As filed with the Securities and Exchange Commission on November 29, 2000
Registration Statement No. 333-47270
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
AMENDMENT NO. 1
to
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
________________
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Depositor)
(Exact name of registrant as specified in its charter)
Delaware 13-3416059
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 World Financial Center Floor #10
New York NY 10080
(212) 449-1000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
________________
Michael M. McGovern
Merrill Lynch Mortgage Investors, Inc.
4 World Financial Center Floor #12
New York NY 10080
(212) 449-0336
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
________________
With a copy to:
Michael P. Peck
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered(1) Per Unit(2) Offering Price(2) Fee(1)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities........................... $2,000,000,000 100% $2,000,000,000 (3)
===========================================================================================================================
</TABLE>
(1) $4,000,000,000 in securities registered by the Registrants under
Registration Statement No. 333-81429 and $187,896,465 in securities
registered by the Registrants under Registration Statement No.
333-39127, and not previously sold, is carried forward in this
Registration Statement pursuant to Rule 429. The registration fee in
connection with such unsold amount of securities was paid previously
under the foregoing Registration Statements. Accordingly, the total
amount registered under this Registration Statement, as so
consolidated, as of the date of this filing is $6,187,896,465.
(2) Estimated for the purpose of calculating the registration fee.
(3) Previously paid.
Pursuant to Rule 429 under the Securities Act of 1933, as amended,
the Prospectus included in this Registration Statement is a combined
prospectus and also relates to registration statement No. 333-81429 as
previously filed by the Registrant on Form S-3. This Registration Statement,
which is a new registration statement, also constitutes Post-Effective
Amendment No. 2 to registration statement No. 333-39127, Post-Effective
Amendment No. 2 to registration statement No. 333-81429 and such
Post-Effective Amendment No. 2 shall hereafter become effective concurrently
with the effectiveness of this Registration Statement and in accordance with
Section 8(c) of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
PROSPECTUS SUPPLEMENT DATED _____ ____, ____
(TO PROSPECTUS DATED _____ _____, ____)
$---------
Merrill Lynch Mortgage Investors, Inc.
Depositor
Mortgage Loan Asset Backed Certificates
Series ____-___
Issuer
Merrill Lynch Mortgage Investors, Inc. is offering to sell the following
certificates:
<TABLE>
<CAPTION>
Initial Principal Balance Pass-Through Rate
<S> <C> <C>
Class A Certificates........................ $_______ _______
Class M-1 Certificates...................... $_______ _______
Class M-2 Certificates...................... $_______ _______
Class B Certificates........................ $_______ _______
</TABLE>
With respect to the information set forth in the table above, the initial
principal balance is plus or minus 5%.
The certificates represent interests in a pool of conventional,
adjustable-rate, one- to four-family, first lien mortgage loans having
original terms to maturity of 30 years. _____________ originated or acquired
the mortgage loans in the ordinary course of its business.
The trustee will make distributions on the certificates to you on the
[20th] day of each month or, if this day is not a business day, on the next
business day, beginning in ____ ____. You will earn interest on your
certificate from the previous distribution date , or, in the case of the first
distribution date, from the date the certificates are issued, through the day
before that distribution date. Your interest will be based on a 360-day year
and the actual number of days since you last received interest, and will be
based on the then-outstanding principal balance of your certificate and the
then-applicable interest rate.
You will receive payments on the certificates only from payments
received on the mortgage loans. No entity has any obligation to make payments
on the certificates from its own funds. Neither the certificates nor the
mortgage loans are insured or guaranteed by any governmental agency or
instrumentality.
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
----------
The Attorney General of the State of New York has not passed
on or endorsed the merits of this offering. Any
representation to the contrary is unlawful.
------------
Before buying these certificates, you should consider the factors set
forth under "Risk Factors" beginning on page S-__ of this prospectus
supplement.
The underwriter will buy the offered certificates from the depositor
at a price equal to 100% of their face value. The depositor incurred expenses
of approximately $_______ in connection with issuing the certificates. The
underwriter will sell the offered certificates from time to time in negotiated
transactions, at varying prices to be determined at the time of sale.
---------------------
Merrill Lynch & Co.
---------------------
<PAGE>
Important notice about information presented in this Prospectus
Supplement and the accompanying Prospectus
We tell you about the certificates in two separate documents that
progressively provide more detail; first, the accompanying prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your series; and second, this prospectus
supplement, which describes the specific terms of your series of securities.
The information in this prospectus supplement enhances and clarifies
the information set forth in the prospectus. If the terms of your series of
certificates vary between this prospectus supplement and the prospectus, you
should rely on the information in this prospectus supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions can be found.
---------------------
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS SUPPLEMENT.......................S-1
Title of Series.................................S-1
The Certificates................................S-1
Depositor of Mortgage Loans.....................S-1
Mortgage Loan Originator........................S-1
Servicer........................................S-1
Trustee.........................................S-2
Cut-off Date....................................S-2
Closing date....................................S-2
The Mortgage Pool...............................S-2
Distributions--General..........................S-4
Interest Distributions..........................S-4
Pass-Through Rates..............................S-4
Principal Distributions.........................S-5
Credit Enhancement..............................S-5
Subordination............................S-5
Application of Realized Losses...........S-5
Overcollateralization....................S-6
Monthly Excess Cashflow..................S-6
Optional Termination............................S-6
Material Federal Income Tax.....................S-7
Ratings.........................................S-7
Legal Investment................................S-8
ERISA Considerations............................S-8
RISK FACTORS...........................................S-9
THE MORTGAGE LOAN ORIGINATOR..........................S-12
THE MORTGAGE POOL.....................................S-12
General........................................S-12
Statistical Information........................S-13
The Index......................................S-20
Underwriting Standards; Representations........S-21
YIELD ON THE CERTIFICATES.............................S-22
Certain Shortfalls in Collections of Interest..S-22
General Prepayment Considerations..............S-22
Special Yield Considerations with Respect
to the Mortgage Loans........................S-24
The Subordinated Certificates..................S-24
Weighted Average Lives.........................S-25
Final Scheduled Distribution Dates.............S-32
DESCRIPTION OF THE CERTIFICATES.......................S-32
General........................................S-32
Book-Entry Registration and Definitive
Certificates................................ S-33
Calculation of One-Month LIBOR.................S-37
Interest Distributions.........................S-38
Pass-Through Rates.............................S-39
Principal Distributions........................S-40
Credit Enhancement.............................S-47
Allocation of Losses...........................S-48
Application of Monthly Excess Cashflow Amounts.S-48
Monthly Advances...............................S-51
POOLING AND SERVICING AGREEMENT.......................S-52
General........................................S-52
Assignment of the Mortgage Loans...............S-52
The Servicer...................................S-53
The Trustee....................................S-55
Servicing and Other Compensation and
Payment of Expenses..........................S-55
Voting Rights..................................S-56
Termination....................................S-56
MATERIAL FEDERAL INCOME TAX CONSEQUENCES..............S-57
General........................................S-57
Taxation of Regular Interests..................S-57
USE OF PROCEEDS.......................................S-60
UNDERWRITING..........................................S-60
LEGAL MATTERS.........................................S-61
RATINGS...............................................S-61
LEGAL INVESTMENT......................................S-62
ERISA CONSIDERATIONS..................................S-62
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus and
prospectus supplement carefully before you decide to purchase a certificate.
Title of Series.................... Mortgage Loan Asset Backed
Certificates, Series ____-____.
The Certificates.................. The Class A, Class M-1, Class M-2,
Class B, Class BB, Class X and Class R
Certificates are the entire ownership
interest in a trust fund which is
composed primarily of first lien
mortgage loans. The trust will issue
the certificates pursuant to a pooling
and servicing agreement among Merrill
Lynch Mortgage Investors, Inc.,
_______, and _________. Merrill Lynch
Mortgage Investors, Inc. is offering
to sell the Class A, Class M-1, Class
M-2 and Class B Certificates but not
the Class BB, Class X and Class R
Certificates. The trust is offering
each class of certificates as
book-entry securities clearing through
DTC, in the United States, or
Clearstream or Euroclear, in Europe.
See "Description of the Certificates -
Book-Entry Registration and Definitive
Certificates" in this prospectus
supplement.
Depositor of Mortgage Loans....... Merrill Lynch Mortgage Investors, Inc.
will deposit the mortgage loans in the
trust fund. The depositor is a
Delaware corporation and a
wholly-owned, limited purpose
subsidiary of Merrill Lynch Mortgage
Capital Inc., which is a wholly owned
indirect subsidiary of Merrill Lynch &
Co., Inc. The depositor is an
affiliate of the underwriter.
Mortgage Loan Originator.......... ___________, a __________, originated
or acquired the mortgage loans
generally in accordance with the
underwriting standards described in
"The Mortgage Pool - Underwriting
Standards" in this prospectus
supplement.
Servicer.......................... ____________ will service the mortgage
loans for an annual servicing fee,
payable monthly, of _____% of the
total principal balance of the
mortgage loans. The servicer must
advance delinquent payments of
principal and interest on the mortgage
loans, subject to some limitations.
See "Description of the
Certificates--Monthly Advances" in the
prospectus supplement and "Description
of the Certificates--Advances in
Respect of Delinquencies" in the
prospectus.
Trustee........................... ___________.
Cut-off Date...................... The close of business on ________ __,
____.
Closing Date...................... On or about _______ __, ____.
Final Scheduled Distribution
Dates............................ The final scheduled distribution date
for each class of offered certificates
is set forth below:
Class A _______ 20, ____
Class M-1 _______ 20, ____
Class M-2 _______ 20, ____
Class B _______ 20, ____
Each final scheduled distribution date
has been calculated as described under
"Yield on the Certificates--Final
Scheduled Distribution Date" in this
prospectus supplement.
<PAGE>
The Mortgage Pool.................. The following table shows the
characteristics of the mortgage loans
in which percentages are based on the
aggregate principal balance as of
_________ __, ____
Aggregate Current Principal Balances $
Average Current Principal Balances $
Range of Current Principal Balances $
Average Original Principal Balances $
Range of Original Principal Balances $
Prepay Penalties
Product
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR %
Mortgage Interest Rates
Weighted Average By Type of Index %
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR
Gross Margin
Weighted Average By Type of Index
Six Month LIBOR %
__/__/LIBOR %
__/__/LIBOR %
Current Weighted Average Mortgage
Interest Rate %
Range of Current Mortgage Interest
Rates %
Weighted Average Gross Margin %
Range of Gross Margin %
Weighted Average Maximum Lifetime
Mortgage Interest Rate %
Range of Maximum Lifetime Mortgage
Interest Rates %
Weighted Average Lifetime Minimum
Mortgage Interest Rate %
Range of Minimum Lifetime Mortgage
Interest Rates %
Weighted Average Loan-to-Value Ratio
Weighted Average Original %
Amortization Term
Weighted Average Remaining
Amortization Term
Weighted Average Initial Periodic Cap %
Range of Initial Periodic Cap %
Weighted Average Periodic Cap %
Weighted Average Months to Interest
Roll %
Range of Months to Interest Roll %
Weighted Average Interest Roll
Frequency %
Weighted Average FICO Score %
Range of FICO Score
Mortgaged Premises %
Single-family dwellings %
Planned unit developments
Two-to-four family dwellings
Manufactured Homes
Condominiums
Max Zip Code Concentration (%)
Max Zip Code Concentration (zip)
Geographic Concentration (above 5%
of pool)
The interest rate and monthly payment
on each mortgage loan adjusts every
___ months. The new interest rate is
the sum of [six-month] LIBOR and a
fixed margin. None of the mortgage
loans will negatively amortize or
convert from an adjustable rate to a
fixed rate. See "The Mortgage Pool" in
this prospectus supplement for more
information about the mortgage loans.
Distributions--General............. The distribution date will be the
[20th] day of each month or, if that
day is not a business day, the next
business day, beginning in _______
____. Distributions will generally
include payments made on the mortgage
loans during the related collection
period. The collection period for the
distribution date in ______ ____ will
be from _______ __to _______ ___.
Interest Distributions............. On each distribution date, you will be
entitled to receive interest earned
since the previous distribution date
on your certificate at the
pass-through rate and any interest
which you earned previously but which
you did not receive. There are
circumstances which could reduce the
amount of interest paid to you. See
"Description of the Certificates -
Interest Distributions on the
Certificates" in this prospectus
supplement.
Pass-Through Rates................. The pass-through rate on your
certificate on each distribution date
will be a per annum rate equal to the
lowest of the following:
o the sum of one-month LIBOR,
which is a floating interest
rate, plus the following
fixed number of basis
points:
Basis
Class Points
----- ------
A __
M-1 __
M-2 __
B __
o the percentage obtained by
dividing (A) the total
amount of interest which
should have been received on
the mortgage loans at the
weighted average mortgage
rate minus the trustee and
servicer fee rate by (B) the
product of (1) the total
principal balance of all the
certificates, and (2) the
number of days since the
last distribution date
divided by 360; and
o the weighted average maximum
mortgage rate on all the
mortgage loans minus the
trustee and servicer fee
rate.
If on any distribution date, the
pass-through rate is limited by the
second option listed above, you will
be entitled to receive the amount of
additional interest that you would
have received but for this limitation
on future distribution dates when
there is enough money to pay you. This
additional amount of interest is
called the LIBOR Shortfall.
Principal Distributions............ On each distribution date, you will
receive a distribution of principal if
there is cash available on that date
for your class of certificate. You
should review the priority of payments
described under "Description of the
Certificates - Principal Distributions
on the Certificates" in this
prospectus supplement.
Credit Enhancement................. Credit enhancements reduce the harm
caused holders of certificates by
shortfalls in payments received on the
mortgage loans. They can reduce the
effect of shortfalls on all classes,
or they can allocate shortfalls so
they affect some classes before
others. This transaction employs the
following four forms of credit
enhancement. See "Description of the
Certificates - Credit Enhancement" in
this prospectus supplement.
Subordination. On each distribution
date, classes that are lower in order
of payment priority will not receive
payments until the classes that are
higher in order of payment priority
have been paid. If there is not enough
money on a distribution date to pay
all classes, the subordinate classes
are the first to forego payment.
Application of Realized Losses. If on
any distribution date, after the
balances of the certificates have been
reduced by the amount of cash paid on
that date, the total principal balance
of the certificates is greater than
the total principal balance of the
mortgage loans, the principal balance
of the certificates that are lower in
order of payment priority will be
reduced by the amount of that excess.
Overcollateralization. Although the
total principal balance of the
mortgage loans is $_________, the
trust is issuing only $_________total
principal amount of certificates. The
remaining ___% of the total principal
balance of the mortgage loans will
absorb losses on the mortgage loans
before those losses affect the
certificates. If the level of
overcollateralization falls below what
is required, the excess interest
described in the next section will be
paid to the certificates as principal.
This will have the effect of reducing
the principal balance of the
certificates faster than the principal
balance of the mortgage loans so that
the required level of
overcollateralization is reached.
Monthly Excess Cashflow. Because more
interest is paid by the borrowers than
is necessary to pay the interest
earned on the certificates, there will
be excess interest each month. Some of
the excess interest will be used to
pay interest on certificates that was
previously earned but not paid, and
some of the excess interest will be
used to reimburse certificates for
losses that they experienced
previously.
Optional Termination............... The owner of the Class X Certificate
has the option, or if the owner of the
Class X Certificate does not exercise
that option, the servicer has the
option, to purchase all the mortgage
loans and any properties that the
trustee acquired in satisfaction of
any of the mortgage loans. This option
can be exercised only when the total
principal balance of the mortgage
loans, including the mortgage loans
related to the properties which the
trustee has acquired, is [10]% or less
than the total principal balance of
the mortgage loans on the cut-off
date. If the option is exercised, your
certificate will be retired early and
you will be entitled to the following
amounts:
o the outstanding principal
balance of your certificate;
o one month's interest on that
balance at the pass-through
rate;
o any interest previously
earned but not paid; and
o any LIBOR shortfall from all
previous distribution dates.
You will receive the last two items
only to the extent that there is
enough cash to make those payments.
See "Pooling and Servicing Agreement -
Termination" in this prospectus
supplement.
Material Federal Income Tax
Consequences.................... The trustee will elect to treat the
assets of the trust fund as comprising
several real estate mortgage
investment conduits, or REMICs, for
federal income tax purposes. In
addition, under the terms of your
certificate, you have the right to
receive payments that will not be
treated as having been paid by a
REMIC. For federal income tax
purposes, that right will be treated
as the right to receive payments under
an interest rate cap contract.
For federal income tax reporting
purposes, the offered certificates
will not be treated as having been
issued with original issue discount.
