding.
THERE IS A RISK ASSOCIATED WITH LIMITED ASSETS AND THAT THOSE ASSETS WILL NOT BE
SUFFICIENT TO PAY THE SECURITIES IN FULL.
- - 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
securing them will be the obligations (if any) of any "warranting party"
(as further described in this prospectus) pursuant to certain limited
representations and warranties made with respect to the mortgage loans,
the master servicer's and any sub-servicer's servicing obligations under
the related agreements (including the limited obligation to make certain
advances in the event of delinquencies on the mortgage loans, but only
to the extent they deem such advances recoverable) and, if described in
the related prospectus supplement, certain limited obligations of the
master servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible adjustable-rate mortgage
loan (as more fully described in this prospectus) upon conversion to a
fixed rate or a different index.
- - Since certain representations and warranties with respect to the
mortgage assets may have been made and/or assigned in connection with
transfers of the mortgage assets prior to the closing date, the rights
of the trustee and the securityholders with respect to such
representations or warranties will be limited to their rights as an
assignee thereof.
- - 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 these 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 these securities, no other
assets will be available for payment of the deficiency. Additionally,
certain amounts remaining in certain funds or accounts, including the
collection account and any accounts maintained as credit support, may be
withdrawn under certain conditions, as described in the related
prospectus supplement. In the event of such withdrawal, such amounts
will not be available for future payment of principal of or interest on
the securities.
- - If provided in the prospectus supplement for a series of securities
consisting of one or more classes of subordinate securities, on
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any distribution date in respect of which losses or shortfalls in
collections on the assets have been incurred, the amount of such losses
or shortfalls will be borne first by one or more classes of the
subordinate securities, and, thereafter, by the remaining classes of
securities in the priority and manner and subject to the limitations
specified in that prospectus supplement.
We refer you to "Description of the Trust Funds" for further information.
THERE IS A RISK THAT PREPAYMENTS ON THE ASSETS IN A TRUST FUND WILL ADVERSELY
AFFECT THE AVERAGE LIFE AND YIELDS OF THE RELATED SECURITIES.
- - Prepayments (including those caused by defaults) on the assets in any
trust fund generally will result in a faster rate of principal payments
on one or more classes of the related securities than if payments on
these assets were made as scheduled. Thus, the prepayment experience on
the assets may affect the average life of each class of related
securities. The rate of principal payments on pools of mortgage loans
varies between pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax, legal and other factors.
We can't assure you as to the rate of prepayment on the assets in any
trust fund or that the rate of payments will conform to any model we
describe here or in any prospectus supplement. If prevailing interest
rates fall significantly below the applicable mortgage interest rates,
principal prepayments are likely to be higher than if prevailing rates
remain at or above the rates borne by the mortgage loans underlying or
comprising the mortgage assets in any trust fund. As a result, the
actual maturity of any class of securities evidencing an interest in a
trust fund containing mortgage assets could occur significantly earlier
than expected.
- - A series of securities may include one or more classes of securities
with priorities of payment and, as a result, yields on other classes of
securities, including classes of offered securities, of such series may
be more sensitive to prepayments on assets. A series of securities may
include one or more classes offered at a significant premium or
discount. Yields on these classes of securities will be sensitive, and
in some cases extremely sensitive, to prepayments on mortgage assets
and, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with
certain classes of stripped interest securities, a holder might, in some
prepayment scenarios, fail to recoup its original investment. A series
of securities may include one or more classes of securities, including
classes of offered securities, that provide for distribution of
principal thereof from amounts attributable to interest accrued but not
currently distributable on one or more classes of accrual securities
and, as a result, yields on such securities will be sensitive to (a) the
provisions of such accrual securities relating to the timing of
distributions of interest thereon and (b) if such accrual securities
accrue interest at a variable or adjustable pass-through rate or
interest rate, changes in such rate.
We refer you to "Yield Considerations" in the prospectus and, if applicable, in
the related prospectus supplement for further information.
THERE IS A RISK THAT DEFAULTS BY OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED
PROPERTIES WILL RESULT IN LOSSES TO INVESTORS.
- - An investment in securities such as the securities which generally
represent interests in mortgage loans may be affected by, among other
things, a decline in real estate values and changes in the mortgagors'
financial condition. No assurance can be given that values of the
mortgaged properties have remained or will remain at their levels on the
dates of origination of the related mortgage loans. If the relevant
residential real estate market should experience an overall decline in
property values such that the outstanding balances of the related
mortgage loans, and any secondary financing on the mortgaged properties,
become equal to or greater than the value of the mortgaged properties,
the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending
industry in that market. In addition, in the case of mortgage loans that
are subject to negative amortization, due to the addition to principal
balance of deferred interest, the principal balances of such mortgage
loans
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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 these losses are not covered by the applicable credit
support, if any, holders of securities of the series evidencing
interests in the related mortgage loans will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to
the value of the mortgaged properties for recovery of the outstanding
principal and unpaid interest on the defaulted mortgage loans. Certain
of the types of mortgage loans may involve additional uncertainties not
present in traditional types of loans.
- - For example, certain of the mortgage loans provide for escalating or
variable payments by the mortgagor under the mortgage loan, as to which
the mortgagor is generally qualified on the basis of the initial payment
amount. In some cases the mortgagor's income may not be sufficient to
enable them to continue to make their loan payments as such payments
increase and thus the likelihood of default will increase.
- - In addition to the foregoing, certain geographic regions of the United
States from time to time will experience weaker regional economic
conditions and housing markets, and will thus experience higher rates of
loss and delinquency than the mortgage loans generally will experience.
The mortgage loans underlying certain series of securities may be
concentrated in these regions, and this concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without this concentration.
- - Further, the rate of default on mortgage loans that are refinance or
limited documentation mortgage loans, and on mortgage loans with high
loan-to-value ratios, may be higher than for other types of mortgage
loans. Additionally, a decline in the value of the mortgaged properties
will increase the risk of loss particularly with respect to any related
junior mortgage loans.
We refer you to "--There is a risk that there will be reduced or no proceeds
available when junior lien mortgage loans are liquidated." in this prospectus
for further information.
- - In addition, a prospectus supplement may specify that the loan-to-value
ratios for the mortgage loans in the related trust will exceed 100%. The
related mortgaged properties will thus be highly unlikely to provide
adequate security for these mortgage loans. To the extent specified in
that prospectus supplement, the assessment of the credit history of a
borrower and that borrower's capacity to make payments on the related
mortgage loan will have been the primary considerations in underwriting
the mortgage loans included in that trust. The evaluation of the
adequacy of the loan-to-value ratio, if so specified in the related
prospectus supplement, will have been given less consideration, and in
certain cases no consideration, in underwriting those mortgage loans.
THERE IS A RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE WHEN JUNIOR
LIEN MORTGAGE LOANS ARE LIQUIDATED.
- - Certain mortgage loans may be secured by junior liens and the related
first and other senior liens, if any, may not be included in the
mortgage pool.
- - The primary risk to holders of mortgage loans secured by junior liens is
the possibility that adequate funds will not be received in connection
with a foreclosure of the related senior lien to satisfy fully both the
senior lien and the mortgage loan. If a holder of the senior lien
forecloses on a mortgaged property, the proceeds of the foreclosure or
similar sale will be applied first to the payment of court costs and
fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the senior lien. The claims of the holder of the senior lien
will be satisfied in full out of proceeds of the liquidation of the
mortgage loan, if these proceeds are sufficient, before the trust fund
as holder of the junior lien
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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 that mortgage loan would have to bid an amount
sufficient to pay off all sums due under the mortgage loan and the
senior lien or purchase the mortgaged property subject to the senior
lien. In the event that such proceeds from a foreclosure or similar sale
of the related mortgaged property were insufficient to satisfy both
loans in the aggregate, the trust fund, as the holder of the junior
lien, and, accordingly, holders of the certificates, would bear the risk
of delay in distributions while a deficiency judgment against the
borrower was being obtained and the risk of loss if the deficiency
judgment were not realized upon. Moreover, deficiency judgments may not
be available in certain jurisdictions. In addition, a junior mortgagee
may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgage.
We refer you to "Certain Legal Aspects of the Mortgage Loans -- Junior
Mortgages" in this prospectus for further information.
THERE IS A RISK THAT ANY APPLICABLE CREDIT SUPPORT WILL NOT COVER ALL LOSSES.
- - The prospectus supplement for a series of certificates will describe any
credit support in the related trust fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or combinations of these. Any credit support will be
subject to the conditions and limitations described here and in the
related prospectus supplement. Moreover, this credit support may not
cover all potential losses or risks; for example, credit support may or
may not cover fraud or negligence by a mortgage loan or other parties.
- - A series of securities may include one or more classes of subordinate
securities (which may include offered securities), if we provide for
that in the related prospectus supplement. Although subordination is
designed to reduce the risk to holders of senior securities of
delinquent distributions or ultimate losses, the amount of subordination
will be limited and may decline under certain circumstances. In
addition, if principal payments on one or more classes of securities of
a series are made in a specified order of priority, any limits with
respect to the aggregate amount of claims under any related credit
support may be exhausted before the principal of the lower priority
classes of securities of this series has been repaid. As a result, the
impact of significant losses and shortfalls on the assets may fall
primarily upon those classes of securities having a lower priority of
payment. Moreover, if a form of credit support covers more than one
series of securities (we refer to this as a "covered trust"), holders of
securities evidencing an interest in a covered trust will be subject to
the risk that this credit support will be exhausted by the claims of
other covered trusts.
- - The amount of any applicable credit support supporting one or more
classes of offered securities, including the subordination of one or
more classes of securities, will be determined on the basis of criteria
established by each rating agency rating such classes of securities
based on an assumed level of defaults, delinquencies, other losses or
other factors. We can't assure you, however, that the loss experience on
the related assets will not exceed these assumed levels.