For further information regarding the
federal income tax consequences of
investing in the offered certificates,
see "Material Federal Income Tax
Consequences" in this prospectus
supplement and in the prospectus.
Ratings............................ The trust will not issue the
certificates unless they receive the
respective ratings set forth below
from ________, and _____:
Class _________ _______
A___ ___
M-1 ___ ___
M-2 ___ ___
B___ ___
The rating on the certificates
indicates the likelihood that you will
receive all funds to which you are
entitled by the terms of the
certificate. The rating agency that
issues the rating reviews the nature
and credit quality of the mortgage
loans and the soundness of the
structure which the depositor has
created to allow the payments on the
mortgage loans to flow to the holders
of the certificates. A rating is not a
recommendation to buy, sell or hold
securities and the rating agency can
revise or withdraw it at any time. A
rating does not address the frequency
of prepayments on the mortgage loans
or the effect of those prepayments on
your yield. The ratings also do not
address the likelihood of the payment
of any LIBOR shortfall. See "Yield on
the Certificates" and "Ratings" in
this prospectus supplement and "Yield
Considerations" in the prospectus.
Legal Investment................... You should consult with your lawyer to
see if you are permitted to buy the
offered certificates since the legal
investment rules vary depending on
what kind of entity you are and who
regulates you. The Class A and Class
M-1 Certificates will be "mortgage
related securities" for purposes of
the Secondary Mortgage Market
Enhancement Act of 1984 so long as
they are rated in one of the two
highest rating categories by at least
one rating agency. The Class M-2 and
Class B Certificates will not be
"mortgage related securities" for
purposes of SMMEA. See "Legal
Investment" in this prospectus
supplement and in the prospectus.
ERISA Considerations............... If you are a fiduciary of any employee
benefit plan or other retirement
arrangement subject to the Employee
Retirement Income Security Act of
1974, as amended, or Section 4975 of
the Internal Revenue Code you should
review carefully with your lawyer
whether you can buy or hold an offered
certificate. See "ERISA
Considerations" in this prospectus
supplement and in the prospectus.
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this prospectus supplement
and the prospectus, you should carefully consider the following risk factors
before deciding to purchase a certificate.
There is a risk to holders of subordinated securities that losses will have a
greater impact on them.
o If you buy a Class M-1, Class M-2 or Class B Certificate, you will not
receive any payments on your certificate until the holders of the Class A
Certificates have received all payments to which they are entitled.
Additionally, payments on the Class M-2 Certificates will be subordinate
to payments on the Class M-1 Certificates and payments on the Class B
Certificates will be subordinate to payments on the Class M-1 and Class
M-2 Certificates. As a result, the yield on your subordinated certificate
will be sensitive to losses on the mortgage loans. This sensitivity
increases with the subordination of a certificate, so that the yield on
the Class B Certificate is the most sensitive. You should carefully
consider the risk that you may lose all or a part of the money that you
paid for the subordinated certificate if losses are greater than
expected.
o If you buy a subordinated certificate you will not receive any principal
distributions until _______ ____ at the earliest, unless the Class A
Certificates have been paid down to zero before that date. As a result,
your subordinated certificate will be outstanding longer than would be
the case if principal were distributed on a proportionate basis among the
Class A Certificates and the subordinated certificates. Because your
subordinated certificate is outstanding longer, there is a greater period
of time during which losses on the mortgage loans will affect your
subordinated certificate. Therefore the risk that you will lose all or
part of the money you paid for the certificate also increases.
There is a risk that mortgaged properties concentrated in a geographic region
suffering from adverse economic conditions will result in losses to investors.
o Mortgaged properties located in the State of _____ secure approximately
_____% of the mortgage loans by aggregate principal balance as of the
cut-off date. This geographic concentration might magnify the effect on
the mortgage pool of adverse economic conditions in _______ and might
increase the rate of delinquencies, defaults and losses on the mortgage
loans more than would be the case if the mortgage properties were more
geographically diversified. See "The Mortgage Pool--Underwriting
Standards; Representations" in this prospectus supplement.
There is a risk that the securities will have limited liquidity.
o The underwriter may assist in resales of the certificates, but it is
under no obligation to do so. A secondary market for the certificates may
not develop. If a secondary market does develop, it might not continue or
it might not be sufficiently liquid to allow you to resell your
certificate.
There is a risk that book-entry registration certificates will have limited
liquidity.
o Since the certificates are being offered as book-entry securities, you
may have difficulty selling, pledging or otherwise taking action with
your certificate since some potential buyers may not want to buy a
security for which they cannot receive a physical certificate and some
potential buyers may not participate in the DTC, Clearstream or Euroclear
systems. See "Description of the Certificates--Book-Entry Registration
and Definitive Certificates" in this prospectus supplement.
There is a risk that the receipt of distributions may be delayed because of
the book-entry registration.
o You may experience some delay in your receipt of distributions of
interest and principal on certificates since those distributions will be
forwarded by the trustee to DTC and DTC will credit those distributions
to the accounts of its participants which will thereafter credit them to
your account. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in this prospectus supplement.
There is a risk that mortgage loans with high loan-to-value ratios will result
in losses to investors.
o Approximately ____% of the mortgage loans, by aggregate principal balance
as of the cut-off date, had a loan-to-value ratio at origination in
excess of __% but less than or equal to __%, and the mortgage loans will
not be covered by a primary mortgage insurance policy. Because the
weighted average remaining term to maturity of the mortgage loans as of
the cut-off date is approximately ___ months, most of the monthly payment
made by the borrowers for a substantial period of time after the issuance
of the certificates will be applied as interest and will not
significantly reduce the balance of the loan. Therefore, mortgage loans
with higher loan-to-value ratios will be more sensitive to declining
property values than would those with lower loan-to-value ratios and may
present a greater risk of loss. See "The Mortgage Pool--General" in this
prospectus supplement.
There is a risk that, because certificates are not obligations of any entity
other than the trust, the assets will not be sufficient to pay the securities
in full.
o The offered certificates will not represent an interest in or obligation
of any entity except for the obligations of the depositor and of the
mortgage loan originator pursuant to limited representations and
warranties made with respect to the mortgage loans and of the servicer
with respect to its servicing obligations under the pooling and servicing
agreement, including the limited obligation to make monthly advances.
Neither the certificates nor the underlying mortgage loans will be
guaranteed or insured by any governmental agency or instrumentality.
Proceeds of the assets included in the trust fund, including the mortgage
loans, will be the sole source of payments on the offered certificates.
You will not be able to receive money from any entity in the event that
proceeds are not enough to make all payments provided for under the
offered certificates.
There is a risk that the yield on the certificates may vary which will affect
the availability of funds to pay the securities in full.
o Because the interest rates on the mortgage loans are based on the index
while the pass-through rates on the offered certificates are based in
part on one-month LIBOR and because the first adjustment date of many of
the loans is more than six months after origination, one or more
pass-through rates may be limited by the available funds pass-through
rate. Although you are entitled to receive, to the extent funds are
available, any related LIBOR shortfall, those funds might not be
available or, if available, might not be sufficient. The ratings of the
offered certificates do not address the likelihood of the payment of any
LIBOR shortfall.
o Also, because the interest rates on the mortgage loans are based on the
addition of a fixed number of basis points to the index, the resulting
rates could be higher than market interest rates. If they are higher,
prepayments may increase as borrowers refinance their mortgage loans at
the lower rate.
There is a risk that in the event of solvency of the mortgage loan originator
while in possession of the mortgage loans will result in losses to investors.
o The depositor believes that the transfer of the mortgage loans by the
mortgage loan originator to it constituted an absolute and unconditional
sale. However, in the event of a bankruptcy of the mortgage loan
originator at a time when it or any affiliate holds certificates, the
trustee in bankruptcy could attempt to recharacterize the sale of the
mortgage loans by the mortgage loan originator as a borrowing by the
mortgage loan originator or the affiliate from the depositor, secured by
a pledge of the mortgage loans. An attempt, even if unsuccessful, could
result in delays in payments on the certificates. If an attempt were
successful, the trustee in bankruptcy could elect to liquidate the
mortgage loans and pay down the certificates early. Thus, you could lose
the right to future payments of interest, and might suffer reinvestment
loss in a lower interest rate environment. Brown & Wood LLP will deliver
a legal opinion in connection with the issuance of the certificates to
the effect that, in the event of the bankruptcy of the mortgage loan
originator, a court would not hold that the transfer of the mortgage
loans by the mortgage loan originator to the depositor is a loan secured
by the mortgage loans rather than a sale of the ownership interest in the
mortgage loans evidenced by the offered certificates.
<PAGE>
There is a Glossary on page S-70 where you will find definitions of
the capitalized terms used in this prospectus supplement.
THE MORTGAGE LOAN ORIGINATOR
_________ is a ______________ headquartered in _______, ______, as
mortgage loan originator. The information set forth in the following
paragraphs has been provided by the mortgage loan originator and neither the
depositor nor any other party makes any representation as to the accuracy or
completeness of the information.
[Specific information provided by the mortgage loan originator.]
THE MORTGAGE POOL
General
The mortgage pool will consist of conventional, one- to four-family,
adjustable-rate mortgage loans secured by first liens on residential real
properties. The mortgage loans have original terms to maturity of __ years.
The mortgage loans will consist of approximately _____ mortgage loans having
an aggregate principal balance as of the cut-off date of approximately
$________, after application of payments of principal due on or before the
cut-off date, whether or not received.
The mortgage loans are secured by mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties consisting of detached or semi-detached one- to
four-family dwelling units, townhouses, individual condominium units and
individual units in planned unit developments and manufactured housing. [The
mortgage loans to be included in the mortgage pool were acquired by the
depositor from Merrill Lynch Mortgage Capital, Inc., an affiliate, which
acquired them from the mortgage loan originator.] See "--Underwriting
Standards; Representations" in this prospectus supplement.
All of the mortgage loans have scheduled monthly payments due on the
first day of the month. Each mortgage loan is assumable upon transfer or sale
of the mortgaged property by the related mortgagor if the purchaser or
transferee meets the then current credit requirements of the mortgage loan
originator.
Approximately ____% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on prepayments.
Generally, each mortgage loan provides for payment of a prepayment charge on
partial prepayments and all prepayments in full made within one year, two
years, three years, four years or five years from the date of origination of
that mortgage loan. The amount of the prepayment charge is as provided in the
related mortgage note and generally equals six months' interest on the amount
of the prepayment in excess of __% of the original principal amount of the
loan. Any prepayment charges received on the mortgage loans will not be
available for distribution on the offered certificates.
Each mortgage loan provides for semiannual adjustment to the mortgage
rate on that mortgage loan and for corresponding adjustments to the monthly
payment amount due on that mortgage loan, in each case on each adjustment date
applicable to that mortgage loan; [provided, however, that in the case of
approximately ____% of the mortgage loans, each a "two year delayed first
adjustment date mortgage loan," the first adjustment date for each mortgage
loan will occur after an initial period of two years from the origination of
that mortgage loan; and in the case of approximately ____% of the mortgage
loans, each a "one year delayed first adjustment date mortgage loan," the
first adjustment date for each mortgage loan will occur after an initial
period of one year from the origination of that mortgage loan]. On each
adjustment date for each mortgage loan, the mortgage rate on that mortgage
loan will be adjusted to equal the sum, rounded to the nearest multiple of
____%, of the index and a fixed percentage amount, or the "Gross Margin";
provided, however, that the mortgage rate on each mortgage loan generally will
not increase or decrease by more than ___basis points, which is the periodic
rate cap, on any related adjustment date other than on the first adjustment
date and will not exceed a specified maximum mortgage rate over the life of
that mortgage loan or be less than a specified minimum mortgage rate over the
life of that mortgage loan. In general, the two year delayed first adjustment
date mortgage loans have a periodic rate cap of ___ basis points for their
first adjustment date and the one year delayed first adjustment date mortgage
loans have a periodic rate cap of ___ basis points for their first adjustment
date, while both have subsequent periodic rate caps of ___ basis points for
each adjustment date thereafter and have a minimum mortgage rate equal to the
related initial mortgage rate. Effective with the first monthly payment due on
each adjustable rate mortgage loan after each related adjustment date, the
monthly payment amount will be adjusted to an amount that will amortize fully
the outstanding principal balance of the related mortgage loan over its
remaining term, and pay interest at the mortgage rate as so adjusted. None of
the mortgage loans permits the related mortgagor to convert the adjustable
mortgage rate on those mortgage loans to a fixed mortgage rate.
Statistical Information
Set forth below is summary statistical information regarding the
mortgage loans expected to be included in the trust fund as of the closing
date. All of the information is approximate and is given as of the cut-off
date. Prior to the closing date, mortgage loans may be removed from the trust
fund and other mortgage loans may be substituted for those mortgage loans. In
addition, mortgage loans may be prepaid at any time. As a result,
characteristics of the mortgage loans in the trust fund may vary from the
characteristics set forth below as of the cut-off date.
<PAGE>
Principal Balances at Origination
<TABLE>
<CAPTION>
Aggregate
Principal Balance % of
Number Outstanding as of Aggregate Current
Range of Origination Date Principal Balances of Loans the Cut-Off Date Principal Balance
-------------------------------------------- -------- ---------------- -----------------
<S> <C> <C> <C>
$0.01- $25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
350,000.01- 375,000.00
375,000.01- 400,000.00
400,000.01- 425,000.00
425,000.01- 450,000.00
450,000.01- 500,000.00
500,000.01- 550,000.00
550,000.01- 600,000.00
700,000.01- 750,000.00 ___________ ________
Totals $ 100.00%
The average principal balance of the mortgage loans at origination was
approximately $__________. No mortgage loan had a principal balance at
origination greater than $_____________ or less than $______________.
<PAGE>
Principal Balances as of the Cut-Off Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Cut-Off Date Principal Balances of Loans the Cut-Off Date the Cut-off Date
---------------------------------------- -------- ---------------- ----------------
$0.01- $25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
350,000.01- 375,000.00
375,000.01- 400,000.00
400,000.01- 425,000.00
425,000.01- 450,000.00
450,000.01- 500,000.00
500,000.01- 550,000.00
550,000.01- 600,000.00
700,000.01- 750,000.00 __________ _________ _______
Totals $ 100.00%
</TABLE>
The average principal balance of the mortgage loans as of the cut-off date was
approximately $_________. No mortgage loan had a principal balance as of the
cut-off date greater than $________ or less than $________.
<PAGE>
<TABLE>
<CAPTION>
Property Types
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Cut-Off Date the Cut-off Date
------------- -------- ---------------- ----------------
<S> <C> <C> <C>
Single Family $ %
Planned Unit Development
Condo
Two- to Four-Family
Manufactured Housing _______ ______________ _______
otal $ 100.00%
Occupancy Status
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy of Loans the Cut-Off Date the Cut-off Date
--------- -------- ---------------- ----------------
Owner - Occupied $ %
Non-owner - Occupied __________ _____________ ________
Total $ 100.00%
</TABLE>
The occupancy status of a mortgaged property is as represented by the
mortgagor in its loan application.
<PAGE>
<TABLE>
<CAPTION>
Mortgage Rates as of the Cut-Off Date
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Mortgage Rates of Loans the Cut-Off Date the Cut-off Date
----------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
6.500- 6.999 $ %
7.000- 7.499
7.500- 7.999
8.000- 8.499
8.500- 8.999
9.000- 9.499
9.500- 9.999
10.000- 10.499
10.500- 10.999
11.000- 11.499
11.500- 11.999
12.000- 12.499
12.500- 12.999 ______________ ______________ _________
Total $ 100.00%
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the mortgage
loans was approximately ______% per annum and ranged from ____% to ______%.
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range of Original Loan-to-Value of Loans the Cut-Off Date the Cut-off Date
------------------------------------- -------- ---------------- ----------------
Ratios
<S> <C> <C> <C>
10.01 - 20.00 $ %
20.01 - 30.00
30.01 - 40.00
40.01 - 50.00
50.01 - 60.00
60.01 - 70.00
70.01 - 80.00
80.01 - 90.00
90.01 - 99.99 ___________ _____________ _________
Total $ 100.00%
</TABLE>
The weighted average loan-to-value ratio at origination of the mortgage loans
was approximately ____%. No mortgage loan had a loan-to-value ratio at
origination greater than ____% or less than ____%
<PAGE>
Geographic Distribution of the Mortgaged Properties
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
State of Loans the Cut-Off Date the Cut-off Date
----- -------- ---------------- ----------------
[Alabama $ %
Arizona
California
Colorado
Connecticut
Florida
Georgia
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
New Hampshire
New Jersey
New Mexico
Nevada
Ohio
Oregon
Pennsylvania
Rhode Island
Texas
Utah
Vermont
Washington
Wisconsin
Wyoming] ___________ _____________ _________
Total $ 100%
<PAGE>
<TABLE>
<CAPTION>
Purpose of the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Loan Purpose Loans the Cut-Off Date the Cut-off Date
------------ --------- ---------------- ----------------
<S> <C> <C> <C>
Purchase $ %
Cashout
Refinance _________ ____________ ____________
Total $ 100.00%
Mortgage Loan Programs
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Documentation Loans the Cut-Off Date the Cut-off Date
------------- ----- ---------------- ----------------
Full Documentation Program $ %
No Income Verification
Limited Income Verification
Unknown _________ ____________ __________
Total $ 100.00%
Mortgage Loan Risk Categories
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Risk Categories Loans the Cut-Off Date the Cut-off Date
--------------- --------- ---------------- ----------------
Direct Access $ %
B
A-
C
A1
D __________ ____________ __________
Total $ 100.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Credit Bureau Risk Score
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Credit Bureau Risk Score Loans the Cut-Off Date the Cut-off Date
------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
541- 560 $ %
561- 580
581- 600
601- 620
621- 640
641- 660
661- 680
681- 700
701- 720
721- 740
741- 760
761- 780
781- 800 ___________ ____________ ___________
Totals $ %
The weighted average credit bureau risk score as of the cut-off date was approximately ____.
Maximum Mortgage Rates
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Maximum Mortgage Rate Loans the Cut-Off Date the Cut-off Date
--------------------- ----- ---------------- ----------------
9.500- 9.999 $ %
12.500- 12.999
13.000- 13.499
13.500- 13.999
14.000- 14.499
14.500- 14.999
15.000- 15.499
15.500- 15.999
16.000- 16.499
16.500-16.999
17.000- 17.499
17.500- 17.999
18.000- 18.499
18.500- 18.999 ___________ _____________ __________
Total $ 100.00%
The weighted average maximum mortgage rate of the mortgage loans as of the
cut-off date was approximately ______% per annum and ranged from _______% to
_______%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Minimum Mortgage Rates
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Minimum Mortgage Rates Loans the Cut-Off Date the Cut-off Date
---------------------- ----- ---------------- ----------------
<S> <C> <C> <C>
6.500- 6.999 $ %
7.000- 7.499
7.500- 7.999
8.000- 8.499
8.500- 8.999
9.000- 9.499
9.500- 9.999
10.000- 10.499
10.500- 10.999
11.000- 11.499
11.500- 11.999
12.000- 12.499
12.500- 12.999 __________ ______________ __________
Total $ 100.00%
Gross Margin
Aggregate % of Aggregate
Principal Balance Principal Balance
Number of Outstanding as of Outstanding as of
Gross Margin Loans the Cut-Off Date the Cut-off Date
------------ --------- ---------------- ----------------
3.250- 3.499 $ %
3.500- 3.749
3.750- 3.999
4.000- 4.249
4.250- 4.499
4.500- 4.749
4.750- 4.999
5.000- 5.249
5.250- 5.499
5.500- 5.749
5.750- 5.999
6.000- 6.249
6.250- 6.499
6.500- 6.749
6.750- 6.999
7.000- 7.249
7.250- 7.499
7.500- 7.749
7.750- 7.999
8.000- 8.249 __________ _____________ ____________
Total $ 100.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Next Adjustment Dates for the Mortgage Loans
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Month of Next Adjustment Date of Loans the Cut-Off Date the Cut-off Date
----------------------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
-/--/-- $ %
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/----
--/--/---- ---------- -------------- -----------
Totals $ 100.00%
</TABLE>
As of the cut-off date, the weighted average next adjustment date of the
mortgage loans was ________ __, _____.
The Index
As of any adjustment date, the index applicable to the determination
of the mortgage rate on each mortgage loan will be the six-month LIBOR, which
is the average of the interbank offered rates for six-month United States
dollar deposits in the London market, as published in The Wall Street Journal
and as most recently available as of the first business day of the month
preceding the month of that adjustment date, as specified in the related
mortgage note.
In the event that the index becomes unavailable or otherwise
unpublished, the servicer will select a comparable alternative index over
which it has no direct control and which is readily verifiable.
<PAGE>
The table below sets forth historical average rates of six-month
LIBOR for the months indicated as made available from FNMA, which rates may
differ from the rates of the index, which is six-month LIBOR as published in
The Wall Street Journal as described above. The table does not purport to be
representative of the subsequent rates of the index which will be used to
determine the mortgage rate on each mortgage loan.
<TABLE>
<CAPTION>
Year
Month ______ ______ ______ ______ ______ ______ ______ ______ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January % % % % % % % % %
February
March
April
May
June
July
August
September
October
November
December
</TABLE>
Underwriting Standards; Representations
The depositor acquired the mortgage loans from [Merrill Lynch
Mortgage Capital Inc., an affiliate, which acquired the mortgage loans from]
the mortgage loan originator pursuant to a master mortgage loan purchase and
interim servicing agreement, dated as of _____ __, ____. All of the mortgage
loans were originated or acquired by the mortgage loan originator, generally
in accordance with the underwriting criteria described in this prospectus
supplement. The information set forth in the following paragraphs has been
provided by the mortgage loan originator and neither the depositor nor any
other party makes any representation as to the accuracy or completeness of the
information.
[Mortgage loan originator's underwriting standards.]
The mortgage loan originator will make representations and warranties
with respect to the mortgage loans as of the closing date. The mortgage loan
originator will be obligated to repurchase or substitute for mortgage loans in
respect of which a material breach of the representations and warranties it
has made has occurred, other than those breaches which have been cured. For a
discussion of the representations and warranties made and the repurchase
obligation, see "Description of the Agreements--Representations and
Warranties; Repurchases" in the prospectus.
YIELD ON THE CERTIFICATES
Certain Shortfalls in Collections of Interest
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the due date of the
preceding monthly payment up to the date of that prepayment, instead of for a
full month. When a partial principal prepayment is made on a mortgage loan,
the mortgagor is charged interest on the amount of that prepayment up to the
date of that prepayment and not for the balance of the month in which that
prepayment is made. Principal prepayments in full received, and partial
principal prepayments applied, from the first day of a month through the
determination date in that month, other than the month of the cut-off date,
will be distributed on the distribution date in the same month thereby
eliminating any shortfall to certificateholders. Principal prepayments in full
received and partial principal prepayments applied after the determination
date in a month, or, in the case of the first distribution date, from the
cut-off date through the thirtieth day of the month preceding that
distribution date, will be distributed on the distribution date in the
following month. Regarding Prepayment Interest Shortfalls, which are interest
shortfalls attributable to the latter full and partial prepayments by the
mortgagors on the mortgage loans, the servicer will be obligated to pay from
its own funds those shortfalls, but only to the extent of its servicing fee
for the related collection period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" in this
prospectus supplement. In addition, the application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended, to any mortgage loan will
adversely affect, for an indeterminate period of time, the ability of the
servicer to collect full amounts of interest on that mortgage loan. The effect
of any shortfalls resulting from the application of the Relief Act, will be to
reduce the aggregate amount of interest collected that is available for
distribution to certificateholders. See "Certain Legal Aspects of the Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the prospectus.
General Prepayment Considerations
The rate of principal payments on the offered certificates, the
aggregate amount of distributions on the offered certificates and the yield to
maturity of the offered certificates will be related to the rate and timing of
payments of principal on the mortgage loans. The rate of principal payments on
the mortgage loans will in turn be affected by the amortization schedules of
those mortgage loans as the same change to accommodate changes in the mortgage
rates and by the rate of principal prepayments on those mortgage loans,
including for this purpose payments resulting from refinancings, liquidations
of the mortgage loans due to defaults, casualties, condemnations and
repurchases, whether optional or required, by the depositor or the mortgage
loan originator, as the case may be. The mortgage loans generally may be
prepaid by the mortgagors at any time; however, as described under "The
Mortgage Pool" in this prospectus supplement, with respect to a majority of
the mortgage loans, a prepayment may subject the related mortgagor to a
prepayment charge, which will not be available to holders of the offered
certificates. In addition, the mortgage loans are assumable in connection with
the conveyance of the related mortgaged property by persons who meet the then
current credit standards of the servicer for mortgage loans similar to the
mortgage loans.
Prepayments, liquidations and repurchases of the mortgage loans will
result in distributions in respect of principal to the holders of the offered
certificates then entitled to receive those distributions that otherwise would
be distributed over the remaining terms of the mortgage loans. See "Maturity
and Prepayment Considerations" in the prospectus. Since the rate of payment of
principal on the mortgage loans will depend on future events and a variety of
factors, as described more fully in this prospectus supplement and in the
prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations," no assurance can be given as to the rate or the rate of
principal prepayments. The extent to which the yield to maturity of the
offered certificates may vary from the anticipated yield will depend upon the
degree to which those certificates are purchased at a discount or premium and
the degree to which the timing of payments on those certificates is sensitive
to prepayments on the mortgage loans. Further, in the case of offered
certificates purchased at a discount, an investor should consider the risk
that a slower than anticipated rate of principal payments on the mortgage
loans could result in an actual yield to the investor that is lower than the
anticipated yield and, in the case of offered certificates purchased at a
premium, an investor should consider the risk that a faster than anticipated
rate of principal payments could result in an actual yield to the investor
that is lower than the anticipated yield. In general, the earlier a prepayment
of principal on the mortgage loans, the greater will be the effect on the
yield to maturity of an investor in the offered certificates. As a result, the
effect on an investor's yield of principal payments occurring on the mortgage
loans at a rate higher, or lower, than the rate anticipated by the investor
during the period immediately following the issuance of the offered
certificates would not be fully offset by a subsequent like reduction, or
increase, in the rate of principal payments.
It is highly unlikely that the mortgage loans will prepay at any
constant rate until maturity or that all of the mortgage loans will prepay at
the same rate, and the prepayment charges imposed in connection with
prepayments on the mortgage loans will have an uncertain effect on the rate
and timing of prepayments on the mortgage loans. Moreover, the timing of
prepayments on the mortgage loans may significantly affect the actual yield to
maturity on the offered certificates, even if the average rate of principal
payments experienced over time is consistent with an investor's expectation.
The rate of payments, including prepayments, on pools of mortgage
loans is influenced by a variety of economic, geographic, social and other
factors. If prevailing mortgage rates fall significantly below the mortgage
rates on the mortgage loans, the rate of prepayment, and refinancing, would be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the mortgage rates on the mortgage loans, the rate of
prepayment on the mortgage loans would be expected to decrease. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. The existence of the periodic rate cap,
maximum mortgage rates and minimum mortgage rates also may affect the
prepayment experience on the mortgage loans. In addition, the prepayment
experience on the delayed first adjustment date mortgage loans may differ from
that on the other mortgage loans, especially as they approach their first
adjustment date. At that time, the prepayment experience on the delayed first
adjustment date mortgage loans may be more sensitive to relatively small
changes in market interest rates. There can be no certainty as to the rate of
prepayments on the mortgage loans during any period or over the life of the
certificates. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the prospectus.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates generally
are higher for mortgage loans used to refinance an existing mortgage loan than
on mortgage loans used to purchase a home. In the event of a mortgagor's
default on a mortgage loan, other than as provided by the
overcollateralization provisions of the trust fund, there can be no assurance
that recourse will be available beyond the specific mortgaged property pledged
as security for repayment. See "The Mortgage Pool--Underwriting Standards;
Representations" in this prospectus supplement.
Special Yield Considerations with Respect to the Mortgage Loans
The mortgage rates on the mortgage loans adjust semiannually, in the
case of the delayed first adjustment date mortgage loans, after an initial
period of one or two years, based upon the index, whereas the pass-through
rates on the offered certificates adjust monthly based upon one-month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" in this prospectus supplement, subject to the available funds
pass-through rate. As a result, increases in the pass-through rates on the
offered certificates may be limited for extended periods in a rising interest
rate environment. In addition, because each pass-through rate is determined,
to some extent, by the mortgage rates on the mortgage loans, disproportionate
prepayments of mortgage loans with mortgage rates above the then current
weighted average mortgage rate may adversely affect the pass-through rate on
one or more classes of offered certificates by lowering the available funds
pass-through rate. [Investors should note that approximately ____% of the
mortgage loans are two year delayed first adjustment date mortgage loans and
approximately ____% of the mortgage loans are one year delayed first
adjustment date mortgage loans.] The interest due on the mortgage loans during
any collection period may not equal the amount of interest that would accrue
at one-month LIBOR plus the applicable pass-through margin during the related
interest accrual period in which case the applicable pass-through rate will be
limited to the available funds pass-through rate. Although holders of the
offered certificates are entitled to receive from and to the limited extent of
funds available for those certificates as described in this prospectus
supplement, any related LIBOR carryover amount, there can be no assurance that
funds will be available or, if available, sufficient for those purposes. The
ratings of the offered certificates do not address the likelihood of the
payment of any LIBOR carryover amount. Since the pass-through margin is
different for each class of offered certificates, it is possible that, on any
particular distribution date, the LIBOR Rate applicable to one or more classes
of offered certificates, may be less than the available funds pass-through
rate, while the LIBOR Rate applicable to one or more other classes of offered
certificates may exceed the available funds pass-through rate. In addition,
the index and one-month LIBOR may respond differently to economic and market
factors. Thus, it is possible, that if both one-month LIBOR and the index rise
during the same period, one-month LIBOR may rise more rapidly than the index
or may rise higher than the index. In addition, the index and/or one-month
LIBOR may not move at the same time or in the same direction as market
interest rates generally. It is possible that market interest rates may fall
at the same time that one-month LIBOR and/or the index is rising.
The Subordinated Certificates
The weighted average lives of, and the yields to maturity on, the
subordinated certificates, in increasing order of their numerical class
designations, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the mortgage loans.
If the actual rate and severity of losses on the mortgage loans is higher than
those assumed by a holder of a subordinated certificate, the actual yield to
maturity of that certificate may be lower than the yield expected by the
holder based on that assumption. The timing of losses on the mortgage loans
will also affect an investor's actual yield to maturity, even if the rate of
defaults and severity of losses over the life of the mortgage pool are
consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Applied
Realized Loss Amounts on the mortgage loans will reduce the class certificate
balance of the applicable class of subordinated certificates, and if the
subordinated certificates are no longer outstanding, will reduce the class
certificate balance of the Class A Certificates, without the receipt of cash
attributable to the reduction. As a result of the reductions, less interest
will accrue on the class of subordinated certificates, or Class A
Certificates, than otherwise would be the case.
The Principal Remittance Amount includes the net proceeds in respect
of principal received upon liquidation of a liquidated mortgage loan. If those
net proceeds are less than the unpaid principal balance, the pool principal
balance will decline more than the aggregate class certificate balance of the
offered certificates, thereby reducing the overcollateralization amount. If
the difference is not covered by the overcollateralization amount, or the
application of the monthly excess cashflow amount, the class of subordinated
certificates then outstanding with the highest numerical class designation
will bear the loss as a result of the application of Applied Realized Loss
Amounts. In addition, the subordinated certificates will not be entitled to
any principal distributions prior to the Stepdown Date or during the
continuation of a Trigger Event, unless all of the certificates with a higher
payment priority have been paid in full. Because of the disproportionate
distribution of principal of the Class A Certificates, depending on the timing
of Realized Losses, the subordinated certificates may bear a disproportionate
percentage of the Realized Losses on the mortgage loans.
For all purposes, the Class B Certificates will be deemed to have the
highest numerical class designation and the lowest payment priority of any
class of subordinated certificates.
Weighted Average Lives
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of that security will be repaid to the investor. The weighted average lives of
the offered certificates will be influenced by the rate at which principal on
the mortgage loans is paid, which may be in the form of scheduled payments or
prepayments, including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the mortgage loans, and the timing of those payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the "Prepayment Assumption" which assumes a prepayment rate of __% CPR. The
Constant Prepayment Rate model assumes that the outstanding principal balance
of a pool of mortgage loans prepays at a specified constant annual rate or
CPR. In generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume __% CPR or any other CPR percentage is to
assume that the stated percentage of the outstanding principal balance of the
pool is prepaid over the course of a year. No representation is made that the
mortgage loans will prepay at __% CPR or at any other rate. Neither the
prepayment model used in this prospectus supplement nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the mortgage loans included in the mortgage pool.