- - Regardless of the form of credit enhancement, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The master servicer
will generally be permitted to reduce, terminate or substitute all or a
portion of the credit enhancement for any series of securities, if the
applicable rating agency indicates that the then-current rating of those
securities will not be adversely affected.
- - The rating agency rating a series of securities may lower their rating
following the initial issuance of the securities if the obligations of
any applicable credit support
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provider have been downgraded, or as a result of losses on the related
assets substantially in excess of the levels contemplated by that rating
agency when they performed their initial rating analysis. None of the
depositor, the master servicer or any of their affiliates will have any
obligation to replace or supplement any credit support or to take any
other action to maintain any rating of any series of securities.
We refer you to "--There are risks in relying on the limited nature of
ratings.", "Description of the Securities" and "Description of Credit Support"
for further information.
THERE IS A RISK TO HOLDERS OF SUBORDINATE SECURITIES THAT LOSSES WILL HAVE A
GREATER IMPACT ON THEM.
- - The rights of subordinate securityholders to receive distributions to
which they would otherwise be entitled with respect to the assets will
be subordinate to the rights of the master servicer (to the extent that
the master servicer is paid its servicing fee, including any unpaid
servicing fees with respect to one or more prior due periods, and is
reimbursed for certain unreimbursed advances and unreimbursed
liquidation expenses) and the senior securityholders to the extent
described in the related prospectus supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be
subject to delays in payment and may not recover their initial
investments in the subordinate securities.
We refer you to "Description of the Securities -- General" and "-- Allocation of
Losses and Shortfalls" in this prospectus for further information.
- - The yields on the subordinate securities may be extremely sensitive to
the loss experience of the assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed
the rate and amount of such losses assumed by an investor, the yields to
maturity on the subordinate securities may be lower than you
anticipated.
THERE IS A RISK THAT OBLIGORS ON BALLOON LOANS WILL NOT BE ABLE TO MAKE BALLOON
PAYMENTS.
Some of the mortgage loans as of the cut-off date may not be fully
amortizing over their terms to maturity (we call these "balloon loans") and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or to
timely sell the related mortgaged property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale or
refinancing, the mortgagor's equity in the related mortgaged property, the
financial condition of the mortgagor, the value of the mortgaged property, tax
laws, prevailing general economic conditions and the availability of credit for
single family or multifamily real properties generally.
THERE IS A POSSIBILITY, IF THE RELATED PROSPECTUS SUPPLEMENT PROVIDES FOR IT,
THAT UPON AN OPTIONAL TERMINATION OF A TRUST FUND, THE PROCEEDS MAY BE LESS THAN
THE OUTSTANDING PRINCIPAL AMOUNT OF THE SECURITIES PLUS ACCRUED INTEREST.
- - If specified in the related prospectus supplement, a series of
securities may be subject to optional early termination through the
repurchase of the assets in the related trust fund by the party
specified therein, under the circumstances and in the manner set forth
therein. If provided in the related prospectus supplement, upon the
reduction of the security balance of a specified class or classes of
securities to a specified percentage or amount, the party specified
therein will solicit bids for the purchase of all assets of the trust
fund, or of a sufficient portion of such assets to retire such class or
classes or purchase such class or classes at a price set forth in the
related prospectus supplement, in each case, under the circumstances and
in the manner set forth therein.
- - In either such case, if the related prospectus supplement provides for
it, the proceeds available for distribution to securityholders may be
less than the outstanding principal balance of their securities plus
accrued interest. If this happens, these
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securityholders could incur a loss on their investment.
THERE ARE RISKS RELATING TO CERTAIN FEDERAL INCOME TAX CONSIDERATIONS REGARDING
REMIC RESIDUAL CERTIFICATES.
- - Holders of REMIC residual certificates must report on their federal
income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Material Federal Income Tax
Consequences -- REMICs." Under certain circumstances, holders of offered
securities that are REMIC residual certificates may have taxable income
and tax liabilities arising from such investment during a taxable year
in excess of the cash received during such period. Individual holders of
REMIC residual certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC.
- - In addition, REMIC residual certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of REMIC
residual certificates, the taxable income arising in a given year on a
REMIC residual certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pre-tax yield. Therefore,
the after-tax yield on the REMIC residual certificate may be
significantly less than that of a corporate bond or stripped instrument
having similar cash flow characteristics. Additionally, prospective
purchasers of a REMIC residual certificate should be aware that recently
issued temporary regulations provide restrictions on the ability to
mark-to-market certain "negative value" REMIC residual interests.
We refer you to "Material Federal Income Tax Consequences -- REMICs" in this
prospectus for further information.
THERE ARE RISKS IN RELYING ON THE LIMITED NATURE OF RATINGS.
Any rating assigned by a rating agency to a class of securities will
reflect that rating agency's assessment solely of the likelihood that holders of
securities of that class will receive payments to which those securityholders
are entitled under the related agreement. This rating will not be an assessment
of the likelihood that principal prepayments (including those caused by
defaults) on the related mortgage assets will be made, the degree to which the
rate of such prepayments might differ from that you originally anticipated or
the likelihood of early optional termination of the series of securities. This
rating will not address the possibility that prepayment at higher or lower rates
than you anticipated may cause you to experience a yield lower than you
anticipated or that an investor purchasing a security at a significant premium
might fail to recoup its initial investment under certain prepayment scenarios.
Each prospectus supplement will identify any payment to which holders of offered
securities of the related series are entitled that is not covered by the
applicable rating.
We refer you to "Rating" in this prospectus for further information.
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include:
(i) one- to five-family mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home Equity
Loans and Home Improvement Contracts,
(ii) pass-through certificates or other mortgage-backed securities (such
as debt obligations or participation interests or certificates) evidencing
interests in or secured by one or more Mortgage Loans or other similar
participations, certificates or securities ("MBS") or
(iii) direct obligations of the United States, agencies thereof or
agencies created thereby which are:
(a) interest-bearing securities,
(b) non-interest-bearing securities,
(c) originally interest-bearing securities from which coupons
representing the right to payment of interest have been removed, or
(d) interest-bearing securities from which the right to payment
of principal has been removed (the "Government Securities").
As used herein, "Mortgage Loans" refers to both whole Mortgage Loans (or
certain balances thereof) and Mortgage Loans underlying MBS. Mortgage Loans that
secure, or interests in which are evidenced by, MBS are herein sometimes
referred to as "Underlying Mortgage Loans." Mortgage Loans (or certain balances
thereof) that are not Underlying Mortgage Loans are sometimes referred to as
"Whole Loans." Any pass-through certificates or other asset-backed certificates
in which an MBS evidences an interest or which secure an MBS are sometimes
referred to herein also as MBS or as "Underlying MBS." Mortgage Loans and MBS
are sometimes referred to herein as "Mortgage Assets." The Mortgage Assets will
not be guaranteed or insured by Merrill Lynch Mortgage Investors, Inc. (the
"Depositor") or any of its affiliates or, unless otherwise provided in the
Prospectus Supplement, by any governmental agency or instrumentality or by any
other person. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "Asset Seller"), which may be an affiliate of the
Depositor and, with respect to Assets, which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by:
(i) a lien on a Mortgaged Property consisting of a one- to five-family
residential property (a "Single Family Property" and the related Mortgage Loan a
"Single Family Mortgage Loan") or
(ii) a security interest in shares issued by private cooperative housing
corporations ("Cooperatives"). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use.
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Mortgaged Properties will be located, unless otherwise specified in the
related Prospectus Supplement, in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any U.S. possession. To the extent
specified in the related Prospectus Supplement, the Mortgage Loans will be
secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on Mortgaged Property. The
Mortgaged Properties may include apartments owned by Cooperatives and leasehold
interests in properties, the title to which is held by third party lessors.
Unless otherwise specified in the Prospectus Supplement, the term of any such
leasehold shall exceed the term of the related mortgage note by at least five
years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties. No more than 20% of the Mortgage
Loans (by principal balance) in a Trust Fund will be, as of the related Cut-off
Date, 30 days or more past their most recent contractually scheduled payment
date.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan plus the principal balance of any senior mortgage loan to the
Value of the related Mortgaged Property. The "Value" of a Mortgaged Property,
other than with respect to Refinance Loans, is generally the lesser of:
(a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and
(b) the sales price for such property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
set forth in the related Prospectus Supplement, the Value of the Mortgaged
Property securing a Refinance Loan is the appraised value thereof determined in
an appraisal obtained at the time of origination of the Refinance Loan. The
Value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the value at origination and will
fluctuate from time to time based upon changes in economic conditions and the
real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
(i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
Mortgage Loans as of the applicable Cut-off Date,
(ii) the type of property securing the Mortgage Loans,
(iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans,
(iv) the earliest and latest origination date and maturity date of
the Mortgage Loans,
(v) the range of the Loan-to-Value Ratios at origination of the
Mortgage Loans,
(vi) the Mortgage Rates or range of Mortgage Rates and the weighted
average Mortgage Rate borne by the Mortgage Loans,
(vii) the state or states in which most of the Mortgaged Properties
are located,
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(viii) information with respect to the prepayment provisions, if any,
of the Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates
("ARM Loans"), the index, the frequency of the adjustment dates,
the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and
(x) information regarding the payment characteristics of the
Mortgage Loans, including without limitation balloon payment and
other amortization provisions.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or home improvement
installment sales contracts or installment loan agreements (the "Home
Improvement Contracts") originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified period
of time, automatically become part of the Trust Fund for a series. As a result,
the aggregate balance of the revolving Home Equity Loans will fluctuate from day
to day as new draws by borrowers are added to the Trust Fund and principal
collections are applied to purchase such balances. Such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions may
be made to the extent that such additions could be made in connection with a
Trust Fund with respect to which a REMIC election has been made. The related
Prospectus Supplement will set forth the characteristics that such additional
Mortgage Loans will be required to meet. Such characteristics will be specified
in terms of the categories described in the second preceding paragraph.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will:
(i) have individual principal balances at origination of not less
than $25,000,
(ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus
Supplement.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate, or
from a fixed to an adjustable Mortgage Rate, from time to time pursuant to an
election or as otherwise specified on the related Mortgage Note, in
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each case as described in the related Prospectus Supplement. Each Mortgage Loan
may provide for scheduled payments to maturity or payments that adjust from time
to time to accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in each
case as described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the
"MBS Servicer") of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made
on MBS on the dates specified in the related Prospectus Supplement. The MBS may
be issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Mortgage Loans or
Underlying MBS evidenced by or securing such MBS and other factors and generally
will have been established for the MBS on the basis of requirements of either
any Rating Agency that may have assigned a rating to the MBS or the initial
purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available to the Depositor:
(i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to
be included in the Trust Fund,
(ii) the original and remaining term to stated maturity of the MBS,
if applicable,
(iii) whether such MBS is entitled only to interest payments, only to
principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for
determining such rates, if any,
(v) the applicable payment provisions for the MBS, including, but
not limited to, any priorities, payment schedules and
subordination features,
(vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of
credit or guarantees relating to the related Underlying Mortgage
Loans, the Underlying MBS or directly to such MBS,
(viii) the terms on which the related Underlying Mortgage Loans or
Underlying MBS for such MBS or the MBS may, or are required to,
be purchased prior to their maturity,
(ix) the terms on which Mortgage Loans or Underlying MBS may be
substituted for those originally underlying the MBS,
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(x) the servicing fees payable under the MBS Agreement,
(xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements" above, and the type of
information in respect of the Underlying MBS described in this
paragraph,
(xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the
MBS and
(xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the
Participants Trust Company.