The tables following the next paragraph indicate the percentage of
the initial class certificate balance of each class of offered certificates
that would be outstanding after each of the dates shown at various percentages
of the Prepayment Assumption and the corresponding weighted average lives. The
tables are based on the following "modeling assumptions":
o the mortgage pool consists of mortgage loans with the
characteristics set forth in the table below,
o distributions on the certificates are received, in cash, on the
20th day of each month, commencing in _______ __,
o the mortgage loans prepay at the percentages of the Prepayment
Assumption indicated,
o no defaults or delinquencies occur in the payment by mortgagors
of principal and interest on the mortgage loans and no
shortfalls due to the application of the Relief Act are
incurred,
o none of the depositor, the mortgage loan originator, the holder
of the Class X Certificates, the servicer or any other person
purchases from the trust fund any mortgage loan pursuant to any
obligation or option under the agreement, except as otherwise
indicated in the tables,
o scheduled monthly payments on the mortgage loans are received
on the first day of each month commencing in ______ __, and are
computed prior to giving effect to any prepayments received in
the prior month, and the number of days of accrual on the
mortgage loans in the first accrual period is the same as the
number of days in the first interest accrual period for the
certificates,
o prepayments representing payment in full of individual mortgage
loans are received on the last day of each month commencing in
______ ____, and include 30 days' interest,
o the scheduled monthly payment for each mortgage loan is
calculated based on its principal balance, mortgage rate,
original term to maturity and remaining term to maturity so
that the mortgage loan will amortize in amounts sufficient to
repay the remaining principal balance of that mortgage loan by
its remaining term to maturity,
o the certificates are purchased on _______ __, ____,
o the index remains constant at _______% per annum and the
mortgage rate on each mortgage loan is adjusted on the next
adjustment date, and on subsequent adjustment dates if
necessary, to equal the index plus the applicable gross margin,
subject to the applicable periodic rate cap,
o one-month LIBOR remains constant at ______% per annum,
o the monthly payment on each mortgage loan is adjusted on the
due date immediately following the next adjustment date, and on
subsequent adjustment dates, if necessary, to equal a fully
amortizing monthly payment as described above, and
o the expense fee rate is equal to ______% per annum.
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the tables. Any
discrepancy may have an effect upon the percentages of the initial class
certificate balance outstanding, and the weighted average life, of each class
of offered certificates set forth in the tables. In addition, since the actual
mortgage loans will have characteristics that differ from those assumed in
preparing the tables set forth below and, since it is not likely the level of
the index will remain constant as assumed, each class of offered certificates
may mature earlier or later than indicated by the tables. Variations in the
prepayment experience and the balance of the mortgage loans that prepay may
increase or decrease the percentages of initial class certificate balances,
and weighted average lives, shown in the following tables. Variations may
occur even if the average prepayment experience of all mortgage loans equals
any of the specified percentages of the Prepayment Assumption.
Hypothetical Mortgage Loans (6 Month LIBOR):
<TABLE>
<CAPTION>
Original Remaining Periodic
Maximum Minimum Term to Term to Cap (%)
Principal Months to Interest Gross Interest Interest Maturity Maturity Initial/
Balance ($) Rate Change Rate % Margin % Rate % Rate % (Months) (Months) Subsequent
----------- ----------- ------ -------- ------ ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
With respect to the information set forth in the table below, the
weighted average life of a certificate is determined by:
o multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to
the related distribution date,
o adding the results and
o dividing the sum by the initial certificate principal balance
of the certificate.
In addition, the weighted average life of a certificate assumes the
majority holder of the residual certificates exercises its option to purchase
the mortgage loans when the aggregate principal balance of the mortgage loans
and REO properties remaining is [10]% of cut-off date pool principal balance.
See "Pooling and Servicing Agreement--Termination" in this prospectus
supplement. Also, the information assumes that the certificates remain
outstanding to their maturity date.
<TABLE>
<CAPTION>
Class A Certificates
----------------------------------------------------------------------------------
Distribution Date 0% 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
----------------- --- ------- ------- ------- ------- ------- -------
CPR
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in Years
Weighted Avg. Life in Years
</TABLE>
<PAGE>
With respect to the information set forth in the table below, the
weighted average life of a certificate is determined by:
o multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to
the related distribution date,
o adding the results and
o dividing the sum by the initial certificate principal balance
of the certificate.
In addition, the weighted average life of a certificate assumes the majority
holder of the residual certificates exercises its option to purchase the
mortgage loans when the aggregate principal balance of the mortgage loans and
REO properties remaining is [10]% of cut-off date pool principal balance. See
"Pooling and Servicing Agreement--Termination" in this prospectus supplement.
Also, the information assumes that the certificates remain outstanding to
their maturity date.
<TABLE>
<CAPTION>
Class M-1 Certificates
--------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in Years
Weighted Avg. Life in Years
</TABLE>
With respect to the information set forth in the table below, the
weighted average life of a certificate is determined by:
o multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to
the related distribution date,
o adding the results and
o dividing the sum by the initial certificate principal balance
of the certificate.
In addition, the weighted average life of a certificate assumes the majority
holder of the residual certificates exercises its option to purchase the
mortgage loans when the aggregate principal balance of the mortgage loans and
REO properties remaining is [10]% of cut-off date pool principal balance. See
"Pooling and Servicing Agreement--Termination" in this prospectus supplement.
Also, the information assumes that the certificates remain outstanding to
their maturity date.
<TABLE>
<CAPTION>
Class M-2 Certificates
-----------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in Years
Weighted Avg. Life in Years
</TABLE>
<PAGE>
With respect to the information set forth in the table below, the weighted
average life of a certificate is determined by:
o multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the certificate to
the related distribution date,
o adding the results and
o dividing the sum by the initial certificate principal balance
of the certificate.
In addition, the weighted average life of a certificate assumes the majority
holder of the residual certificates exercises its option to purchase the
mortgage loans when the aggregate principal balance of the mortgage loans and
REO properties remaining is [10]% of cut-off date pool principal balance. See
"Pooling and Servicing Agreement--Termination" in this prospectus supplement.
Also, the information assumes that the certificates remain outstanding to
their maturity date.
<TABLE>
<CAPTION>
Class B Certificates
--------------------------------------------------------------------------------------
Distribution Date 0% CPR 15% CPR 20% CPR 25% CPR 30% CPR 35% CPR 40% CPR
----------------- ------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
_________ 20, _____
Weighted Avg. Life in Years
Weighted Avg. Life in Years
</TABLE>
<PAGE>
There is no assurance that prepayments of the mortgage loans will
conform to any of the levels of the Prepayment Assumption indicated in the
table above, or to any other level, or that the actual weighted average life
of any class of offered certificates will conform to any of the weighted
average lives set forth in the table above. Furthermore, the information
contained in the table with respect to the weighted average lives is not
necessarily indicative of the weighted average lives that might be calculated
or projected under different or varying prepayment or index level assumptions.
The characteristics of the mortgage loan will differ from those assumed in
preparing the table above. In addition, it is unlikely that any mortgage loan
will prepay at any constant percentage until maturity, that all of the
mortgage loans will prepay at the same rate or that the level of the index
will remain constant or any level for any period of time. The timing of
changes in the rate of prepayments may significantly affect the actual yield
to maturity to investors, even if the average rate of principal prepayments
and the level of the index is consistent with the expectations of investors.
Final Scheduled Distribution Dates
The final scheduled distribution date of each class of offered
certificates is set forth under "Summary of Prospectus Supplement." The final
scheduled distribution date for the Class A Certificates has been calculated
on the basis of the modeling assumptions and the assumptions that there are no
prepayments and no monthly excess interest amounts are used to create
overcollateralization. The final scheduled distribution date for each other
class of offered certificates has been set to equal the distribution date in
the thirteenth month after the month of maturity of the latest maturing
mortgage loan. Since the rate of distributions in reduction of the class
certificate balance of each class of offered certificates will depend on the
rate of payment, including prepayments, of the mortgage loans, the class
certificate balance of any class could be reduced to zero significantly
earlier or later than the final scheduled distribution date. The rate of
payments on the mortgage loans will depend on their particular
characteristics, as well as on prevailing interest rates from time to time and
other economic factors, and no assurance can be given as to the actual payment
experience of the mortgage loans.
DESCRIPTION OF THE CERTIFICATES
General
o The certificates will consist of:
o the Class A Certificates, o the Class M-1 Certificates and the
Class M-2 Certificates, collectively, the "mezzanine
certificates,"
o the Class B Certificates, collectively with the mezzanine
certificates, the "subordinated certificates,"
o the Class BB Certificates,
o the Class X Certificates, and
o the Class R Certificates, or the "residual certificates."
It should be noted that the residual certificates with the Class BB
Certificates and the Class X Certificates are collectively referred to as the
"non-offered certificates." Only the Class A Certificates and the subordinated
certificates, or the "offered certificates," are offered hereby. The
non-offered certificates, which are not being offered hereby, may be sold at
any time on or after the closing date in accordance with the agreement.
The certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting primarily of a pool of
conventional, one- to four-family, first lien mortgage loans having original
terms to maturity of 30 years. The Class A Certificates evidence an initial
beneficial interest in the trust fund of ____% and the Class M-1, Class M-2
and Class B Certificates evidence initial beneficial interests in the trust
fund of ___%, ___% and ___%, respectively.
The "class certificate balance" of any class of certificates as of any
distribution date is the initial class certificate balance of that class of
certificates reduced by the sum of:
o all amounts previously distributed to holders of certificates
of that class as payments of principal and
o in the case of any class of offered certificates, any Applied
Realized Loss Amounts allocated to that class.
All distributions to holders of the offered certificates, other than
the final distribution on the offered certificates, will be made by or on
behalf of the trustee to the persons in whose names those offered certificates
are registered at the close of business on each record date. Distributions
will be made either:
o by check mailed to the address of each certificateholder as it
appears in the certificate register or
o upon written request to the trustee at least five business days
prior to the relevant record date by any holder of offered
certificates having an aggregate initial certificate principal
balance that is in excess of $__________ by wire transfer in
immediately available funds to the account of that
certificateholder specified in the request.
The final distribution on any class of offered certificates will be
made in like manner, but only upon presentment and surrender of the
certificates at the corporate trust office of the trustee or any other
location specified in the notice to certificateholders of the final
distribution.
Book-Entry Registration and Definitive Certificates
The offered certificates will be issued, maintained and transferred
on the book-entry records of DTC and its participants in minimum denominations
of $100,000 and integral multiples of $1,000 in excess of $100,000. The
offered certificates will initially be represented by one or more global
certificates registered in the name of the nominee of DTC, except as provided
below. The depositor has been informed by DTC that DTC's nominee will be Cede
& Co. No certificate owner will be entitled to receive a certificate
representing that person's interest, except as set forth below. Unless and
until definitive certificates are issued under the limited circumstances
described in this prospectus supplement, all references to actions by
certificateholders with respect to the offered certificates refer to actions
taken by DTC upon instructions from its participants, and all references in
this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the offered certificates refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the offered certificates, for distribution to certificate
owners in accordance with DTC procedures.
Holders of offered certificates may hold their certificates through
DTC, in the United States, or Clearstream or the Euroclear system in Europe.
Transfers within DTC, Clearstream or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of the relevant
system, in Europe, if they are participants of those systems, or indirectly
through organizations which are participants in those systems.
Clearstream and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositories which in turn
will hold those positions in customers' securities accounts in the
depositaries' names on the books of DTC. _______ will act as depositary for
Clearstream and ________will act as depositary for Euroclear. Transfers
between participants will occur in accordance with DTC rules. Transfers
between Clearstream participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
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 UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations 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
securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. Indirect access to the DTC
system also is available to others like banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Beneficial owners of the offered certificates or prospective owners,
as the case may be, that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in the offered certificates may do so only through participants and
indirect participants. In addition, certificate owners will receive all
distributions of principal and interest on the offered certificates from the
trustee or the applicable paying agent through DTC and its participants. Under
a book-entry format, certificateholders may receive payments after the related
distribution date because, while payments are required to be forwarded to Cede
& Co., as nominee for DTC on each date, DTC will forward those payments to its
participants which thereafter will be required to forward them to indirect
participants or certificate owners. The only "certificateholder," as the term
is used in the agreement, will be Cede & Co., as nominee of DTC, and the
certificate owners will not be recognized by the trustee as certificateholders
under the agreement. Certificate owners will be permitted to exercise the
rights of certificate owners under the agreement only indirectly through DTC
and its participants who in turn will exercise their rights though 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 certificates and is
required to receive and transmit distributions of principal of and interest on
the certificates. Participants and indirect participants with which
certificate owners have accounts with respect to the certificates similarly
are required to make book-entry transfers and receive and transmit those
payments on behalf of their respective certificate owners.
Because DTC can act only on behalf of participants, who in turn act
on behalf of indirect participants and other entities, the ability of a
certificate owner to pledge certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of those
certificates, may be limited due to the lack of a physical certificate for
those certificates.
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, cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in the 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 received in
Clearstream or Euroclear as a result of a transaction with a participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Credits or any transactions in
those securities settled during the processing will be reported to the
relevant Euroclear or Clearstream participants on that business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream participant or 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.
Clearstream Banking is a duly licensed bank organized as a "societe
anonyme", limited company, under the laws of Luxembourg. Clearstream holds
securities for its participating organizations 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, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to Clearstream is also available to others,
like banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Clearstream participant, either
directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear 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. Euroclear
includes various other services including lending and borrowing and interfaces
with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of
New York, as Euroclear operator, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. All operations are conducted
by the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, and not the
cooperative. The cooperative establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks, central banks,
securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly. The Euroclear operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System 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. The Terms and Conditions govern transfers of securities and cash
with Euroclear, withdrawals of securities and cash from Euroclear, and
receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific 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. Distributions will be
subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Material Federal Income Tax Consequences." Clearstream
or the Euroclear operator, as the case may be, will take any other action
permitted to be taken by a certificateholder under the agreement on behalf of
a Clearstream participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to its depositary's ability to
effect those actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the procedures
in order to facilitate transfers of certificates among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform those procedures and those procedures may be discontinued at any
time.
DTC has advised the depositor that it will take any action permitted
to be taken by a certificateholder under the agreement only at the direction
of one or more participants to whose account with DTC the certificates are
credited.
Certificates initially issued as book-entry certificates will be
issued as definitive certificates only if:
DTC or the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the
certificates and the servicer is unable to locate a qualified
successor or
o the depositor, at its option, elects to terminate the
book-entry system through DTC or
o if holders of offered certificates evidencing not less than 51%
of the voting rights advise the trustee in writing that the
continuation of a book-entry system through DTC, or a successor
to DTC, to the exclusion of any physical certificates being
issued to certificate owners is no longer in the best interests
of certificate owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all participants of the
availability through DTC of definitive certificates for the certificates. Upon
surrender by DTC of the certificate or certificates representing those
certificates and instructions for registration, the trustee will issue those
certificates in the form of definitive certificates as certificateholders
under the agreement and those holders of definitive certificates will deal
directly with the trustee with respect to transfers, notices and
distributions. In the event that definitive certificates are issued or DTC
ceases to be the clearing agency for the certificates, the agreement will
provide that the applicable certificateholders will be notified of that event.
Calculation of One-Month LIBOR
The pass-through rates for the first interest distribution date will
be determined on the second business day preceding the closing date and for
each subsequent distribution date will be determined on the second business
day prior to the immediately preceding distribution date. The trustee will
determine the one-month LIBOR, which is the London interbank offered rate for
one-month U.S. dollar deposits, for the next interest accrual period on the
basis of the offered rates of the reference banks for one-month U.S. dollar
deposits, as those rates appear on the Telerate Page 3750, as of 11:00 a.m.,
London time, on that interest determination date. As used in this section:
"business day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; "Telerate Page 3750" means
the display page currently so designated on the Dow Jones Telerate Service, or
any other page as may replace the Telerate Page 3750 page on that service for
the purpose of displaying London interbank offered rates of major banks; and
"reference banks" means leading banks selected by the trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market:
o with an established place of business in London,
o whose quotations appear on the Telerate Page 3750 on the
interest determination date in question,
o which have been designated by the trustee and
o which are not controlling, controlled by, or under common
control with, the depositor or the mortgage loan originator.
On each interest determination date, one-month LIBOR for the related
interest accrual period will be established by the trustee as follows:
o If on the interest determination date two or more reference
banks provide the offered quotations, one-month LIBOR for the
related interest accrual period shall be the arithmetic mean of
the offered quotations, rounded upwards if necessary to the
nearest whole multiple of 0.001%.
o If on the interest determination date fewer than two reference
banks provide the offered quotations, one-month LIBOR for the
related interest accrual period shall be the higher of:
o one-month LIBOR as determined on the previous interest
determination date and
o the Reserve Interest Rate. The "reserve interest rate"
shall be the rate per annum that the trustee determines to
be either:
o the arithmetic mean, rounded upwards if necessary
to the nearest whole multiple of 0.001%, of the
one-month U.S. dollar lending rates which New York
City banks selected by the trustee are quoting on the
relevant interest determination date to the principal
London offices of leading banks in the London
interbank market or, in the event that the trustee
can determine no arithmetic mean or
o the lowest one-month U.S. dollar lending rate
which New York City banks selected by the trustee are
quoting on the interest determination date to leading
European banks.
The establishment of one-month LIBOR on each interest determination
date by the trustee and the trustee's calculation of the rate of interest
applicable to each class of offered certificates for the related interest
accrual period shall, in the absence of manifest error, be final and binding.
Interest Distributions
On each distribution date the Interest Remittance Amount will be
distributed in the following order of priority:
o First, to the trustee, the trustee fee;
o Second, to the holders of the Class A Certificates, the related
accrued certificate interest plus the Class A interest carry forward
amount;
o Third, to the extent of the Interest Remittance Amount then
remaining, to the holders of the Class M-1 Certificates, the related
accrued certificate Interest;
o Fourth, to the extent of the Interest Remittance Amount then
remaining, to the holders of the Class M-2 Certificates, the related
accrued certificate interest;
o Fifth, to the extent of the Interest Remittance Amount then
remaining, to the holders of the Class B Certificates, the related
accrued certificate interest; and
o Sixth, the amount, if any, of the Interest Remittance Amount
remaining in the certificate account after application with respect
to the priorities set forth above is defined as the "Monthly Excess
Interest Amount" for the distribution date and will be applied under
"--Application of Monthly Excess Cashflow Amounts."
"Interest Remittance Amount" means, as of any determination date, the
sum, without duplication, of:
o all interest due and collected or advanced during the related
collection period on the mortgage loans, less the servicing fee,
amounts available for reimbursement of monthly advances and
servicing advances under "-Advances" and other reimbursable expenses
pursuant to the agreement,
o all compensating interest paid by the servicer on the determination
date and
o the portion of any payment in connection with any substitution,
purchase price or Net Liquidation Proceeds relating to interest;
provided that with respect to the first collection period, the
Interest Remittance Amount shall be reduced by an amount equal to
five days of interest due and collected or advanced on the mortgage
loans.
The "interest accrual period" for any distribution date is the period
from the distribution date in the month immediately preceding the month in
which the distribution date occurs, or, in the case of the first distribution
date, from the closing date, through the day before that distribution date.
All distributions of interest will be based on a 360-day year and the actual
number of days in the applicable interest accrual period.
Pass-Through Rates
The pass-through rate on each class of offered certificates on each
distribution date will be a rate per annum equal to the least of:
o one-month LIBOR, as defined in this prospectus supplement, plus the
applicable pass-through margin, or the LIBOR Rate,
o the available funds pass-through rate for the distribution date, and
o the weighted average expense adjusted maximum mortgage rate for all
mortgage loans.
The "pass-through margin" for each class of offered certificates will
be as set forth below; provided, however, that for each interest accrual
period beginning after the distribution date on which the aggregate stated
principal balance, as defined in this prospectus supplement, of the mortgage
loans is [10]% or less of the stated principal balance of the mortgage loans
as of the cut-off date each pass-through margin will be doubled for the senior
certificates and increased by __% for the subordinated certificates:
Class Pass-Through Margin
----- -------------------
A ___%
M-1 ___%
M-2 ___%
B ___%
The "available funds pass-through rate" will be, with respect to any
distribution date, the per annum rate equal to the percentage obtained by
dividing:
o the amount of interest that accrued on the mortgage loans in respect
of the related collection period at the weighted average of the
related mortgage rates applicable to monthly payments due on those
mortgage loans during that collection period, reduced by the Expense
Fee Rate, by
o the product of:
o the aggregate class certificate balance and
o the actual number of days elapsed during the interest accrual
period divided by 360.
The "expense adjusted maximum mortgage rate" on any mortgage loan is
equal to the applicable maximum mortgage rate on the mortgage loan minus the
sum of:
o the trustee fee rate, and
o the servicing fee rate.
For any distribution date, the trustee fee rate is _____% per annum
and the servicing fee rate is ___% per annum.
The pass-through rate on each class of offered certificates for the
current interest accrual period, to the extent it has been determined, and for
the immediately preceding interest accrual period may be obtained by
telephoning the trustee at (___) ___-____.
Principal Distributions
With respect to each distribution date before the Stepdown Date or
with respect to which a Trigger Event is in effect, holders of the Class A
Certificates will be entitled to receive 100% of the Principal Distribution
Amount for that distribution date until the class certificate balance of those
certificates has been reduced to zero.
In the event that on any distribution date on or after the Stepdown
Date on which a Trigger Event is in effect the holders of the Class A
Certificates will be entitled to receive 100% of the Principal Distribution
Amount until the class certificate balance of the Class A Certificates has
been reduced to zero. Once the class certificate balance of the Class A
Certificates has been reduced to zero, the holders of the Class M-1
Certificates will be entitled to receive 100% of the Principal Distribution
Amount for the distribution date until the class certificate balance of the
Class M-1 Certificates has been reduced to zero. Similarly if the class
certificate balance of the Class M-1 Certificates has been reduced to zero,
the holders of the Class M-2 Certificates will be entitled to receive 100% of
the Principal Distribution Amount until the class certificate balance of the
Class M-2 Certificates has been reduced to zero. Finally, if the class
certificate balance of the Class M-2 Certificates has been reduced to zero,
the holders of the Class B Certificates will be entitled to receive 100% of
the Principal Distribution Amount until the class certificate balance of the
Class B Certificates has been reduced to zero.
With respect to each distribution date on or after the Stepdown Date
and as long as a Trigger Event is not in effect, the holders of all classes of
offered certificates will be entitled to receive payments of principal, in the
order of priority and in the amounts set forth below and to the extent of the
Principal Distribution Amount:
o First, the lesser of:
o the Principal Distribution Amount and
o the Class A Principal Distribution Amount will be distributed
to the Class A Certificates, until the class certificate
balance of those certificates has been reduced to zero;
o Second, the lesser of:
o the excess of:
o the Principal Distribution Amount over
o the amount distributed to the Class A Certificates in
first clause above and
o the Class M-1 Principal Distribution Amount will be distributed
to the Class M-1 Certificates, until the class certificate
balance of those certificates has been reduced to zero;
o Third, the lesser of:
o the excess of:
o the Principal Distribution Amount over:
o the sum of the amount distributed to the Class A
Certificates in the first clause above and the amount
distributed to the Class M-1 Certificates in the second
clause above and
o the Class M-2 Principal Distribution Amount will be distributed
to the Class M-2 Certificates, until the class certificate
balance of those certificates has been reduced to zero;
o Fourth, the lesser of:
o the excess of:
o the Principal Distribution Amount over:
o the sum of the amount distributed to the Class A
Certificates pursuant to the first clause above, the
amount distributed to the Class M-1 Certificates pursuant
to the second clause above and the amount distributed to
the Class M-2 Certificates pursuant to the third clause
above and
o the Class B Principal Distribution Amount will be distributed
to the Class B Certificates, until the class certificate
balance of those certificates has been reduced to zero; and
o Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in the first, second, third and
fourth clauses above will be included as part of the monthly excess
cashflow amount and will be applied under "--Application of Monthly
Excess Cashflow Amounts."
The following terms will have the respective meanings set forth
below.
"Class A Principal Distribution Amount" means as of any distribution
date:
prior to the Stepdown Date or with respect to which a Trigger Event
is in effect, the lesser of:
o 100% of the Principal Distribution Amount and
o the class certificate balance of the Class A Certificates and
o on or after the Stepdown Date and as long as a Trigger Event is not
in effect, the positive difference, if any, of the excess of:
o the class certificate balance of the Class A Certificates
immediately prior to such distribution date over:
o the lesser of:
o the product of:
o approximately ___% and
o the pool principal balance as of the last day of the
related collection period and
o the pool principal balance as of the last day of the
related collection period minus $-------.
"Class M-1 Principal Distribution Amount" means as of any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, the positive difference, if any, of the excess of:
o the sum of:
o the class certificate balance of the Class A Certificates,
after taking into account the payment of the Class A Principal
Distribution Amount on the distribution date, and
o the class certificate balance of the Class M-1 Certificates
immediately prior to such distribution date over
o the lesser of:
o the product of:
o approximately ___% and
o the pool principal balance as of the last day of the
related collection period and
o the pool principal balance as of the last day of the related
collection period minus $--------.
"Class M-2 Principal Distribution Amount" means as of any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, the positive difference, if any, of the excess of:
o the sum of
o the class certificate balance of the Class A Certificates, after
taking into account the payment of the Class A Principal
Distribution Amount on the distribution date,
o the class certificate balance of the Class M-1 Certificates, after
taking into account the payment of the Class M-1 Principal
Distribution Amount on the distribution date and
o the class certificate balance of the Class M-2 Certificates
immediately prior to the distribution date over
o the lesser of
o the product of
o approximately ___% and
o the pool principal balance as of the last day of the
related collection period and
o the pool principal balance as of the last day of the related
collection period minus $-------.
"Class B Principal Distribution Amount" means as of any distribution
date on or after the Stepdown Date and as long as a Trigger Event is not in
effect, the positive difference, if any, of the excess of:
o the sum of:
o the class certificate balance of the Class A Certificates,
after taking into account the payment of the Class A Principal
Distribution Amount on the distribution date,
o the class certificate balance of the Class M-1 Certificates,
after taking into account the payment of the Class M-1
Principal Distribution Amount on the distribution date,
o the class certificate balance of the Class M-2 Certificates,
after taking into account the payment of the Class M-2
Principal Distribution Amount on the distribution date, and
o the class certificate balance of the Class B Certificates
immediately prior to such distribution date over
o the lesser of:
o the product of:
o approximately ___% and
o the pool principal balance as of the last day of the
related collection period and
o the pool principal balance as of the last day of the related
collection period minus $-------.
"Extra Principal Distribution Amount" means, as of any distribution
date, the lesser of:
o the Monthly Excess Interest Amount for such distribution date and
o the Overcollateralization Deficiency for the distribution date,
provided that on the first distribution date principal due during
the period from the cut-off date to the related determination date
will be distributed, which will reduce the amount available on the
distribution date for distribution as Extra Principal Distribution
Amount.
"Liquidated Mortgage Loan" means as to any distribution date, a
mortgage loan with respect to which the servicer has determined, in accordance
with the servicing procedures specified in the agreement, as of the end of the
preceding collection period, that all Liquidation Proceeds which it expects to
recover with respect to that mortgage loan have been recovered.
"Overcollateralization Amount" means as of any distribution date the
excess, if any, of:
o the pool principal balance as of the last day of the immediately
preceding collection period over
o the aggregate class certificate balance of all classes of offered
certificates, after taking into account all distributions of
principal on the distribution date.
"Overcollateralization Deficiency" means, as of any distribution
date, the excess, if any, of:
o the Targeted Overcollateralization Amount for the distribution date
over
o the Overcollateralization Amount for the distribution date,
calculated for this purpose after taking into account the reduction
on the distribution date of the class certificate balances of all
classes of the offered certificates resulting from the distribution
of the Principal Remittance Amount, but not the Extra Principal
Distribution Amount, on the distribution date, but prior to taking
into account any Applied Realized Loss Amounts on the distribution
date.
"Overcollateralization Release Amount" means, with respect to any
distribution date after the Stepdown Date on which a Trigger Event is not in
effect, the lesser of:
o the Principal Remittance Amount for such distribution date and
o the excess, if any, of:
o the Overcollateralization Amount for the distribution date,
assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on the offered certificates on
the distribution date, over
o the Targeted Overcollateralization Amount for the distribution
date.
"Principal Distribution Amount" means as of any distribution date,
the sum of:
o the Principal Remittance Amount, minus, for distribution dates
occurring on and after the Stepdown Date and for which a Trigger
Event is not in effect, the Overcollateralization Release Amount, if
any, and
o the Extra Principal Distribution Amount, if any.
"Principal Remittance Amount" means, with respect to any distribution
date, to the extent of funds available therefor as described in this
prospectus supplement the amount equal to the sum, less certain amounts
available for reimbursement of monthly advances and servicing advances under
"-Advances" and certain other reimbursable expenses pursuant to the agreement,
of the following amounts, without duplication, with respect to the immediately
preceding collection period:
o each payment of principal on a mortgage loan received by the
servicer during such collection period, including all full and
partial principal prepayments and any advances with respect thereto,
o the Net Liquidation Proceeds allocable to principal actually
collected by the servicer during the related collection period,
o the portion of the purchase price allocable to principal of all
repurchased defective mortgage loans with respect to such collection
period and
o any substitution adjustment amounts received on or prior to the
previous determination date and not yet distributed.
"Senior Enhancement Percentage" for any distribution date is the
percentage obtained by dividing:
o the sum of:
o the aggregate class certificate balance of the subordinated
certificates and
o the Overcollateralization Amount, in each case after taking
into account the distribution of the Principal Distribution
Amount on the distribution date by
o the pool principal balance as of the last day of the related
collection period.
"Senior Specified Enhancement Percentage" on any date of
determination thereof means 30.50%.
"60+ Day Delinquent Loan" means each Mortgagee Loan with respect to
which any portion of a monthly payment is, as of the last day of the prior
collection period, two months or more past due, without giving effect to any
grace period, each mortgage loan in foreclosure, all REO Property and each
mortgage loan for which the mortgagor has filed for bankruptcy.
"Stepdown Date" means the earlier to occur of:
o the later to occur of:
o the distribution date in _______ ____ and
o the first distribution date on which the Senior
Enhancement Percentage, after taking into account
distributions of principal on such distribution date, is
greater than or equal to the Senior Specified Enhancement
Percentage and
o the distribution date on which the class certificate balance of
the Class A Certificates has been reduced to zero.
"Targeted Overcollateralization Amount" means as of any distribution
date,
o prior to the Stepdown Date, ___% of the initial class
certificate balance of the pool principal balance and
o on and after the Stepdown Date and assuming a Trigger Event is
not in effect, the greater of
o __% of the pool principal balance as of the last day of
the related collection period and
o $_______. If a Trigger Event is in effect on and after the
Stepdown Date, the Targeted Overcollateralization Amount
shall be equal to the Targeted Overcollateralization
Amount for the immediately preceding distribution date.
A "Trigger Event" has occurred on a distribution date if the
three-month rolling average of 60+ Day Delinquent Loans equals or exceeds
one-half of the Senior Enhancement Percentage; provided, that if the class
certificate balance of the Class A Certificates has been reduced to zero, a
Trigger Event will have occurred if the three-month rolling average of 60+ Day
Delinquent Loans equals or exceeds ____%.
Credit Enhancement
The credit enhancement consists of the subordination of the
subordinated certificates to the Class A Certificates, the further
subordination of each other class of subordinated certificates that is junior
in priority of distribution, the priority of the application of the Applied
Realized Loss Amounts and the overcollateralization provisions of the trust
fund as described in this prospectus supplement.
The rights of the holders of the subordinated certificates to receive
distributions with respect to the mortgage loans will be subordinated, to the
extent described in this prospectus supplement, to the rights of the holders
of the Class A Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates of
the full amount of their scheduled monthly payment of interest and principal
and to afford those certificateholders protection against Realized Losses. The
protection afforded to the holders of the Class A Certificates by means of the
subordination of the subordinated certificates will be accomplished by the
preferential right of the holders of the Class A Certificates to receive,
prior to any distribution being made on a distribution date in respect of the
subordinated certificates, the amounts of interest due them and principal
available for distribution on the distribution date.
In addition, the rights of the holders of the Class M-2 and Class B
Certificates to receive distributions will be subordinated, to the extent
described in this prospectus supplement, to the rights of the holders of the
Class A Certificates and the Class M-1 Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates and the Class M-1 Certificates of the amount of interest
due them and principal available for distribution and to afford the
certificateholders with protection against losses.
The rights of the holders of the Class B Certificates to receive
distributions will be subordinated in the same manner to the rights of the
holders of the Class A Certificates, the Class M-1 Certificates and the Class
M-2 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates, the Class M-1
Certificates and the Class M-2 Certificates of the amount of interest due them
and principal available for distribution and to afford the certificateholders
with protection against losses.
The protection afforded to the Class B Certificateholders against
losses is provided by the Overcollateralization Amount and the Monthly Excess
Cashflow Amounts.
Allocation of Losses
If a mortgage loan becomes a liquidated mortgage loan during a
collection period, the Net Liquidation Proceeds relating to that mortgage loan
and allocated to principal may be less than the stated principal balance of
that mortgage loan. The amount of that insufficiency is a "Realized Loss."
Realized Losses will, in effect, be absorbed first by the Class R
Certificates, through the application of the monthly excess interest amount to
fund that deficiency, as well as through a reduction in the
Overcollateralization Amount.