Each MBS will be either:
(i) a security exempted from the registration requirements of the
Securities Act,
(ii) a security that has been previously registered under the
Securities Act or
(iii) a security that is eligible for sale under Rule 144(k) under the
Securities Act.
In the case of clause (iii), such security will be acquired in a secondary
market transaction not from the issuer thereof or an affiliate of such issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available,
(i) the aggregate approximate initial and outstanding principal
amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund,
(ii) the original and remaining terms to stated maturity of the
Government Securities,
(iii) whether such Government Securities are entitled only to interest
payments, only to principal payments or to both,
(iv) the interest rates of the Government Securities or the formula
to determine such rates, if any,
(v) the applicable payment provisions for the Government Securities
and
(vi) to what extent, if any, the obligation evidenced thereby is
backed by the full faith and credit of the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the "Subsequent Assets") from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such series on
date of such issuance.
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ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreement--Collection
Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
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PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of interest
will be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period, the distribution of such interest
will be made on a day which may be several days, weeks or months following the
period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans. The rate of principal payments on some or all of
the classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions or with lower Prepayment
Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the
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related Prospectus Supplement, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the classes of the Securities
of the related series.
If so provided in the Prospectus Supplement for a series of Securities,
one or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Assets is paid to
such class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Mortgage Loans comprising or underlying the
Assets in a Trust Fund. If any Mortgage Loans comprising or underlying the
Assets in a particular Trust Fund have actual terms to maturity less than those
assumed in calculating final scheduled Distribution Dates for the classes of
Securities of the related series, one or more classes of such Securities may be
fully paid prior to their respective final scheduled Distribution Dates, even in
the absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates and maturities
of the Mortgage Loans comprising or underlying such Assets. See "Description of
the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
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Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
Mortgage Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Mortgage Loans having balloon payments may
default at maturity. In the case of defaults, recovery of proceeds may be
delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the servicer may, to the extent and under
the circumstances set forth in the related Prospectus Supplement, be permitted
to modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of the
Securities, thereby lengthening the period of time elapsed from the date of
issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate. In addition, certain Mortgage
Loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the mortgagor during the early
years of the Mortgage Loan will be less than the scheduled monthly payments
thereon (the "Buydown Period"). The periodic increase in the amount paid by the
mortgagor of a Buydown Mortgage Loan during or at the end of the applicable
Buydown Period may create a greater financial burden for the mortgagor, who
might not have otherwise qualified for a mortgage, and may accordingly increase
the risk of default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of
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such Securities will be reduced and may adversely affect yield to holders
thereof, depending upon the price at which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted average
life of the Mortgage Loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Sub-Servicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, Sub-Servicers may encourage the
refinancing of Mortgage Loans, including defaulted Mortgage Loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale" clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
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executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310. Its
telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an "Indenture"). Each
series of Securities will consist of one or more classes of Securities that may:
(i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
(ii) be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the
Securities;
(iii) be entitled to principal distributions, with disproportionately
low, nominal or no interest distributions (collectively,
"Stripped Principal Securities");
(iv) be entitled to interest distributions, with disproportionately
low, nominal or no principal distributions (collectively,
"Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon commencing
only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such
series (collectively, "Accrual Securities");
(vi) provide for payments of principal as described in the related
Prospectus Supplement, from all or only a portion of the Assets
in such Trust Fund, to the extent of available funds, in each
case as described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics
described in this paragraph including a Stripped Principal
Security component and a Stripped Interest Security component.
If so specified in the related Prospectus Supplement, a Trust Fund may
include additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or, in the case of revolving Home
Equity loans or certain balances thereof, any additional balances advanced to
the borrowers under the revolving Home Equity loans during certain periods. If
so specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus
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Supplement. See "Risk Factors--Book-Entry Registration" and "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series and
such Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date, exclusive
of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due Period
(unless the related Prospectus Supplement provides otherwise, a
"Due Period" with respect to any Distribution Date will commence
on the second day of the month in which the immediately
preceding Distribution Date occurs, or the day after the Cut-off
Date in the case of the first Due Period, and will end on the
first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides
otherwise, all prepayments, together with related payments of
the interest thereon and related Prepayment Premiums,
Liquidation Proceeds, Insurance Proceeds and other unscheduled
recoveries received subsequent to the related Due Period, and
(c) all amounts in the Collection Account that are due
or reimbursable to the Depositor, the Trustee, an Asset Seller,
a Sub-Servicer, the Master Servicer or any other entity as
specified in the related Prospectus Supplement or that are
payable in respect of certain expenses of the related Trust
Fund;
(ii) if the related Prospectus Supplement so provides, interest
or investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
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(iii) all advances made by a Master Servicer or any other entity
as specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment
Period; and
(v) unless the related Prospectus Supplement provides otherwise,
to the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or
in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will
be made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
"Accrued Security Interest" will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal.
Unless otherwise provided in the related Prospectus Supplement, the
Accrued Security Interest on a series of Securities will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans comprising or underlying the
Assets in the Trust Fund for such series. The particular manner in which such
shortfalls are to be allocated among some or all of the classes of Securities of
that series will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will also describe the extent to which the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans comprising or underlying the Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Securities by reason of the allocation to such class of a portion of
any deferred interest on the Mortgage Loans comprising or underlying the Assets
in the related Trust Fund will result in a corresponding increase in the
Security
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Balance of such class. See "Risk Factors--Average Life of Securities;
Prepayments; Yields" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference in
such sections to Security Balance and Pass-Through Rate or interest rate refer
to the principal balance, if any, of any such component and the Pass-Through
Rate or interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement, the
Master Servicer or another entity described therein will be required as part of
its servicing responsibilities to advance on or before each Distribution Date
its own funds or funds held in the Collection Account that are not included in
the Available Distribution Amount for such Distribution Date, in an amount equal
to the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on
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other Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the related Prospectus Supplement, advances of the Master
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Mortgage Loans (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan, "Related Proceeds") and, if so provided in the Prospectus Supplement, out
of any amounts otherwise distributable on one or more classes of Subordinate
Securities of such series; provided, however, that any such advance will be
reimbursable from any amounts in the Collection Account prior to any
distributions being made on the Securities to the extent that the Master
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Master Servicer
from excess funds in the Collection Account, the Master Servicer is required to
replace such funds in the Collection Account on any future Distribution Date to
the extent that funds in the Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the Master
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
the Master Servicer (or another entity) will be entitled to receive interest at
the rate specified therein on its outstanding advances and will be entitled to
pay itself such interest periodically from general collections on the Assets
prior to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of
such class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of
such class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a
Master Servicer (and, if payable directly out of the related Trust Fund,
by any Sub-Servicer) and such other customary information as any such
Master Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at the
close of business on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close
of business on such Distribution Date;
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(vii) the number and aggregate principal balance of Whole Loans
in respect of which:
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the
related Due Period, the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan, and the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan
and included in the Trust Fund as of the end of the related Due Period,
the loan number of the related Mortgage Loan and the date of
acquisition;
(x) with respect to each REO Property relating to a Whole Loan
and included in the Trust Fund as of the end of the related Due Period:
(a) the book value,
(b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as if
such Mortgage Loan were still outstanding taking into account
certain limited modifications to the terms thereof specified in
the Agreement),
(c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and
(d) if applicable, the aggregate amount of interest
accrued and payable on related servicing expenses and related
advances;
(xi) with respect to any such REO Property sold during the
related Due Period:
(a) the aggregate amount of sale proceeds,
(b) the portion of such sales proceeds payable or
reimbursable to the Master Servicer in respect of such REO
Property or the related Mortgage Loan and
(c) the amount of any loss to Securityholders in respect
of the related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the
case may be, of each class of Securities (including any class of
Securities not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such Security
Balance due to the allocation of any loss and increase in the Security
Balance of a class of Accrual Securities in the event that Accrued
Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made during
the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
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(xv) the amount remaining in the reserve fund, if any, as of the
close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such Distribution
Date;
(xvii) in the case of Securities with a variable Pass-Through
Rate or interest rate, the Pass-Through Rate or interest rate applicable
to such Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified
in the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable
Pass-Through Rate or interest rate, for statements to be distributed in
any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such Distribution Date,
if available, and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount
of coverage of each instrument of Credit Support included therein as of
the close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of default
interest, late charges and assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i), (ii),
(xii), (xvi) and (xvii) above, such amounts shall also be provided with respect
to each component, if any, of a class of Securities. The Master Servicer or the
Trustee, as specified in the related Prospectus Supplement, will forward or
cause to be forwarded to each holder, to the Depositor and to such other parties
as may be specified in the Agreement, a copy of any statements or reports
received by the Master Servicer or the Trustee, as applicable, with respect to
any MBS. The Prospectus Supplement for each series of Offered Securities will
describe any additional information to be included in reports to the holders of
such Securities.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the
Securities--Registration and Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
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If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes
of the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede & Co., as nominee for DTC ("Cede"), on each such date, DTC will forward
such payments to its Participants which thereafter will be required to forward
them to Indirect Participants or Security Owners. Unless otherwise provided in
the related Prospectus Supplement, the only "Securityholder" (as such term is
used in the Agreement) will be Cede, as nominee of DTC, and the Security Owners
will not be recognized by the Trustee as Securityholders under the Agreement.
Security Owners will be permitted to exercise the rights of Securityholders
under the related Agreement, Trust Agreement or Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to
be taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
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settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Consequences" in this Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to the
related Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Security under the
Indenture, Trust Agreement or Pooling and Servicing Agreement, as applicable, on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and Euroclear
will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
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Transfers between DTC's participating organizations (the "Participants")
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue its
services, the Administrator would seek an alternative depository (if available)
or cause the issuance of Definitive Securities to the owners thereof or their
nominees in the manner described in the Prospectus under "Description of the
Securities--Book Entry Registration and Definitive Securities".
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance and servicing
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of the related Assets, the Pooling and Servicing Agreement may be referred to
herein as the "Agreement". Notwithstanding the foregoing, if the Assets of the
Trust Fund for such a series consists only of Government Securities or MBS, such
Assets will be conveyed to the Trust Fund and administered pursuant to a trust
agreement between the Depositor and the Trustee (a "Trust Agreement"), which may
also be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued, and
the related Trust Fund will be created, pursuant to a Trust Agreement between
the Depositor and the Trustee. The Assets of the related Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with a
servicing agreement (a "Servicing Agreement") between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the "Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the Trust
Fund and administered in accordance with the terms of the Trust Agreement, which
in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series
of Securities will be named in the related Prospectus Supplement. In any series
of Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in
each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that materially
differs from the description thereof contained in this Prospectus. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement for each Trust
Fund and the description of such provisions in the related Prospectus
Supplement. As used herein with respect to any series, the term "Security"
refers to all of the Securities of that series, whether or not offered hereby
and by the related Prospectus Supplement, unless the context otherwise requires.
The Depositor will provide a copy of the Agreement (without exhibits) relating
to any series of Securities without charge upon written request of a holder of a
Security of such series addressed to Merrill Lynch Mortgage Investors, Inc., 250
Vesey Street, World Financial Center, North Tower, 10th Floor, New York, New
York 10281-1310. Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless
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otherwise provided in the related Prospectus Supplement, such schedule will
include detailed information (i) in respect of each Whole Loan included in the
related Trust Fund, including without limitation, the address of the related
Mortgaged Property and type of such property, the Mortgage Rate and, if
applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Value and
Loan-to-Value Ratio as of the date indicated and payment and prepayment
provisions, if applicable; and (ii) in respect of each MBS included in the
related Trust Fund, including without limitation, the MBS Issuer, MBS Servicer
and MBS Trustee, the pass-through or bond rate or formula for determining such
rate, the issue date and original and remaining term to maturity, if applicable,
the original and outstanding principal amount and payment provisions, if
applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Whole Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that an
Asset Seller will fulfill this repurchase or substitution obligation, and
neither the Master Servicer nor the Depositor will be obligated to repurchase or
substitute for such Mortgage Loan if the Asset Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified
in the related Prospectus Supplement, the documents with respect to Home Equity
Loans and Home Improvement Contracts will not be delivered to the Trustee (or a
custodian), but will be retained by the Master Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will not be recorded, unless otherwise provided in the related Prospectus
Supplement.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or
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documents required to transfer fully such Government Security or MBS, as
applicable, to the Trustee for the benefit of the Certificateholders. With
respect to each Government Security or MBS in uncertificated or book-entry form
or held through a "clearing corporation" within the meaning of the UCC, the
Depositor and the Trustee will cause such Government Security or MBS to be
registered directly or on the books of such clearing corporation or of one or
more securities intermediaries in the name of the Trustee for the benefit of the
Securityholders. Unless otherwise provided in the related Prospectus Supplement,
the related Agreement will require that either the Depositor or the Trustee
promptly cause any MBS and Government Securities in certificated form not
registered in the name of the Trustee to be re-registered, with the applicable
persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters:
(i) the accuracy of the information set forth for such Whole Loan on
the schedule of Assets appearing as an exhibit to the related
Agreement;
(ii) the existence of title insurance insuring the lien priority of
the Whole Loan;
(iii) the authority of the Warranting Party to sell the Whole Loan;
(iv) the payment status of the Whole Loan;
(v) in the case of a Whole Loan, the existence of customary
provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
(vi) the existence of hazard and extended perils insurance coverage
on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Whole Loan or the interests therein of
the Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Whole
Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor. As
to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Rate from
the date as to which interest was last paid to the due date in the Due Period in
which the relevant purchase is to occur, plus certain
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servicing expenses that are reimbursable to the Master Servicer. If so provided
in the Prospectus Supplement for a series, a Warranting Party, rather than
repurchase a Whole Loan as to which a breach has occurred, will have the option,
within a specified period after initial issuance of such series of Certificates,
to cause the removal of such Whole Loan from the Trust Fund and substitute in
its place one or more other Whole Loans in accordance with the standards
described in the related Prospectus Supplement. If so provided in the Prospectus
Supplement for a series, a Warranting Party, rather than repurchase or
substitute a Whole Loan as to which a breach has occurred, will have the option
to reimburse the Trust Fund or the Securityholders for any losses caused by such
breach. Unless otherwise specified in the related Prospectus Supplement, this
reimbursement, repurchase or substitution obligation will constitute the sole
remedy available to holders of Securities or the Trustee for a breach of
representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering the
accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and covering the authority of
the Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See "Events of Default" and "Rights Upon Event of
Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either
(i) an account or accounts the deposits in which are insured by the
Federal Deposit Insurance Corporation ("FDIC") (to the limits
established by the FDIC) and, if so specified in the related
Prospectus Supplement, the uninsured deposits in which are
otherwise secured such that the Trustee have a claim with
respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing
such funds that is superior to the claims of any other
depositors or general creditors of the institution with which
the Collection Account is maintained or
(ii) otherwise maintained with a bank or trust company, and in a
manner, satisfactory to the Rating Agency or Agencies rating any
class of Securities of such series.
The collateral eligible to secure amounts in the Collection Account is limited
to United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Collection
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Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion thereof retained by a Master Servicer or a Sub-Servicer as its
servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be
maintained in respect of each Mortgaged Property securing a Whole Loan
in the Trust Fund (to the extent such proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance
with the normal servicing procedures of a Master Servicer or the related
Sub-Servicer, subject to the terms and conditions of the related
Mortgage and Mortgage Note) (collectively, "Insurance Proceeds") and all
other amounts received and retained in connection with the liquidation
of defaulted Mortgage Loans in the Trust Fund, by foreclosure or
otherwise ("Liquidation Proceeds"), together with the net proceeds on a
monthly basis with respect to any Mortgaged Properties acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes Credit Support for the related series of
Securities as described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole
Loan, property acquired in respect thereof purchased by the Depositor,
any Asset Seller or any other specified person as described under
"Assignment of Assets; Repurchases" and "Representations and Warranties;
Repurchases," all proceeds of any defaulted Mortgage Loan purchased as
described under "Realization Upon Defaulted Whole Loans," and all
proceeds of any Asset purchased as described under "Description of the
Securities--Termination" (also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain
interest shortfalls arising out of the prepayment of Whole Loans in the
Trust Fund as described under "Description of the Agreements --Retained
Interest; Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments on
account of modification or assumption fees, late payment charges or
prepayment premiums on the Mortgage Assets;
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(x) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or
the Trustee in connection with losses realized on investments for the
benefit of the Master Servicer or the Trustee, as the case may be, of
funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described in
the related Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund for
any of the following purposes:
(i) to make distributions to the Securityholders on each
Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts
advanced as described under "Description of the Securities--Advances in
Respect of Delinquencies," such reimbursement to be made out of amounts
received which were identified and applied by the Master Servicer as
late collections of interest (net of related servicing fees and Retained
Interest) on and principal of the particular Whole Loans with respect to
which the advances were made or out of amounts drawn under any form of
Credit Support with respect to such Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with respect
to Whole Loans and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular Whole Loans
and properties, and net income collected on the particular properties,
with respect to which such fees were earned or such expenses were
incurred or out of amounts drawn under any form of Credit Support with
respect to such Whole Loans and properties;
(iv) to reimburse a Master Servicer for any advances described
in clause (ii) above and any servicing expenses described in clause
(iii) above which, in the Master Servicer's good faith judgment, will
not be recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on
other Assets or, if and to the extent so provided by the related
Agreement and described in the related Prospectus Supplement, just from
that portion of amounts collected on other Assets that is otherwise
distributable on one or more classes of Subordinate Securities, if any,
remain outstanding, and otherwise any outstanding class of Securities,
of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of
their respective directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby, as
and to the extent described under "Certain Matters Regarding a Master
Servicer and the Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "Certain Matters Regarding the Trustee";
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(ix) unless otherwise provided in the related Prospectus
Supplement, to pay a Master Servicer, as additional servicing
compensation, interest and investment income earned in respect of
amounts held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited in
the Collection Account that were identified and applied by the Master
Servicer as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income
received on such property;
(xii) if one or more elections have been made to treat the Trust
Fund or designated portions thereof as a REMIC, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Material Federal
Income Tax Consequences--REMICS--Prohibited Transactions Tax and Other
Taxes";
(xiii) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
Securityholders;
(xv) to pay for the costs of recording the related Agreement if
such recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to remedy
any breach of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited
in the Collection Account in error, including amounts received on any
Asset after its removal from the Trust Fund whether by reason of
purchase or substitution as contemplated by "Assignment of Assets;
Repurchase" and "Representations and Warranties; Repurchases" or
otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to
make reasonable efforts to collect all scheduled payments under the Whole Loans
and will follow or cause to be followed such collection procedures as it
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would follow with respect to mortgage loans that are comparable to the Whole
Loans and held for its own account, provided such procedures are consistent
with:
(i) the terms of the related Agreement and any related hazard
insurance policy or instrument of Credit Support, if any,
included in the related Trust Fund described herein or under
"Description of Credit Support,"
(ii) applicable law and
(iii) the general servicing standard specified in the related
Prospectus Supplement or, if no such standard is so specified,
its normal servicing practices (in either case, the "Servicing
Standard").
In connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not affect the amount or timing of any
scheduled payments of principal or interest on the Whole Loan or, in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent, and in
its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See "Retained Interest; Servicing Compensation
and Payment of Expenses."
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REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if cure
is likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Securityholder) that constitutes a fair price for such defaulted Whole Loan. In
the absence of any bid determined in accordance with the related Agreement to be
fair, the Master Servicer shall proceed with respect to such defaulted Mortgage
Loan as described below. Any bid in an amount at least equal to the Purchase
Price described under "Representations and Warranties; Repurchases" will in all
cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within three years of acquisition,
unless the Internal Revenue Service grants an extension of time to sell such
property, or unless the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund subsequent to
three years after its acquisition will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to solicit bids for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property and accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under
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the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds recovered
on any defaulted Whole Loan, prior to the distribution of such Liquidation
Proceeds to Securityholders, amounts representing its normal servicing
compensation on the Whole Loan, unreimbursed servicing expenses incurred with
respect to the Whole Loan and any unreimbursed advances of delinquent payments
made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself,
the Trustee and the Securityholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
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The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property as
is consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan where
the terms of the Mortgage Loan so permit; provided, however, that the addition
of such cost will not be taken into account for purposes of calculating the
distribution to be made to Certificateholders. Such costs may be recovered by
the Master Servicer or Sub-Servicer, as the case may be, from the Collection
Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability of
the Master Servicer to present or cause to be presented such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer by mortgagors.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the Whole
Loan upon any sale, transfer or conveyance of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any action in relation to the enforcement
of any due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in an Asset
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represents a specified portion of the interest payable thereon. The Retained
Interest will be deducted from mortgagor payments as received and will not be
part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it of a
portion of the interest payment on each Asset. Since any Retained Interest and a
Master Servicer's primary compensation are percentages of the principal balance
of each Asset, such amounts will decrease in accordance with the amortization of
the Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets, including,
without limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other expenses
described in the related Prospectus Supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Whole
Loans and, to the extent so provided in the related Prospectus Supplement,
interest thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ("FHLMC") or such other audit or attestation program used
by the Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other audit or attestation program requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC or such other audit or attestation program used by
such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies
of such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
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CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the Master
Servicer shall be deemed to be to the servicer of substantially all of the Whole
Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that any Master Servicer, the Depositor and any
director, officer, employee or agent of a Master Servicer or the Depositor will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities; provided, however,
that such indemnification will not extend to any loss, liability or expense:
(i) specifically imposed by such Agreement or otherwise
incidental to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of an
enforcement action in respect of any specific Whole Loan or Whole Loans
(except as any such loss, liability or expense shall be otherwise
reimbursable pursuant to such Agreement);
(ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement;
(iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties thereunder, or by
reason of reckless disregard of such obligations or duties;
(iv) incurred in connection with any violation of any state or
federal securities law; or
(v) imposed by any taxing authority if such loss, liability or
expense is not specifically reimbursable pursuant to the terms of the
related Agreement.
In addition, each Agreement will provide that neither any Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
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expenses, costs and liabilities of the Securityholders, and the Master Servicer
or the Depositor, as the case may be, will be entitled to be reimbursed therefor
and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged
or consolidated, or any person resulting from any merger or consolidation to
which the Master Servicer or the Depositor is a party, or any person succeeding
to the business of the Master Servicer or the Depositor, will be the successor
of the Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement, Events
of Default under the related Agreement will include:
(i) any failure by the Master Servicer to distribute or cause to
be distributed to Securityholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to Securityholders,
any required payment that continues after a grace period, if any;
(ii) any failure by the Master Servicer duly to observe or
perform in any material respect any of its other covenants or
obligations under the Agreement which continues unremedied for thirty
days (or such other period specified in the related Prospectus
Supplement) after written notice of such failure has been given to the
Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights;
(iii) any breach of a representation or warranty made by the
Master Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues unremedied
for thirty days (or such longer period specified in the related
Prospectus Supplement) after written notice of such breach has been
given to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of
Securities evidencing not less than 25% of the Voting Rights; and
(iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency
or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans, or if the related
Prospectus Supplement so
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specifies, then the Trustee will not be obligated to make such advances) and
will be entitled to similar compensation arrangements. Unless otherwise
specified in the related Prospectus Supplement, in the event that the Trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, it shall appoint, or
petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the Rating Agency with a net worth at the
time of such appointment of at least $15,000,000 (or such other amount specified
in the related Prospectus Supplement) to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under "Events of Default" may be waived only by all of
the Securityholders. Upon any such waiver of an Event of Default, such Event of
Default shall cease to exist and shall be deemed to have been remedied for every
purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for sixty days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement:
(i) to cure any ambiguity or correct any mistake,
(ii) to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein or with the
related Prospectus Supplement,
(iii) to make any other provisions with respect to matters or
questions arising under the Agreement which are not materially
inconsistent with the provisions thereof, or
(iv) to comply with any requirements imposed by the Code; provided
that, in the case of clause (iii), such amendment will not (as
evidenced by an opinion of counsel to such effect or a letter
from the applicable Rating Agency that such amendment will not
result in a reduction or withdrawal of its rating of the related
Security) adversely affect in any material respect the interests
of any holder of Securities covered by the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each Agreement
may also be amended by the Depositor, the Master Servicer, if any, and the
Trustee, with the consent of the holders of Securities affected thereby
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, for any purpose; provided, however,
that unless otherwise specified in the related Prospectus Supplement, no such
amendment may:
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(i) reduce in any manner the amount of or delay the timing of,
payments received or advanced on Mortgage Loans which are
required to be distributed on any Security without the consent
of the holder of such Security or
(ii) reduce the consent percentages described in this paragraph
without the consent of the holders of all Securities covered by
such Agreement then outstanding.
However, with respect to any series of Securities as to which a REMIC election
is to be made, the Trustee will not consent to any amendment of the Agreement
unless it shall first have received an opinion of counsel to the effect that
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause the related Trust Fund to fail to qualify as a REMIC at any time
that the related Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset or
related document and is not accountable for the use or application by or on
behalf of any Master Servicer of any funds paid to the Master Servicer or its
designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing, the
Trustee is required to perform only those duties specifically required under the
related Agreement or Trust Agreement, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the Trustee is required to examine such documents and to determine
whether they conform to the requirements of the Agreement or Trust Agreement, as
applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's:
(i) enforcing its rights and remedies and protecting the interests,
of the Securityholders during the continuance of an Event of
Default,
(ii) defending or prosecuting any legal action in respect of the
related Agreement or series of Securities,
(iii) being the mortgagee of record with respect to the Mortgage Loans
in a Trust Fund and the owner of record with respect to any
Mortgaged Property acquired in respect thereof for the benefit
of Securityholders, or
(iv) acting or refraining from acting in good faith at the direction
of the holders of the related series of Securities entitled to
not less than 25% (or such other percentage as is specified in
the related Agreement with respect to any particular matter) of
the Voting Rights for such series; provided, however, that such
indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or
negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless
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disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the
Trustee made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Holders of the Securities of any series entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series may at any time remove the Trustee without cause
and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include:
(i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment
of any principal of or interest on any Note of such series;
(ii) failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture which continues for a period of
sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related
Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the
Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith
with respect to or affecting such series having been incorrect
in a material respect as of the time made, and such breach is
not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is
given in accordance with the procedures described in the related
Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or
(v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain
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circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the Notes of such series.
If, following an Event of Default with respect to any series of Notes,
the Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless:
(a) the holders of 100% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate outstanding
amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such series at the date of such sale
or
(c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such
Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders of 66 2/3% (or such other
percentage specified in the related Prospectus Supplement) of
the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders would be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing rights
specified in the Indenture) upon the delivery to the Indenture Trustee for
cancellation of all the Notes of such series or, with certain limitations, upon
deposit with the Indenture Trustee of funds sufficient for the payment in full
of all of the Notes of such series.
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In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series
of Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the Master
Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect
to one or more classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against all
risks of loss and will not guarantee repayment of the entire Security Balance of
the Securities and interest thereon. If losses or shortfalls occur that exceed
the amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of:
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(a) the nature and amount of coverage under such Credit Support,
(b) any conditions to payment thereunder not otherwise described
herein,
(c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and
(d) the material provisions relating to such Credit Support.
Additionally, the related Prospectus Supplement will set forth
certain information with respect to the obligor under any
instrument of Credit Support, including
(i) a brief description of its principal business
activities,
(ii) its principal place of business, place of incorporation
and the jurisdiction under which it is chartered or
licensed to do business,
(iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its
business and
(iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date
specified in the Prospectus Supplement.
See "Risk Factors--Credit Support Limitations--Risk That Credit Support Will Not
Cover All Losses."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Securities in a series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Assets prior to
distributions on Subordinate Securities evidencing interests in a different
group of Assets within the Trust Fund. The Prospectus Supplement for a series
that includes a cross-support provision will describe the manner and conditions
for applying such provisions.