If, after giving effect to the distribution of the Principal
Distribution Amount on any distribution date the aggregate class certificate
balance of the offered certificates exceeds the pool principal balance as of
the end of the related collection period, the excess will be allocated against
the Class B, Class M-2, Class M-1 and Class A Certificates, in that order and
until the respective class certificate balances of those certificates are
reduced to zero. Any allocation of the excess in reduction of a class
certificate balance is referred to as an "Applied Realized Loss Amount." Any
reduction of a class certificate balance will not be reversed or reinstated.
However, on future distribution dates, certificateholders of the related class
may receive amounts in respect of prior reductions in the related class
certificate balances. Subsequent payments will be applied in the reverse of
the order set forth above.
Application of Monthly Excess Cashflow Amounts
The weighted average available funds pass-through rate for the
mortgage loans is generally expected to be higher than the weighted average of
the pass-through rates on the offered certificates, thus generating excess
interest collections which, in the absence of losses, will not be necessary to
fund interest distributions on the offered certificates. This excess interest
for a collection period, together with interest on the Overcollateralization
Amount itself, is the "Monthly Excess Interest Amount."
The required level of overcollateralization for any distribution date
is the Targeted Overcollateralization Amount. The Targeted
Overcollateralization Amount is initially, i.e., prior to the Stepdown Date,
$________.
If Realized Losses not accounted for by an application of the monthly
excess interest amount occur, those Realized Losses will result in an
Overcollateralization Deficiency, since it will reduce the pool principal
balance without giving rise to a corresponding reduction of the aggregate
class certificate balance. The cashflow priorities of the trust fund require
that, in this situation, an extra Principal Distribution Amount be paid,
subject to the availability of any monthly excess cashflow amount in
subsequent months, for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is
not in effect, the Targeted Overcollateralization Amount may be permitted to
decrease or "step-down." If the Targeted Overcollateralization Amount is
permitted to "step-down" on a distribution date, the agreement permits a
portion of the Principal Remittance Amount for that distribution date not to
be passed through as a distribution of principal on that distribution date.
This has the effect of decelerating the amortization of the offered
certificates relative to the pool principal balance, thereby reducing the
actual level of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the offered certificates therefore releases
overcollateralization from the trust fund. The amount of the releases are the
"Overcollateralization Release Amounts."
On any distribution date, the sum of the monthly excess interest
amount and the Overcollateralization Release Amount is the "monthly excess
cashflow amount," which is required to be applied in the following order of
priority on the distribution date:
o to fund the Class A interest carry forward amount, if any;
o to fund the extra Principal Distribution Amount for the
distribution date;
o to fund the Class M-1 interest carry forward amount, if any;
o to fund the Class M-1 Realized Loss Amortization Amount for the
distribution date;
o to fund the Class M-2 interest carry forward amount, if any;
o to fund the Class M-2 Realized Loss Amortization Amount for the
distribution date;
o to fund the Class B interest carry forward amount, if any;
o to fund the Class B Realized Loss Amortization Amount for the
distribution date;
o to fund the aggregate amount of LIBOR carryover amount, among
all classes of offered certificates in proportion to the
respective LIBOR carryover amounts for each class in the same
priority order as interest distributions;
o to fund a distribution to the holders of the Class B
Certificates;
o to fund a distribution to the holders of the Class X
Certificates; and
o to fund a distribution to the holders of the Class R
Certificates.
For purposes of the foregoing, the following terms will have the
respective meanings set forth below.
"Class B Applied Realized Loss Amount" means, as to the Class B
Certificates and as of any distribution date, the lesser of:
o the class certificate balance of those certificates, after
taking into account distribution of the Principal Distribution
Amount, but prior to the application of the Class B Applied
Realized Loss Amount, if any, on the distribution date, and
o the Applied Realized Loss Amount as of the distribution date.
"Class B Realized Loss Amortization Amount" means, as to the Class B
Certificates and as of any distribution date, the lesser of:
o the Class B Unpaid Realized Loss Amount as of such distribution
date and
o the excess of:
o the Monthly Excess Cashflow Amount over
o the sum of the Class A Interest Carry Forward Amount, the
Extra Principal Distribution Amount, the Class M-1
Realized Loss Amortization Amount, the Class M-2 Realized
Loss Amortization Amount, the Class M-1 Interest Carry
Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B Interest Carry Forward Amount, in
each case for the distribution date.
"Class M-1 Applied Realized Loss Amount" means, as to the Class M-1
Certificates and as of any distribution date, the lesser of:
o the class certificate balance thereof, after taking into
account the distribution of the Principal Distribution Amount
on such distribution date, but prior to the application of the
Class M-1 Applied Realized Loss Amount, if any, on the
distribution date, and
o the excess of:
o the Applied Realized Loss Amount as of the distribution
date over
o the sum of the Class M-2 Applied Realized Loss Amount and
the Class B Applied Realized Loss Amount, in each case as
of the distribution date.
"Class M-1 Realized Loss Amortization Amount" means, as to the Class
M-1 Certificates and as of any distribution date, the lesser of:
o the Class M-1 Unpaid Realized Loss Amount as of such
distribution date and
o the excess of:
o the Monthly Excess Cashflow Amount over
o the sum of the Class A Interest Carry Forward Amount, the
Extra Principal Distribution Amount and the Class M-1
Interest Carry Forward Amount, in each case for the
distribution date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class M-2
Certificates and as of any distribution date, the lesser of:
o the class certificate balance thereof, after taking into
account the distribution of the Principal Distribution Amount
on such distribution date, but prior to the application of the
Class M-2 Applied Realized Loss Amount, if any, on the
distribution date, and
o the excess of:
o the related Applied Realized Loss Amount as of such
distribution date over
o the Class B Applied Realized Loss Amount and the Class B
Applied Realized Loss Amount, in each case as of the
distribution date.
"Class M-2 Realized Loss Amortization Amount" means, as to the Class
M-2 Certificates and as of any distribution date, the lesser of:
o the Class M-2 Unpaid Realized Loss Amount as of such
distribution date and
o the excess of:
o the Monthly Excess Cashflow Amount over
o the sum of the Class A Interest Carry Forward Amount, the
Extra Principal Distribution Amount, the Class M-1
Interest Carry Forward Amount, the Class M-1 Realized Loss
Amortization Amount and the related Class M-2 Interest
Carry Forward Amount, in each case for the distribution
date.
"Unpaid Realized Loss Amount" means for any class of subordinated
certificates and as to any distribution date, the excess of:
o the aggregate cumulative amount of related Applied Realized
Loss Amounts with respect to that class for all prior
distribution dates over
o the aggregate, cumulative amount of related Realized Loss
Amortization Amounts with respect to that class for all prior
distribution dates.
Monthly Advances
Subject to the following limitations, the servicer will be obligated
to advance or cause to be advanced by the servicer before each distribution
date its own funds in an amount equal to the aggregate of all payments of
principal and interest, net of the servicing fee rate, that were due during
the related collection period on the mortgage loans and that were delinquent
on the related determination date, plus amounts representing assumed payments
not covered by any current net income on the mortgage properties acquired by
foreclosure or deed in lieu of foreclosure.
Monthly advances are required to be made only to the extent they are
deemed by the servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making monthly
advances is to maintain a regular cash flow to the certificateholders, rather
than to guarantee or insure against losses. The servicer will not be required
to make any monthly advances with respect to reductions in the amount of the
monthly payments on the mortgage loans due to bankruptcy proceedings or the
application of the Relief Act.
All monthly advances will be reimbursable to the servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage
loan as to which the unreimbursed monthly advances were made. In addition, any
monthly advances or servicing advances previously made in respect of any
mortgage loan that are deemed by the servicer to be nonrecoverable from
related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the servicer out of any funds in the collection account prior to
the distributions on the certificates. In the event the servicer fails in its
obligations to make any advance, the trustee will be obligated to make any
advance, to the extent required in the agreement.
POOLING AND SERVICING AGREEMENT
General
The certificates will be issued pursuant to the agreement, a form of
which is filed as an exhibit to the registration statement. The trust fund
created under the agreement will consist of:
o all of the depositor's right, title and interest in the
mortgage loans, the related mortgage notes, Mortgages and other
related documents,
o all payments on or collections in respect of the mortgage loans
received after the cut-off date, other than payments due on or
before the cut-off date, together with any proceeds of those
payments,
o any mortgage properties acquired on behalf of
certificateholders by foreclosure or by deed in lieu of
foreclosure, and any revenues received on those mortgaged
properties,
o the rights of the trustee under all insurance policies required
to be maintained pursuant to the agreement and
o the rights of the depositor under the mortgage loan purchase
agreement between the depositor and the mortgage loan
originator.
Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the trust
fund, the terms and conditions of the agreement and the offered certificates.
The offered certificates will be transferable and exchangeable at the
corporate trust offices of the trustee, located in _______, ______. The
depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy, without exhibits, of the agreement.
Requests should be addressed to the Secretary, Merrill Lynch Mortgage
Investors, Inc.
Assignment of the Mortgage Loans
The depositor will deliver to the trustee with respect to each
mortgage loan:
o the original mortgage note endorsed without recourse to the
trustee to reflect the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on
the original mortgage and
o an original assignment of the Mortgage in recordable form to
the trustee, reflecting the transfer of the mortgage loan.
Assignments of mortgage loans are required to be recorded by or on
behalf of the depositor in the appropriate offices for real property records.
The trustee, concurrently with the depositor's assignment, will deliver the
certificates to the depositor in exchange for the mortgage loans.
The Servicer
The mortgage loans will be serviced on behalf of the trust fund by
_______, a _______, as servicer. The information set forth in the following
paragraphs has been provided by the servicer and neither the depositor nor any
other party makes any representation as to the accuracy or completeness of the
information.
[Specific information as provided by the servicer.]
Delinquency and Foreclosure Experience. The following table sets
forth the delinquency and foreclosure experience of the mortgage loans
serviced by the servicer as of the date indicated. The servicer's portfolio of
mortgage loans may differ significantly from the mortgage loans in terms of
interest rates, principal balances, geographic distribution, types of
properties and other possibly relevant characteristics. There can be no
assurance, and no representation is made, that the delinquency and foreclosure
experience with respect to the mortgage loans will be similar to that
reflected in the table below, nor is any representation made as to the rate at
which losses may be experienced on liquidation of defaulted mortgage loans.
The actual delinquency experience on the mortgage loans will depend, among
other things, upon the value of the real estate securing the mortgage loans
and the ability of the related mortgagor to make required payments. It should
be noted that the servicer's business emphasizes to a degree the acquisition
of servicing rights with respect to non-performing and subperforming mortgage
loans, and the servicer has been an active participant in the market for the
servicing rights over the past several months. The acquisition of the
servicing rights may have affected the delinquency and foreclosure experience
of the servicer in the period ending on _______ __, ____ as compared with the
period ending on _______ __, ____.
With respect to the information set forth in the table below, the
table shows mortgage loans which were delinquent or for which foreclosure
proceedings had been instituted as of the date indicated. With respect to REO
properties, the principal balance is at the time of foreclosure. In addition,
no mortgage loan is included in this table as delinquent until it is 30 days
past due. The table is exclusive of the number of loans and principal balance
shown in period of delinquency.
<PAGE>
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience(1)
As of ____ __, ____ As of ____ __, ____
-------------------------------------- -----------------------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(2) Balance Loans Balance(2) Balance
<S> <C> <C> <C> <C> <C> <C>
Current Loans $ % $
Period of Delinquency(3)
30-59 %
60-89 %
90 Days or More __________ % ______ ___________ _______
Total Delinquencies %
Foreclosure/Bankruptcies(4) %
Real Estate Owned %
------------------------------------- -------------------------------------
Total Portfolio ______ $________ 100.0% _______ $_______ 100.00%
====== ========= ====== ======= ======== =======
As of ______ __, ____
--------------------------------------
% by
No. of Principal Principal
Loans Balance(2) Balance
<S> <C> <C> <C>
Current Loans $ %
Period of Delinquency3
30-59 %
60-89 %
90 Days or More ______ ___________ _____%
Total Delinquencies %
Foreclosure/Bankruptcies4 %
Real Estate Owned %
-------------------------------------
Total Portfolio ______ $________ 100.0%
====== ========= ======
</TABLE>
<PAGE>
It is unlikely that the delinquency experience of the mortgage loans
comprising the mortgage pool will correspond to the delinquency experience of
the servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the servicer's
mortgage servicing portfolio, which may differ substantially from the mortgage
pool with respect to credit underwriting standards and other factors, only for
the periods presented, whereas the aggregate delinquency experience on the
mortgage loans comprising the mortgage pool will depend on the results
obtained over the life of the mortgage pool. There can be no assurance that
the mortgage loans comprising the mortgage pool will perform in a manner
consistent with the delinquency or foreclosure experience described in this
prospectus supplement. It should be noted that if the residential real estate
market should experience an overall decline in property values, the actual
rates of delinquencies and foreclosures could be higher than those previously
experienced by the servicer. In addition, adverse economic conditions may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the mortgage loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the mortgage pool.
The Trustee
__________ will act as trustee for the certificates pursuant to the
agreement. The trustee's offices for notices under the agreement are located
at ________, ______, _____ _____, and its telephone number is (___) ___-____.
The principal compensation to be paid to the trustee in respect of its
obligations under the agreement will be equal to accrued interest at the
trustee fee rate of _____% per annum on the stated principal balance of each
mortgage loan. The agreement will provide that the trustee and any director,
officer, employee or agent of the trustee will be indemnified by the trust
fund and will be held harmless against any loss, liability or expense, not
including expenses, disbursements and advances incurred or made by the
trustee, including the compensation and the expenses and disbursements of its
agents and counsel, in the ordinary course of the trustee's performance in
accordance with the provisions of the agreement, incurred by the trustee
arising out of or in connection with the acceptance or administration of its
obligations and duties under the agreement, other than any loss, liability or
expense:
o resulting from the servicer's actions or omissions in
connection with the agreement and the mortgage loans,
o that constitutes a specific liability of the trustee under the
agreement or
o incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the trustee's duties under the
agreement or as a result of a breach, or by reason of reckless
disregard, of the trustee's obligations and duties under the
agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the servicer in respect of
it servicing activities for the certificates will be equal to accrued interest
at the servicing fee rate of ___% per annum, in each case with respect to each
mortgage loan on the stated principal balance of each mortgage loan. As
additional servicing compensation, the servicer is entitled to retain all
assumption fees, late payment charges and other fees and charges, other than
prepayment penalties, to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the certificate account
and any escrow accounts. The servicer will be obligated to offset any
Prepayment Interest Shortfall on any distribution date to the extent of the
servicing fee for that distribution date. The servicer is obligated to pay
insurance premiums and ongoing expenses associated with the mortgage pool and
incurred by the servicer in connection with its responsibilities with respect
to the mortgage loans and is entitled to reimbursement for those expenses as
provided in the agreement.
Voting Rights
Actions specified in the prospectus that may be taken by holders of
certificates evidencing a specified percentage of all undivided interests in
the trust fund may be taken by holders of certificates entitled in the
aggregate to that percentage of voting rights. The percentage of the voting
rights allocated among holders of the offered certificates, other than the
Class X Certificates, will be __%; the percentage of the voting rights
allocated to the holders of the Class X Certificates will be __%; and the
percentage of the voting rights allocated among holders of the Class R
Certificates will be _%. The voting rights allocated to each class of
certificates will be allocated among all holders of each class in proportion
to the outstanding certificate principal balance of those certificates.
Termination
The circumstances under which the obligations created by the
agreement will terminate in respect of the certificates are described in
"Description of the Certificates--Termination" in the prospectus. The
depositor will have the right to purchase all remaining mortgage loans and any
properties acquired in respect of those mortgage loans and thereby effect
early retirement of the certificates on any distribution date following the
collection period during which the aggregate principal balance of the mortgage
loans and the properties at the time of purchase is [10]% or less of the
cut-off date pool principal balance. In the event the depositor exercises that
option, the purchase price payable in connection with that option generally
will be equal to par plus accrued interest for each mortgage loan at the
related mortgage rate to but not including the first day of the month in which
the repurchase price is distributed. In the event the depositor exercises that
option, the portion of the purchase price allocable to the each class of
offered certificates will be, to the extent of available funds:
o 100% of the then outstanding class certificate balance of those
certificaters, plus
o one month's interest on the then outstanding class certificate
balance of those certificates at the then applicable
pass-through rate, plus
o any previously accrued but unpaid interest thereon, plus
o any related LIBOR carryover amount.