INSURANCE OR GUARANTEES
If so provided in the Prospectus Supplement for a series of Securities,
the Whole Loans in the related Trust Fund will be covered for various default
risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the
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aggregate principal balance of the Assets on the related Cut-off Date or of the
initial aggregate Security Balance of one or more classes of Securities. If so
specified in the related Prospectus Supplement, the letter of credit may permit
draws in the event of only certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related Prospectus Supplement. The obligations of the L/C Bank
under the letter of credit for each series of Securities will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities,
the MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS
may be covered by one or more of the types of Credit Support described herein.
The related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
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FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states,
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published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration) plus the expenses incurred in enforcing
the obligation. In other states, the mortgagor or the junior lienholder is not
provided a period to reinstate the loan, but has only the right to pay off the
entire debt to prevent the foreclosure sale. Generally, the procedure for public
sale, the parties entitled to notice, the method of giving notice and the
applicable time periods are governed by state law and vary among the states.
Foreclosure of a deed to secure debt is also generally accomplished by a
non-judicial sale similar to that required by a deed of trust, except that the
lender or its agent, rather than a trustee, is typically empowered to perform
the sale in accordance with the terms of the deed to secure debt and applicable
law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
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The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building was so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or
deeds of trust, which are subordinate to first or other senior mortgages or
deeds of trust held by other lenders. The rights of the Trust Fund as the holder
of a junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of
trust are subordinate to the terms of the first mortgage or deed of trust, in
the event of a conflict between the terms of the first mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the first mortgage or
deed of trust will generally govern. Upon a failure of the mortgagor or trustor
to perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
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through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally provide
that the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain limited
exceptions. Due-on-sale clauses
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contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
mortgagor may have difficulty servicing and repaying multiple loans. In
addition, if the junior loan permits recourse to the mortgagor (as junior loans
often do) and the senior loan does not, a mortgagor may be more likely to repay
sums due on the junior loan than those on the senior loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the mortgagor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the mortgagor is additionally burdened. Third, if the mortgagor defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the senior
lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not taken
the requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be
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usurious and the mortgagor's counsel has rendered an opinion that such choice of
law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a mortgagor who enters military service
after the origination of such mortgagor's Mortgage Loan (including a mortgagor
who was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of any servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related series of Certificates,
and would not be covered by advances or, unless otherwise specified in the
related Prospectus Supplement, any form of Credit Support provided in connection
with such Certificates. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected Mortgage
Loan during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the
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Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Securities applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Securities.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States person
under any applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision of the administration
of the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. Persons
as well.
GENERAL
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC election
will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund
will be treated as a grantor trust, then Brown & Wood LLP will deliver its
opinion that the Trust Fund will not be classified as an association taxable as
a corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case, owners
of Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
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Each Grantor Trust Certificateholder will be required to report on
its federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the applicable amount and (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
A Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Master Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the Master Servicer, whichever
is earlier. If the servicing fees paid to the Master Servicer are deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of the
Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as
to each Series of Certificates evidencing an interest in a Trust Fund comprised
of Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building
and loan association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Assets will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of Code
Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described in
such Code section;
(ii) a Grantor Trust Certificate owned by a real estate
investment trust representing an interest in Mortgage Assets will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the extent
that the Mortgage Assets represented by that Grantor Trust Certificate
are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will
represent "obligation[s] . . . which [are] principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under these
rules, such Government Securities are treated as having OID based on the
purchase price and the stated redemption price at maturity of each Security. As
such, Grantor Trust Certificateholders would be required to include in income
their pro rata share of the OID on each Government Security recognized in any
given year on an economic accrual basis even if the Grantor Trust
Certificateholder is a cash method taxpayer. Accordingly, the sum of the income
includible to the Grantor Trust Certificateholder in any taxable year may exceed
amounts actually received during such year.
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Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Mortgage Loan (or an underlying mortgage
loan with respect to a Mortgage Asset) prepays in full, equal to the difference
between the portion of the prepaid principal amount of such Mortgage Loan (or
underlying mortgage loan) that is allocable to the Certificate and the portion
of the adjusted basis of the Certificate that is allocable to such Mortgage Loan
(or underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Certificates. Absent further guidance from
the IRS, the Trustee intends to account for amortizable bond premium in the
manner described above. Prospective Certificateholders should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market
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discount is equal to the excess of the portion of the principal amount of such
Mortgage Asset allocable to such holder's undivided interest over such holder's
tax basis in such interest. Market discount with respect to a Grantor Trust
Certificate will be considered to be zero if the amount allocable to the Grantor
Trust Certificate is less than 0.25% of the Grantor Trust Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described in
the relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining
OID at the beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the Grantor Trust Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
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made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. STRIPPED BONDS AND STRIPPED COUPONS
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the "Stripped
Bond Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), any non-de
minimis discount arising from a subsequent transfer of the Certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Mortgage Asset by Mortgage Asset basis, which
could result in some Mortgage Assets being treated as having more than 100 basis
points of interest stripped off. See "--Non-REMIC Certificates" and "Multiple
Classes of Grantor Trust Certificates --Stripped Bonds and Stripped Coupons"
herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either:
(i) the amount of OID with respect to the Mortgage Assets is treated
as zero under the OID de minimis rule when the Certificate was
stripped or
(ii) no more than 100 basis points (including any amount of servicing
fees in excess of reasonable servicing fees) is stripped off of
the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. However, based
on the recent IRS guidance, it appears that all payments from a Mortgage Asset
underlying a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case, all
payments from such Mortgage Asset would be included in the Mortgage Asset's
stated redemption price at maturity for purposes of calculating income on such
certificate under the OID rules of the Code.
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It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However, if
such Certificate is treated as an interest in discrete Mortgage Assets, or if no
prepayment assumption is used, then when a Mortgage Asset is prepaid, the holder
of such Certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the underlying Mortgage Assets and interest on such Mortgage Assets qualify
for such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] . . . which [are]
principally secured, directly or indirectly, by an interest in real property"
within the meaning of Code Section 860G(a)(3).
2. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER
THAN ARM LOANS
The OID rules of Code Sections 1271 through 1275 will be applicable to a
Certificateholder's interest in those Mortgage Assets as to which the conditions
for the application of those sections are met. Rules regarding periodic
inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage Assets.
OID on each Grantor Trust Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest, in
advance of receipt of the cash attributable to such income. The amount of OID
required to be included in an owner's income in any taxable year with respect to
a Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the
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date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the Master Servicer intends to calculate and report OID
under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the respective component under the
Prepayment Assumption) of all remaining payments to be
received under the Prepayment Assumption on the
respective component and
(b) any payments included in the state redemption price at
maturity received during such accrual period, and
(ii) subtracting from that total the "adjusted issue price" of the
respective component at the beginning of such accrual period.
The adjusted issue price of a Grantor Trust Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a Grantor
Trust Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under any
reasonable method.
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OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Asset, no OID attributable to the difference between the
issue price and the original principal amount of such Mortgage Asset (i.e.
points) will be includible by such holder. Other OID on the Mortgage Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(generally more than one year). Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations.
Prospective investors should consult their own tax advisors concerning
the treatment of capital gains.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Grantor Trust Certificate by a bank or a thrift institution to which
such section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust Certificateholder holding on behalf of an owner that is not a U.S. Person
will be subject to federal income tax, collected by withholding, at a rate of
30% or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust
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Certificate evidences ownership in Mortgage Assets issued after July 18, 1984,
by natural persons if such Grantor Trust Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Grantor Trust Certificateholder under penalties of perjury, certifying that such
Grantor Trust Certificateholder is not a U.S. Person and providing the name and
address of such Grantor Trust Certificateholder). Additional restrictions apply
to Mortgage Assets of where the mortgagor is not a natural person in order to
qualify for the exemption from withholding.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
REMICs
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Although a REMIC is not generally subject to federal income
tax (see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) such Certificates held by a thrift institution taxed
as a "domestic building and loan association" will constitute assets described
in Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any
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of the foregoing Code sections, the Certificates will be qualifying assets only
to the extent that the REMIC's assets are qualifying assets. In addition,
payments on Mortgage Assets held pending distribution on the REMIC Certificates
will be considered to be real estate assets for purposes of Code Section 856(c).
The Small Business Job Protection Act of 1996, as part of the repeal of the bad
debt reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the discussion
of Buydown Loans contained in "--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates" above. REMIC Certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(4)(A), and REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any such Series of
Certificates, Brown & Wood LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Agreement, the Master REMIC as well as any Subsidiary REMIC will
each qualify as a REMIC, and the REMIC Certificates issued by the Master REMIC
and the Subsidiary REMIC, respectively, will be considered to evidence ownership
of REMIC Regular Certificates or REMIC Residual Certificates in the related
REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii) "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code; and (iii) whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may
be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular Certificate
and its "issue price." Holders of any class of Certificates issued with OID will
be required to include such OID in gross income for federal income tax purposes
as it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
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Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during the
first period is treated as the amount by which the stated redemption price at
maturity of the Certificate exceeds its issue price for purposes of the de
minimis rule described below. The OID Regulations suggest that all interest on a
long first period REMIC Regular Certificate that is issued with non-de minimis
OID, as determined under the foregoing rule, will be treated as OID. Where the
interval between the issue date and the first Distribution Date on a REMIC
Regular Certificate is shorter than the interval between subsequent Distribution
Dates, interest due on the first Distribution Date in excess of the amount that
accrued during the first period would be added to the Certificates stated
redemption price at maturity. REMIC Regular Certificateholders should consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
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The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not applicable to instruments governed by Code Section
1272(a)(6), they represent the only guidance regarding the current views of the
IRS with respect to contingent payment instruments. In the alternative, the IRS
could assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under "--Taxation of Owners of REMIC Regular Certificates--Premium" would
apply. It is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates --Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on the
first day or first business day of the immediately preceding month, interest may
be treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the REMIC Regular Certificates as
calculated under the Prepayment Assumption) of all
remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and
(b) any payments included in the stated redemption price at
maturity received during such accrual period, and
(iii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual
period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
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adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest made
at the end of or during that accrual period. The OID accrued during an accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the accrual period. The calculation of OID
under the method described above will cause the accrual of OID to either
increase or decrease (but never below zero) in a given accrual period to reflect
the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue price
but less than the stated redemption price at maturity), however, the daily
portion is reduced by the amount that would be the daily portion for such day
(computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that
would have been includible in the gross income of an original
REMIC Regular Certificateholder (who purchased the REMIC Regular
Certificate at its issue price), less
(b) any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that REMIC
Regular Certificate for all days beginning on the date after the purchase date
and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally,
(i) such interest is unconditionally payable at least annually,
(ii) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
(iii) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating
rate," or a combination of "qualified floating rates" that do
not operate in a manner that significantly accelerates or defers
interest payments on such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on
a REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
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Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election and thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of
(i) the REMIC Regular Certificate's stated principal amount or, in
the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had
purchased such REMIC Regular Certificate from an original
holder) over
(ii) the price for such REMIC Regular Certificate paid by the
purchaser.
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity. In
particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount not
previously included in income, and to recognize ordinary income to that extent.
A Certificateholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of:
(i) the total remaining market discount and
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(ii) a fraction, the numerator of which is the OID accruing during
the period and the denominator of which is the total remaining
OID at the beginning of the period.
For REMIC Regular Certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of:
(a) the total remaining market discount and
(b) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the REMIC Regular Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Certificate purchased with market discount. For these purposes,
the de minimis rule referred to above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On December 30,
1997, the IRS issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code section
1272(a)(6). Absent further guidance from the IRS the Trust intends to account
for amortizable bond premium in the manner described above. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
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Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the event
there are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in "--REMIC Regular Certificates--Treatment of Realized
Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "--Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to the
extent that such gain does not exceed the excess, if any, of (i) the amount that
would have been includible in such holder's income with respect to the REMIC
Regular Certificate had income accrued thereon at a rate equal to 110% of the
AFR as defined in Code Section 1274(d) determined as of the date of purchase of
such REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
REMIC Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC may
not have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued
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interest that would be paid if the interest paid on the Distribution Date were
interest accrued from Distribution Date to Distribution Date. If a portion of
the initial purchase price of a REMIC Regular Certificate is allocable to
interest that has accrued prior to the issue date ("pre-issuance accrued
interest") and the REMIC Regular Certificate provides for a payment of stated
interest on the first payment date (and the first payment date is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the REMIC Regular Certificates' issue price may be
computed by subtracting from the issue price the amount of pre-issuance accrued
interest, rather than as an amount payable on the REMIC Regular Certificate.
However, it is unclear under this method how the OID Regulations treat interest
on Payment Lag Certificates. Therefore, in the case of a Payment Lag
Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Taxation of Owners of REMIC Residual
Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Assets remaining in the related Trust Fund have been liquidated or the
Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, Certificateholders who are non-resident alien individuals
should consult their tax advisors concerning this question.
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REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described
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above. The Legislative History indicates that certain adjustments may be
appropriate to reduce (or increase) the income of a subsequent holder of a REMIC
Residual Certificate that purchased such REMIC Residual Certificate at a price
greater than (or less than) the adjusted basis such REMIC Residual Certificate
would have in the hands of an original REMIC Residual Certificateholder. See
"--Sale or Exchange of REMIC Residual Certificates" below. It is not clear,
however, whether such adjustments will in fact be permitted or required and, if
so, how they would be made. The REMIC Regulations do not provide for any such
adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC," other expenses. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that:
(i) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply,
(ii) all bad loans will be deductible as business bad debts, and
(iii) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets, plus any cancellation of indebtedness income upon allocation
of realized losses to the REMIC Regular Certificates. Note that the timing of
cancellation of indebtedness income recognized by REMIC Residual
Certificateholders resulting from defaults and delinquencies on Mortgage Assets
may differ from the time of the actual loss on the Mortgage Asset. The REMIC's
deductions include interest and original issue discount expense on the REMIC
Regular Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC and realized losses on the Mortgage Loans. The requirement
that REMIC Residual Certificateholders report their pro rata share of taxable
income or net loss of the REMIC will continue until there are no Certificates of
any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not
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include cash received by the REMIC that represents a recovery of the REMIC's
basis in its assets, and, as described above, the issue price of the REMIC
Residual Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See "--Sale
or Exchange of REMIC Residual Certificates" below. For a discussion of possible
adjustments to income of a subsequent holder of a REMIC Residual Certificate to
reflect any difference between the actual cost of such REMIC Residual
Certificate to such holder and the adjusted basis such REMIC Residual
Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. A Residual Certificate acquired after January 3,
1995 cannot be marked to market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the REMIC Residual Certificates. In the case of a "single class REMIC," however,
the expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any calendar
quarter will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) may not, except as described below, be offset by any
unrelated losses, deductions or loss carryovers of a REMIC Residual
Certificateholder; (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the REMIC Residual Certificateholder
is a pension fund or any other
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organization that is subject to tax only on its unrelated business taxable
income (see "--Tax-Exempt Investors" below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below. An
exception to the excess inclusion rules that applied to thrifts holding certain
residuals was repealed by the Small Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar quarter
is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (ii) the sum of the "daily accruals" (as defined below) for all days during
the calendar quarter on which the REMIC Residual Certificateholder holds such
REMIC Residual Certificate. For this purpose, the daily accruals with respect to
a REMIC Residual Certificate are determined by allocating to each day in the
calendar quarter its ratable portion of the product of the "adjusted issue
price" (as defined below) of the REMIC Residual Certificate at the beginning of
the calendar quarter and 120 percent of the "Federal long-term rate" in effect
at the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters, and decreased
(but not below zero) by the aggregate amount of payments made on the REMIC
Residual Certificate before the beginning of such quarter. The "federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
exceeds such adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Code Section 1091. In that event, any loss realized by
the REMIC Residual Certificateholder on the sale will not be deductible, but,
instead, will increase such REMIC Residual Certificateholder's adjusted basis in
the newly acquired asset.
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C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day on
which such Trust Fund issues all of its interests could result in the imposition
of a tax on the Trust Fund equal to 100% of the value of the contributed
property (the "Contributions Tax"). No Trust Fund for any Series of Certificates
will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC relating to any Series of Certificates arises out of
or results from (i) a breach of the related Master Servicer's, Trustee's or
Asset Seller's obligations, as the case may be, under the related Agreement for
such Series, such tax will be borne by such Master Servicer, Trustee or Asset
Seller, as the case may be, out of its own funds or (ii) the Asset Seller's
obligation to repurchase a Mortgage Loan, such tax will be borne by the Asset
Seller. In the event that such Master Servicer, Trustee or Asset Seller, as the
case may be, fails to pay or is not required to pay any such tax as provided
above, such tax will be payable out of the Trust Fund for such Series and will
result in a reduction in amounts available to be distributed to the
Certificateholders of such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying
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the inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be subject
to such tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONs
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Amounts distributed to holders of REMIC
Residual Certificates should qualify as "portfolio interest," subject to the
conditions described in "--Taxation of Owners of REMIC Regular Certificates"
above, but only to the extent that the underlying mortgage loans were originated
after July 18, 1984. Furthermore, the rate of withholding on any income on a
REMIC Residual Certificate that is excess inclusion income will not be subject
to reduction under any applicable tax treaties. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the REMIC Residual
Certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
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and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under the Taxpayer Relief
Act of 1997, large partnerships (generally with 250 or more partners) will be
taxable on excess inclusion income as if all partners were disqualified
organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic REMIC
Residual Certificate to a "U.S. Person," as defined above, unless no significant
purpose of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor
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reasonably expect that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that such amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the REMIC Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The provisions in the REMIC
Regulations regarding transfers of REMIC Residual Certificates that have tax
avoidance potential to foreign persons are effective for all transfers after
June 30, 1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it
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becomes fixed and unconditionally payable. A purchaser who buys a Note for more
or less than its principal amount will generally be subject, respectively, to
the premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal
the holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Asset Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If so treated,
the Trust Fund would likely be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be required
to separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income
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payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Company. Based on the economic arrangement of the parties, this
approach for allocating Trust Fund income should be permissible under applicable
treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis
and Certificateholders may become liable for taxes on Trust Fund income even if
they have not received cash from the Trust Fund to pay such taxes. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. Pursuant to formal Treasury regulations issued May 8, 1997
under section 708 of the Code, if such a termination occurs, the Trust Fund (the
"old partnership") would be deemed to contribute its assets to a new partnership
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale
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or other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or
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before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust Fund with the information described above may be
subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
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TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based on
the application of existing law to the facts as set forth in the Trust Agreement
and other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ("Tax Counsel"), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the Certificates
will be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as "unconditionally payable" under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership
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(including a publicly traded partnership treated as a corporation), or an
association taxable as a corporation. Since Tax Counsel will advise that the
Certificates will be treated as indebtedness in the hands of the
Certificateholders for U.S. federal income tax purposes and that the entity
constituted by the Trust will not be a publicly traded partnership treated as a
corporation or an association taxable as a corporation, the Depositor will not
attempt to comply with U.S. federal income tax reporting requirements applicable
to partnerships or corporations as such requirements would apply if the
Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity
(or portion of an entity) that is a "taxable mortgage pool" will be classified
as a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that
all of the provisions of the Trust Agreement, as in effect on the date of
issuance, will be complied with, Tax Counsel will deliver its opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Trust Agreement is a taxable mortgage pool,
such arrangement would be subject to U.S. federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax might
reduce amounts available for distributions to Certificate Owners. The amount of
such a tax would depend upon whether distributions to Certificate Owners would
be deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United sates and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
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If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not to subject to backup withholding. Should a non-exempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
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Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include:
(i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC
regular interests if issued by a REMIC (generally, instruments
that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ("IO") type rate,
(iii) foreclosure property,
(iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks
associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any
debt instruments issued by the holder of the FASIT's ownership
interest or by any person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if:
(i) it is designated as a regular interest,
(ii) it has a stated maturity no greater than thirty years,
(iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its
stated principal amount,
(v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and
(vi) if it pays interest, such interest is payable at either
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to such
principal amount.