In no event will the trust created by the agreement continue beyond
the expiration of 21 years from the death of the survivor of the persons named
in the agreement. See "Description of the Certificates--Termination" in the
prospectus.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The trust agreement provides that the trust fund, exclusive of the
rights of the offered certificates to receive interest payments in excess of
the weighted average interest rate that accrued on the mortgage loans in
respect of the related collection period, as the "cap contract," which is held
by the trust fund in the basis risk reserve fund, will comprise multiple
REMICs organized in a tiered REMIC structure. Each lower tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the lower tier
REMICs and the upper tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Class R Certificate will represent
beneficial ownership of the residual interests in each of the REMICs.
Elections will be made to treat each lower tier REMIC and the upper tier REMIC
as a REMIC for federal income tax purposes.
Each class of offered certificates and the Class X Certificates will
represent beneficial ownership of a corresponding class of regular interests
issued by the upper tier REMIC. In addition, each of the offered certificates
will represent a beneficial interest in the right to receive payments under
the cap contract from the basis risk reserve fund.
Upon the issuance of the offered certificates, Brown & Wood LLP, as
tax counsel, will deliver its opinion to the effect that, assuming compliance
with the trust agreement, for federal income tax purposes, each lower tier
REMIC and the upper tier REMIC will qualify as a REMIC within the meaning of
Section 860D of the Internal Revenue Code of 1986, as amended. In addition,
tax counsel will deliver an opinion to the effect that the basis risk reserve
fund is an "outside reserve fund" that is beneficially owned by the holders of
the Class X certificates. Moreover, tax counsel will deliver an opinion to the
effect that the rights of the holders of the offered certificates to receive
payments from the basis risk reserve fund represent, for federal income tax
purposes, interests in an interest rate cap contract.
Taxation of Regular Interests
A holder of a class of offered certificates will be treated for
federal income tax purposes as owning an interest in the corresponding class
of regular interest in the upper tier REMIC and an interest in the cap
contract. A holder of an offered certificate must allocate its purchase price
for the offered certificate between its two components - the REMIC Regular
Interest component and the cap contract component. For information reporting
purposes, the trustee will assume that, with respect to any offered
certificate, the cap contract component will have only nominal value relative
to the value of the Regular Interest component. The Internal Revenue Service
could, however, argue that the cap contract component has a greater value than
that allocated, and if that argument were to be sustained, the Regular
Interest component could be viewed as having been issued with an additional
amount of original issue discount, which could cause the total amount of OID
to exceed a statutorily defined de minimis amount. See "Material Federal
Income Tax Consequences - Taxation of Owners REMIC Regular Certificates -
Original Issue Discount and Premium" in the prospectus.
For federal income tax reporting purposes, it is expected that the
offered certificates will not be treated as having been issued with original
issue discount. The prepayment assumption that will be used in determining the
rate of accrual of original issue discount, premium and market discount, if
any, for federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the mortgage loans will prepay at
a constant rate of __% CPR. No representation is made that the mortgage loans
will prepay at the rate or at any other rate. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
The IRS has issued regulations under Sections 1271 to 1275 of the
Code generally addressing the treatment of debt instruments issued with
original issue discount. Purchasers of the offered certificates should be
aware that the OID regulations do not adequately address issues relevant to,
or are not applicable to, securities like the offered certificates. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code
to the certificates, and because the rules of the OID regulations relating to
debt instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to the certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the offered certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other manner not yet set forth in
regulations. Prospective purchasers of the offered certificates are advised to
consult their tax advisors concerning the tax treatment of those certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the offered certificates if those certificates are
required to be treated as issued with original issue discount generally would
be to report all income with respect to those certificates as original issue
discount for each period, computing the original issue discount:
o by assuming that the value of the applicable index will remain
constant for purposes of determining the original yield to
maturity of, and projecting future distributions on those
certificates, thereby treating those certificates as fixed rate
instruments to which the original issue discount computation
rules described in the prospectus can be applied, and
o by accounting for any positive or negative variation in the
actual value of the applicable index in any period from its
assumed value as a current adjustment to original issue
discount with respect to that period. See "Material Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the
prospectus.
Upon the sale, exchange, or other disposition of an offered
certificate, the holder must allocate the amount realized between the two
components of the offered certificate based on the relative fair market values
of those components at the time of sale. Assuming that an offered certificate
is held as a "capital asset" within the meaning of Section 1221 of the Code,
gain or loss on the disposition of an interest in the cap contract component
should be capital gain or loss, and gain or loss on the disposition of the
Regular Interest component should, subject to the limitation described below,
be capital gain or loss. Gain attributable to the Regular Interest component
of an offered certificate will be treated as ordinary income, however, to the
extent the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the holder's
gross income with respect to the Regular Interest component had
income on that amount accrued at a rate equal to 110% of the
applicable federal rate as defined in Section 1274(d) of the
Code determined as of the date of purchase of the offered
certificate over
o the amount actually included in the holder's income.
The offered certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" under Section
856(c)(4)(A) of the Code, generally in the same proportion that the assets in
the trust fund would be so treated. In addition, interest on the offered
certificates will be treated as "interest on obligations secured by mortgages
on real property" under Section 856(c)(3)(B) of the Code, generally to the
extent that the offered certificates are treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. Investors are cautioned that since the
offered certificates comprise rights in addition to the rights under the
offered Regular Interests, the offered certificates will not in their entirety
constitute assets described in Section 7701(a)(19) of the Code or real estate
assets described in Section 856(c)(4)(A) of the Code, and income earned on the
offered regular certificates will qualify as "interest on obligations secured
by mortgages on real property" under Section 856(c)(3)(B) of the Code only to
the extent that the income reflects the income so qualifying earned by the
offered Regular Interests. The offered certificates also will not be treated
as "qualified mortgages" under Section 860G(a)(3) of the Code in their
entirety and may not be appropriate investments for REMICs. See "Material
Federal Income Tax Consequences--REMICs-- Characterization of Investments in
REMIC Certificates" in the prospectus.
As indicated above, a portion of the purchase price paid by a holder
to acquire an offered certificate will be attributable to the cap contract
component of that offered certificate. The portion of the overall purchase
price attributable to the cap contract component must be amortized over the
life of an offered certificate, taking into account the declining balance of
the related Regular Interest component. Treasury regulations concerning
notional principal contracts provide alternative methods for amortizing the
purchase price of an interest rate cap contract. Under one method - the level
yield constant interest method - the price paid for an interest rate cap is
amortized over the life of the cap as though it were the principal amount of a
loan bearing interest at a reasonable rate. Holders are urged to consult their
tax advisors concerning the methods that can be employed to amortize the
portion of the purchase price paid for the cap contract component of an
offered certificate.
Any payments made to a holder from the basis risk reserve fund will
be treated as periodic payments on an interest rate cap contract. To the
extent the sum of the periodic payments for a year exceeds that year's
amortized costs of the cap contract components, the excess is ordinary income.
If for any year the amount of that year's amortized cost exceeds the sum of
the periodic payments, the excess is allowable as an ordinary deduction.
It is not anticipated that the trust fund will engage in any
transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any tax
is imposed on the trust fund, that tax will be borne:
o by the trustee, if the trustee has breached its obligations
with respect to REMIC compliance under the agreement,
o the servicer, if the servicer has breached its obligations with
respect to REMIC compliance under the agreement, and
o otherwise by the trust fund, with a resulting reduction in
amounts otherwise distributable to holders of the offered
certificates. See "Description of the Certificates--General"
and "Material Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other
Taxes" in the prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the trustee and/or the servicer. See "Material
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" in the prospectus.
For further information regarding the federal income tax consequences
of investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICs" in the prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the offered certificates will be applied by the depositor to the purchase
price of the mortgage loans and expenses connected with pooling the mortgage
loans and issuing the certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the offered certificates, the depositor has agreed to
sell to Merrill Lynch, Pierce, Fenner & Smith Incorporated, as underwriter,
and the underwriter has agreed to purchase the offered certificates.
In the underwriting agreement, the underwriter has agreed, subject to
the terms and conditions set forth in this prospectus supplement, to purchase
all of the offered certificates offered hereby, if any are purchased.
The distribution of the offered certificates by the underwriter will
be effected 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. The underwriter may effect those transactions by selling the offered
certificates to or through dealers, and those dealers may receive from the
underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The underwriter and any
dealers that participate with the underwriter in the distribution of the
offered certificates may be deemed to be underwriters, and any discounts,
concessions or commissions received by them, and any profit on the resale of
the offered certificates positioned by them, may be deemed to be underwriting
discounts and commissions under the Act.
The depositor has agreed to indemnify the underwriter against, or
make contributions to the underwriter with respect to, liabilities, including
liabilities under the Securities Act of 1933, as amended.
[All of the mortgage loans evidenced by the certificates have been
acquired by the depositor from Merrill Lynch Mortgage Capital Inc., an
affiliate, which acquired them in a privately negotiated transaction with the
mortgage loan originator.]
The depositor is an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
LEGAL MATTERS
Legal matters relating to the offered certificates will be passed
upon for the depositor and the underwriter by Brown & Wood LLP, New York, New
York.
RATINGS
It is a condition to the issuance of the offered certificates that
they receive the respective ratings set forth below from ________ and
________, as rating agencies:
Class _______ ______
-----
A ___ ___
M-1 ___ ___
M-2 ___ ___
B ___ ___
The ratings of the rating agencies assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of
all distributions to which those certificateholders are entitled. The rating
process addresses structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. The
ratings assigned to mortgage pass-through certificates do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which those prepayments will differ from that
originally anticipated. The ratings do not address the likelihood of the
payment of any LIBOR carryover amount.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the offered certificates are subsequently lowered for
any reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the offered certificates.
The depositor has not requested that any rating agency rate the
offered certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate the offered
certificates, or, if it does, what rating would be assigned by any other
rating agency. A rating on the offered certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the offered
certificates as stated above.
LEGAL INVESTMENT
The Class A and Class M-1 Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization, and are legal investments for entities to the extent provided in
SMMEA. SMMEA provided the states could override its provisions on legal
investment and restrict or condition investment in mortgage related securities
by taking statutory action on or prior to October 3, 1991. Some states have
enacted legislation which overrides the preemption provisions of SMMEA. The
Class M-2 and Class B Certificates will not be "mortgage related securities"
for purposes of SMMEA.
The depositor makes no representation as to the proper
characterization of the offered certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the offered
certificates under applicable legal investment restrictions. The uncertainties
may adversely affect the liquidity of the offered certificates. Accordingly,
all institutions 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 the extent to which the offered certificates constitute a legal
investment under SMMEA or are subject to investment, capital or other
restrictions. See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plans or
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which plans,
accounts or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended, or Section 4975 of the
Code should carefully review with its legal advisors whether the purchase or
holding of offered certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975 of
the Code.
The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption 90-29, on May 24, 1990, to the underwriter
which generally exempts from the application of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on the
prohibited transactions pursuant to Sections 4975(a) and (b) of the Code and
Section 502(i) of ERISA, some transactions, among others, relating to the
servicing and operation of mortgage pools and the purchase, sale and holding
of mortgage pass-through certificates underwritten by an underwriter, as in
this prospectus supplement after defined, provided that the conditions set
forth in the Exemption are satisfied. For purposes of this discussion, the
term "underwriter" shall include:
o Merrill Lynch, Pierce, Fenner & Smith Incorporated,
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with Merrill Lynch, Pierce, Fenner & Smith Incorporated
and
o any member of the underwriting syndicate or selling group of
which a person described above is a manager or co-manager with
respect to the Class A Certificates.
The Exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class A Certificates to be eligible for exemptive relief thereunder.
o First, the acquisition of the Class A Certificates by employee
benefit plans subject to Section 4975 of the Code, each, a
"Plan", must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an
unrelated party.
o Second, the rights and interests evidenced by the Class A
Certificates must not be subordinate to the rights and
interests evidenced by the other certificates of the same
trust.
o Third, the Class A Certificates at the time of acquisition by
the Plan must be rated in one of the three highest generic
rating categories by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
or Fitch, Inc.
o Fourth, the trustee cannot be an affiliate of any member of the
"Restricted Group," which consists of any underwriter, the
depositor, the servicer, each sub-servicer and any mortgagor
with respect to the mortgage loans constituting more than 5% of
the aggregate unamortized principal balance of the mortgage
loans as of the date of initial issuance of the Class A
Certificates.
o Fifth, the sum of all payments made to and retained by the
underwriter must represent 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 assignment of the mortgage loans to the trust fund must
represent not more than the fair market value of those
obligations; the sum of all payments made to and retained by
the servicer and any sub-servicer must represent not more than
reasonable compensation for that person's services under the
agreement and reimbursement of that person's reasonable
compensation for that person's services under the agreement and
reimbursement of that person's reasonable expenses in
connection therewith.
o Sixth, the investing Plan must be an accredited investor as
defined in Rule 501 (a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as
amended.
o Seventh:
o the investment pool consists only of assets of the type
enumerated in the Exemption and which have been included
in other investment pools;
o certificates evidencing interests in the other investment
pools have been rated in one of the three highest generic
rating categories by one of the national credit rating
agencies for at least one year prior to a Plan's
acquisition of certificates; and
o certificates evidencing interests in the other investment
pools have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of
certificates. See "ERISA Considerations" in the
prospectus.
In addition, the Exemption will not apply to a Plan's investment in
Class A Certificates if the plan fiduciary responsible for the decision to
invest in Class A Certificates is a mortgagor or obligor with respect to more
than 5% of the fair market value of the obligations constituting the mortgage
loans or an affiliate of that person, unless:
o in the case of an acquisition in connection with the initial
issuance of any certificates, at least 50% of each class of
certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least 50% of
the aggregate interest in the trust is acquired by persons
independent of the Restricted Group;
o the Plan's investment in any class of certificates does not
exceed 25% of the outstanding certificates of that class at the
time of acquisition;
o immediately after the acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has
discretionary authority or renders investment advice are
invested in certificates evidencing interest in trusts
sponsored or containing assets sold or serviced by the same
entity; and
o the Plan is not sponsored by any member of the Restricted
Group.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm:
o that the certificates constitute "certificates" for purposes of
the Exemption and
o that the specific and general conditions of the Exemption and
the other requirements set forth in the Exemption would be
satisfied.
Because the characteristics of the Class M-1, Class M-2 and Class B
Certificates may not meet the requirements of the Exemption or any other
issued exemption under ERISA, the purchase and holding of the Class M-1, Class
M-2 and Class B Certificates by a Plan or by individual retirement accounts or
other plans subject to Section 4975 of the Code may result in prohibited
transactions or the imposition of excise taxes or civil penalties.
Consequently, transfers of the Class M-1, Class M-2 and Class B Certificates
will not be registered by the trustee unless the trustee receives:
o a representation from the transferee of the certificate,
acceptable to and in form and substance satisfactory to the
trustee, to the effect that the transferee is not an employee
benefit plan subject to Section 406 of ERISA or a plan or
arrangement subject to Section 4975 of the Code, nor a person
acting on behalf of any plan or arrangement nor using the
assets of any plan or arrangement to effect the transfer;
o if the purchaser is an insurance company, a representation that
the purchaser is an insurance company which is purchasing the
certificates with funds contained in an "insurance company
general account," as the term is defined in Section V(e) of
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60"),
and that the purchase and holding of the certificates are
covered under PTCE 95-60; or
o an opinion of counsel satisfactory to the trustee that the
purchase or holding of the certificate by a Plan, any person
acting on behalf of a Plan or using the Plan's assets, will not
result in the assets of the trust fund being deemed to be "plan
assets" and subject to the prohibited transaction requirements
of ERISA and the Code and will not subject the trustee to any
obligation in addition to those undertaken in the agreement.
The representation as described above shall be deemed to have been
made to the trustee by a beneficial owner's acceptance of a Class M-1, Class
M-2 or Class B Certificate in book-entry form. In the event that the
representation is violated, or any attempt to transfer to a Plan or person
acting on behalf of a Plan or using the Plan's assets is attempted without the
opinion of counsel, the attempted transfer or acquisition shall be void and of
no effect.
Any Plan fiduciary considering whether to purchase an offered
certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to the investment.
<PAGE>
Glossary
Whenever used in this prospectus supplement, the following terms have
the following meanings:
"Constant Prepayment Rate" means a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of the loans.
"Exemption" means Prohibited Transaction Exemption 90-29, Application
No. D-8012, 55 Fed Reg. 21459 (1990) granted by the DOL to Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
"LIBOR Rate" means the rate for United States dollar deposits for one
month which appear on the Telerate Screen LIBO Page 3750 as of 11:00 A.M.,
London time, on the second business day prior to the first day of any interest
period relating to the certificates, or the second business day prior to the
closing date, in the case of the first distribution date; provided, that, if
that rate does not appear on that page or the other page as may replace that
page on that service, or if that service is no longer offered, the other
service for displaying the LIBOR rate or comparable rates as may be reasonably
selected by the seller, after consultation with the trustee, the rate will be
the [Reference Bank Rate]; provided further, that if no quotations can be
obtained and no [Reference Bank Rate] is available, the LIBOR Rate will be the
LIBOR Rate applicable to the preceding distribution date.