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Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates --Variable Rate REMIC Regulation
Certificate.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Material Federal Income Tax Consequences--FASIT
Securities--Tax Treatment of FASIT Regular Securities --Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" "--Original Issue Discount and Premium" and "--Market
Discount" and "--Premium" above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct the
loss sustained (or alternatively be able to report a lesser amount of income).
See "Material Federal Income Tax Consequences --REMICs--Taxation of Owners of
REMIC Regular Certificates", "--Effects of Default and Delinquencies" and
"--Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution
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taxed as a "domestic building and loan association" will represent qualifying
assets for purposes of the qualification requirements set forth in Code Section
7701(a)(19) to the same extent that REMIC Securities would be so considered. See
"Material Federal Income Tax Consequences--REMICs." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses
or net operating loss carryforwards or carrybacks to offset any income derived
from the High-Yield Interest, for either regular Federal income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule that imposes corporate income tax on income derived from a
FASIT Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "Material Federal Income Tax Consequences--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
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Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Offered Securities. State and local income tax
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state or locality. Therefore, potential investors should consult their own tax
advisors with respect to the various state and local tax consequences of an
investment in the Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code"), impose certain restrictions on employee benefit plans, individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which those plans, accounts or arrangements are
invested (collectively, "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 Section 4975 of the Code, and assets of such plans may
be invested in the Securities without regard to the 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, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other
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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 Assets 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, regulatory 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.
An exception applies if the interest described is treated as
indebtedness under applicable local law and has no substantial equity features.
Generally, a profits interest in a partnership, an undivided ownership interest
in property and a beneficial ownership interest in a trust are deemed to be
"equity interest" under the final regulation. If Notes of a particular Series
were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest
generic rating categories from any of Duff & Phelps Credit Rating Co.,
Fitch IBCA, Inc., Moody's Investors Service, Inc. and Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
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(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 (including the
Trustee, 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 United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider the exemptive relief granted by Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance
in one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized
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investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Alaska, Arkansas, Colorado, Connecticut,
Delaware, Florida, Georgia, Illinois, Kansas, Maryland, Michigan, Missouri,
Nebraska, New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah,
Virginia and West Virginia enacted legislation before the October 4, 1991 cutoff
established by SMMEA for such enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
mortgage related securities, in most cases by requiring the affected investors
to rely solely upon existing state law, and not SMMEA. Investors affected by
such legislation will be authorized to invest in SMMEA Certificates only to the
extent provided in such legislation. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement") setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject
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to insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch or
any other Underwriter in connection with offers and sales related to market
making transactions.
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The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the Depositor
by Brown & Wood LLP, New York, New York. Certain matters with respect to
Delaware law will be passed upon for the Depositor by Richards, Layton & Finger,
P.A., Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes of Offered Securities, the Depositor will provide or
cause to be provided without charge a copy of any of the documents and/or
reports incorporated herein by reference, in each case to the extent the
documents or reports relate to such Classes of Offered Securities, other than
the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, telephone number (212) 449-0357. The Depositor
has determined that its financial statements are not material to the offering of
any Offered Securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
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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 DEFINED TERMS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
1986 Act.....................................................................................................64, 68
Accrual Securities...............................................................................................19
Accrued Security Interest........................................................................................21
adjusted issue price.............................................................................................79
Agreement........................................................................................................29
Amortizable Bond Premium Regulations.........................................................................61, 73
an accrual period................................................................................................70
Applicable Amount................................................................................................78
ARM Loans....................................................................................................11, 64
Asset Seller......................................................................................................9
Assets............................................................................................................9
balloon loans.....................................................................................................7
Book-Entry Securities............................................................................................19
Buydown Mortgage Loans...........................................................................................17
Buydown Period...................................................................................................17
Cash Flow Agreement..............................................................................................14
Cede ............................................................................................................26
CEDEL............................................................................................................26
CEDEL Participants...............................................................................................26
Closing Date.....................................................................................................69
Code ........................................................................................................59, 95
Collection Account...............................................................................................32
Cooperative..................................................................................................27, 51
Cooperative Loans................................................................................................51
Cooperatives......................................................................................................9
covered trust.....................................................................................................6
Covered Trust....................................................................................................47
CPR .............................................................................................................16
Credit Support...................................................................................................14
Crime Control Act................................................................................................59
Deferred Interest................................................................................................66
Definitive Securities........................................................................................19, 28
Depositaries.....................................................................................................27
Depositor.........................................................................................................9
Determination Date...............................................................................................20
disqualified organization........................................................................................81
DTC .............................................................................................................26
Due Period.......................................................................................................20
Eligible Corporations............................................................................................93
ERISA............................................................................................................95
Euroclear........................................................................................................27
Euroclear Operator...............................................................................................27
Euroclear Participants...........................................................................................27
excess servicing.................................................................................................63
Exemption........................................................................................................96
FDIC ........................................................................................................32, 98
FHLMC............................................................................................................40
foreign person...................................................................................................84
Government Securities.............................................................................................9
Home Equity Loans................................................................................................11
Home Improvement Contracts.......................................................................................11
Indenture....................................................................................................19, 29
Indenture Trustee................................................................................................29
</TABLE>
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<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Indirect Participants............................................................................................26
Insurance Proceeds...............................................................................................33
IO ..............................................................................................................92
L/C Bank.........................................................................................................48
Labor............................................................................................................95
Legislative History..............................................................................................65
Loan-to-Value Ratio..............................................................................................10
Master REMIC.....................................................................................................68
MBS ..............................................................................................................9
MBS Agreement....................................................................................................12
MBS Issuer.......................................................................................................12
MBS Servicer.....................................................................................................12
MBS Trustee......................................................................................................12
Merrill Lynch....................................................................................................99
Model Law........................................................................................................98
Mortgage Assets...................................................................................................9
Mortgage Loan Group..............................................................................................19
Mortgage Loans....................................................................................................9
Mortgage Notes...................................................................................................10
Mortgage Rate....................................................................................................11
Mortgages........................................................................................................10
NCUA ............................................................................................................98
new partnership..................................................................................................86
New Regulations......................................................................................67, 76, 88, 91
Nonrecoverable Advance...........................................................................................23
OID .............................................................................................................61
OID Regulations..................................................................................................61
old partnership..................................................................................................86
Originator.......................................................................................................10
OTS .............................................................................................................98
Participants.................................................................................................26, 28
parties in interest..............................................................................................95
pass-through entity..............................................................................................82
Pass-Through Rate................................................................................................21
Payment Lag Certificates.........................................................................................74
Permitted Investments............................................................................................32
phantom income...................................................................................................76
Plans............................................................................................................95
Policy Statement.................................................................................................98
Pooling and Servicing Agreement..................................................................................28
Pre-Funded Amount................................................................................................13
pre-issuance accrued interest....................................................................................75
Prepayment Assumption............................................................................................65
Prohibited Transactions Tax......................................................................................80
PTCE 83-1........................................................................................................97
Record Date......................................................................................................20
Refinance Loans..................................................................................................10
Related Proceeds.................................................................................................23
Relief Act.......................................................................................................58
REMIC Certificates...............................................................................................67
REMIC Regular Certificateholders.................................................................................68
REMIC Regulations................................................................................................59
REMIC Residual Certificateholder.................................................................................76
REMIC Residual Certificates......................................................................................67
Restricted Group.................................................................................................97
Retained Interest................................................................................................39
</TABLE>
103
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<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
RICO ............................................................................................................58
Security Balance.................................................................................................22
Security Owners..................................................................................................26
Senior Securities................................................................................................19
Servicing Agreement..............................................................................................29
Servicing Standard...............................................................................................36
Short-Term Note..................................................................................................84
Single Family Mortgage Loan.......................................................................................9
Single Family Property............................................................................................9
SMMEA............................................................................................................97
SMMEA Securities.................................................................................................97
SPA .............................................................................................................16
Stripped ARM Obligations.........................................................................................66
Stripped Bond Certificates.......................................................................................63
Stripped Coupon Certificates.....................................................................................63
Stripped Interest Securities.....................................................................................19
Stripped Principal Securities....................................................................................19
Subordinate Securities...........................................................................................19
Subsequent Assets................................................................................................13
Sub-Servicer.....................................................................................................36
Sub-Servicing Agreement..........................................................................................36
Subsidiary REMIC.................................................................................................68
Super-Premium Certificates.......................................................................................70
Tax Counsel......................................................................................................89
Terms and Conditions.............................................................................................27
Title V..........................................................................................................57
Title VIII.......................................................................................................58
Trust Agreement..................................................................................................29
U.S. Person......................................................................................................59
UCC .............................................................................................................26
Underlying MBS................................................................................................9, 12
Underlying Mortgage Loans.........................................................................................9
Value............................................................................................................10
Voting Rights....................................................................................................42
Warranting Party.................................................................................................31
Whole Loans.......................................................................................................9
</TABLE>
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$380,161,000 (APPROXIMATE)
SEQUOIA MORTGAGE TRUST 4
MORTGAGE LOAN ASSET BACKED PASS-THROUGH CERTIFICATES, CLASS A
SEQUOIA MORTGAGE FUNDING CORPORATION
Seller
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
GREENWICH CAPITAL MARKETS, INC.
MORGAN STANLEY DEAN WITTER
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 certificates in any state where the offer is not
permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus until 90 days after
the date of this prospectus supplement.