"Liquidation Proceeds" means the proceeds, excluding any amounts
drawn on the insurance policy, received in connection with the liquidation of
any mortgage loan, whether through trustee's sale, foreclosure sale or
otherwise
"Net Liquidation Proceeds" means, with respect to a mortgage loan,
the Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of that amount that exceeds the sum of:
o the principal balance of the mortgage loan plus
o accrued and unpaid interest on that principal balance to the
end of the collection period during which that mortgage loan
became a liquidated mortgage loan.
"Plan" means employee benefit plans and other retirement plans and
arrangement, including, but not limited to, individual retirement accounts and
annuities, as well as collective investment funds and separate general
accounts in which the plans or arrangement are invested, which have
requirements imposed upon them under ERISA and the Code.
"Prepayment Assumption" means, for federal income tax purposes and
any security, the rate of prepayments assumed in pricing the security.
"Prepayment Interest Shortfalls" means with respect to a mortgage
loan that is subject to a mortgagor prepayment or liquidation, the amount the
equals the difference between a full month's interest due with respect to that
mortgage loan and the amount of interest paid or recovered with respect
thereto.
"Realized Loss" means as to any defaulted mortgage loan that is
finally liquidated, the amount of loss realized, if any, as described in the
related pooling and servicing agreement, will equal the portion of the stated
principal balance remaining after application of all amounts recovered, net of
amounts reimbursable to the master servicer for related advances and expenses,
towards interest and principal owing on the mortgage loan. With respect to a
mortgage loan the principal balance of which has been reduced in connection
with bankruptcy proceedings, the amount of the reduction will be treated as a
realized loss.
"Regular Interest" or "Regular Interest Securities" means securities
that are designated as "regular interests" in a REMIC in accordance with the
Code
"REMIC" means a "real estate mortgage investment conduit" under the
Code.
"Restricted Group" means, for any series, the seller, the depositor,
[Merrill Lynch Mortgage Investors, Inc.] and the other underwriters set forth
in the related prospectus supplement, the trustee, the master servicer, any
sub-servicer, any pool insurer, any obligor with respect to the trust fund
asset 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 any of those parties.
"SMMEA" means the Secondary Mortgage Market Enhancement of 1984, as
amended.
<PAGE>
Mortgage Loan Asset Backed Certificates
Series _____-_____
Merrill Lynch Mortgage Investors, Inc.
Depositor
$_____________ Class A Certificates
$___________ Class M-1 Certificates
$___________ Class M-2 Certificates
$_____________ Class B Certificates
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
Merrill Lynch & Co.
You should rely 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.
Until the expiration of 90 days after the date of this prospectus
supplement, all dealers selling the offered certificates, whether or not
participating in this distribution, will deliver a prospectus supplement and
the prospectus to which it relates. This delivery requirement is in addition
to the obligation of dealers to deliver a prospectus supplement and prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
Prospectus Supplement
(To Prospectus Dated _______, ____
$--------
---------------
Asset-Backed Notes, Series ____-__, Class A-F
Issuer
$--------
---------------
Asset-Backed Notes, Series ____-__, Class A-V
Issuer
[LOGO]
-------------------------
Seller and Master Servicer
Merrill Lynch Mortgage Investors, Inc.
Depositor
___________________ Series ____- will be formed pursuant to a trust
agreement, dated as of _____ __, ____, between Merrill Lynch Mortgage
Investors, Inc., as depositor, and ___________, as owner trustee. The Series
____-F Issuer will issue $___________aggregate principal amount of
_____________ Home Equity Loan Asset-Backed Notes, Series ____-__. The Class
A-F Notes will be issued pursuant to an indenture, dated as of ____ __, ____,
between the Series ____-__ Issuer and ________, as indenture trustee.
________Home Equity Loan Trust Series ____-V will be formed pursuant to a
trust agreement, dated as of _______, ____, between the depositor and the
owner trustee. The Series _____-V issuer will issue $___________ aggregate
principal amount of Home Equity Loan Asset-Backed Notes, Series _____-_V. The
Class A-V Notes will be issued pursuant to an indenture between the Series
_____-V Issuer and the indenture trustee. Only the Class A-F Notes and the
Class A-V Notes are offered hereby.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement. Any representation to
the contrary is a criminal offense.
----------
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
----------
Before buying these securities, you should consider the factors set forth
under "Risk Factors" beginning on page S-__ of this prospectus supplement.
The notes will be purchased from the depositor by the underwriter and
will be offered by the underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the depositor from the sale of the Class A-F
Notes are expected to be approximately $____________ before deducting expenses
plus accrued interest from the cut-off date and the proceeds to the depositor
from the sale of the Class A-V Notes are expected to be approximately
$__________ before deducting expenses.
The notes are offered by the underwriter subject to prior sale, when, as
and if delivered to and accepted by the underwriter and subject to other
conditions. The underwriter reserves the right to withdraw, cancel or modify
the offer and to reject any order in whole or in part. It is expected that
delivery of the notes will be made on or about ________, ____ in book-entry
form through The Depository Trust Company, Clearstream and the Euroclear
system as discussed in this prospectus supplement, against payment for the
notes in immediately available funds.
Upon receipt of a request by an investor for an electronic prospectus
supplement from the underwriter or a request by the investor's representative
within the period during which there is an obligation to deliver a prospectus
supplement, the underwriter will promptly deliver, or cause to be delivered,
in addition to the electronic prospectus supplement, without charge, a paper
copy of the prospectus supplement.
There is currently no secondary market for the notes. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, the underwriter, intends to make a
secondary market in the notes, but is not obligated to do so. There can be no
assurance that a secondary market for the notes will develop or, if it does
develop, that it will continue or provide noteholders with sufficient
liquidity of investment. The notes will not be listed on any securities
exchange.
--------------------------
Merrill Lynch & Co.
--------------------------
The date of this prospectus supplement is ______, ___
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary....................................................................S-4
Risk Factors..............................................................S-18
Description Of The Home Equity Loan Pool..................................S-20
The Seller................................................................S-37
The Series _______-F Issuer...............................................S-38
The Series ____-V Issuer..................................................S-38
The Owner Trustee.........................................................S-39
The Indenture Trustee.....................................................S-39
_______________________...................................................S-40
Description Of The Notes..................................................S-42
Certain Yield And Prepayment Considerations...............................S-66
Description Of The Servicing Agreements...................................S-77
The Indentures............................................................S-81
Material Federal Income Tax Consequences..................................S-85
Method Of Distribution....................................................S-86
Legal Opinions............................................................S-87
Ratings...................................................................S-87
Legal Investment..........................................................S-87
Erisa Considerations......................................................S-88
Experts...................................................................S-89
Prospectus
Available Information.........................................................
Incorporation of Certain Information by Reference.............................
Summary of Prospectus.........................................................
Description of the Trust Funds................................................
Use of Proceeds...............................................................
Yield Considerations..........................................................
The Depositor.................................................................
Description of the Securities.................................................
Description of the Agreements.................................................
Description of Credit Support.................................................
Certain Legal Aspects of Mortgage Loans.......................................
Material Federal Income Tax Consequences......................................
State Tax Considerations......................................................
ERISA Considerations..........................................................
Legal Investment..............................................................
Plan of Distribution..........................................................
Legal Matters.................................................................
Financial Information.........................................................
Rating........................................................................
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this prospectus supplement and in
the prospectus. Capitalized terms used in this prospectus supplement and not
otherwise defined in this prospectus supplement have the meanings assigned in
the glossary.
The Notes.......................... $_____________ Home Equity Loan
Asset-Backed Notes, Series _____-F and
$________ Home Equity Loan Asset-Backed
Notes, Series ______-V. The notes will be
issued pursuant to two separate
indentures, each dated as of _____ , ____,
between the related issuer and the
indenture trustee. Each series of notes
represents the right to receive payments
from funds available to be distributed
with respect to the related loan group, as
described in this prospectus supplement;
provided that in the limited circumstances
described in this prospectus supplement
under "Description of the Notes," excess
cash flow from the loan group related to a
series of notes may be available for
shortfalls on the other series of notes.
Issuers ............................The Class A-F Notes will be issued by Home
Equity Loan Trust Series ____-F, the
Series ____-F Issuer, and the Class A-V
Notes will be issued by Home Equity Loan
Trust Series ____-V, the Series -V
-------- Issuer, each a Delaware business
trust established pursuant to a trust
agreement, dated as of _____, ____,
between the depositor and the owner
trustee. The notes will represent
non-recourse obligations solely of the
related issuer, and the proceeds of the
assets of the related issuer and the
related note insurance policy will be the
sole source of payments on the notes, as
applicable. The related issuer is not
expected to have any significant assets
other than those pledged as collateral to
secure the Class A-F Notes and the Class
A-V Notes, as applicable.
Depositor...........................Merrill Lynch Mortgage Investors, Inc. See
"The Depositor" in the prospectus.
Seller..............................___________________ . See "Description of
the Home Equity Loan Pool-- The Seller" in
this prospectus supplement.
Master Servicer.....................___________________. See "Description of
the Servicing Agreement-- The Master
Servicer" in this prospectus supplement.
Sub-Servicer........................___________________. See "Description of
the Servicing Agreement-- The
Sub-Servicer" in this prospectus
supplement.
Owner Trustee.......................___________________, a Delaware _________.
Indenture Trustee...................___________________, a ____________.
Cut-off Date........................___________.
Closing Date........................On or about _____, ______.
Payment Date........................The [25th] day of each month, or, if that
day is not a business day, the next
business day, beginning on ______, _____.
Denominations and Registration......The notes will be issued, maintained and
transferred on the book- entry records of
DTC and its participants, as defined in
the prospectus, or Clearstream or
Euroclear, in Europe. Transfers within
DTC, Clearstream or Euroclear, as the case
may be, will be in accordance with the
usual rules and operating procedures of
the relevant system. The notes will be
offered in registered form, in minimum
denominations of $25,000 and integral
multiples of $1,000 in excess of $25,000.
The notes will be represented by one or
more notes registered in the name of Cede
& Co., as nominee of DTC. No security
owner will be entitled to receive a note
in fully registered, certificated form,
except under the limited circumstances
described in this prospectus supplement.
See "Description of the Notes-- Book-Entry
Notes" in this prospectus supplement.
The Home Equity Loan Pool...........The home equity loan pool will consist of
two groups of home equity loans. The loans
in each loan group are referred to in this
prospectus supplement as the "fixed rate
loans" and the "adjustable rate loans."
Fixed Rate Loans. The fixed rate loans are
secured by first and second liens on one-
to four- family real properties. The
initial fixed rate loans have individual
principal balances as of the cut-off date
of at least $________ but not more than
$_______ with an average principal balance
as of the cut-off date of approximately
$______. Approximately _____% of the
initial fixed rate loans, by aggregate
principal balance as of the cut-off date,
are secured by second liens on the related
mortgaged properties. The initial fixed
rate loans generally have terms to
maturity of up to 30 years from the date
of origination and a weighted average
remaining term to stated maturity of
approximately ___ months as of the cut-off
date.
The mortgage rate on the fixed rate loans
will be fixed for the life of the loan.
As of the cut-off date, the initial fixed
rate loans in the aggregate will have
mortgage rates of at least ____% per annum
but not more than _____% per annum, with a
weighted average of ______%.
Approximately ____% of the initial fixed
rate loans, by aggregate principal balance
of the fixed rate loans as of the cut-off
date, were thirty days or more but less
than sixty days delinquent in their
monthly payments as of the cut-off date.
None of the initial fixed rate loans were
sixty days or more delinquent in their
monthly payments as of the cut-off date.
Adjustable Rate Loans. The adjustable rate
loans are secured by first liens on
mortgaged properties. The initial
adjustable rate loans have individual
principal balances as of the cut-off date
of at least $_______ but not more than
$_______ with an average principal balance
as of the cut-off date of approximately
$_______. The initial adjustable rate
loans generally have terms to maturity of
up to 30 years from the date of
origination and a weighted average
remaining term to stated maturity of
approximately ___ months as of the cut-off
date.
The mortgage rate on the adjustable rate
loans will be adjustable, subject to
adjustment commencing:
o with respect to approximately _____% of
the initial adjustable rate loans
approximately six months after the date of
origination,
o with respect to approximately _____% of
the initial adjustable rate loans,
approximately two years after origination,
o with respect to approximately _____% of
the initial adjustable rate loans,
approximately three years after
origination and
o with respect to approximately _____% of
the initial adjustable rate loans,
approximately five years after origination
on the adjustment date to equal the sum,
rounded as described in this prospectus
supplement, of the index described below
and a fixed percentage set forth in the
related mortgage note.
However,
o on any adjustment date the mortgage rate
may not increase or decrease by more than
the periodic rate cap, except as described
in this prospectus supplement,
o over the life of the adjustable rate
loan, the mortgage rate may not exceed the
related maximum mortgage rate, which
maximum mortgage rates will range from
_____% per annum to _____% per annum and
o over the life of the adjustable rate
loan, the mortgage rate may not be lower
than a specified minimum mortgage rate,
which minimum mortgage rates will range
from _____% per annum to _____% per annum.
The adjustable rate loans will have gross
margins ranging from _____% per annum to
_____% per annum with a weighted average
of _____% as of the cut-off date.
For a further description of the loans,
see "Description of the Home Equity Loan
Pool" in this prospectus supplement.
Pre-Funding Accounts................On the closing date, approximately
$___________ from the sales proceeds of
the Class A-F Notes will be deposited in
an account, which account is in the name
of the indenture trustee and is part of
the related trust estate and will be used
to acquire subsequent fixed rate loans.
During the Class A-F funding period, the
Class A-F original pre-funded amount will
be reduced by the amount of the pre-funded
amount used by the related issuer to
purchase subsequent fixed rate loans from
the seller. In addition, on the closing
date, approximately $____________ from the
sales proceeds of the Class A-V Notes will
be deposited in an account, which account
is in the name of the indenture trustee
and is part of the related trust estate
and will be used to acquire subsequent
adjustable rate loans. During the related
Class A-V funding period, the Class A-V
original pre-funded amount will be reduced
by the amount of the original pre-funded
amount used by the related issuer to
purchase subsequent adjustable rate loans
from the seller. The Class A-F funding
period and the Class A-V funding period
are the periods commencing on the closing
date and ending on the earlier to occur of
the date on which the amount on deposit in
the Class A-V pre-funding account is less
than $_______, and _____, ____. See
"Description of the Home Equity Loan Pool"
in this prospectus supplement.
Interest Coverage Accounts..........On the closing date, a portion of the
sales proceeds of the Class A-F Notes will
be deposited in an account for application
by the indenture trustee to cover
shortfalls in the Class A-F interest
payment amount, as described in this
prospectus supplement, attributable to the
pre-funding feature during the Class A-F
funding period. In addition, on the
closing date, a portion of the sales
proceeds of the Class A-V Notes will be
deposited in an account for application by
the indenture trustee to cover shortfalls
in the Class A-V interest payment amount
attributable to the pre-funding feature
during the Class A-V funding period. Any
amounts remaining in an interest coverage
account at the end of the related
pre-funding period will be paid to the
seller. See "Description of the Notes--
Interest Coverage Accounts" in this
prospectus supplement
The Index...........................As of any adjustment date with respect to
any adjustable rate loan, the index
applicable to the determination of the
related mortgage rate will be the average
of the interbank offered rates for
six-month U.S. dollar deposits in the
London market based on quotations of major
banks as most recently available generally
as of the first business day of the month
immediately preceding the month in which
the adjustment date occurs.
Interest Payments...................Interest on the Class A-F Notes will be
paid monthly on each payment date,
commencing in _______, in an amount which
is equal to interest accrued on the Class
A-F Note principal balance immediately
before the payment date at ____% per
annum. The sum of the aggregate principal
balance of the initial fixed rate loans as
of the cut-off date and the Class A-F
original pre-funded amount is referred to
in this prospectus supplement as the Class
A-F original pool balance. Interest on the
Class A-V Notes will be paid monthly on
each payment date, commencing in ________,
in an amount which is equal to the lesser
of
o interest accrued on the Class A-V Note
principal balance immediately prior to the
payment date at the Class A-V Note
interest rate for the related interest
period and
o the guaranteed interest payment amount.
The Class A-V Note interest rate on each
payment date will be a floating rate equal
to the lesser of
o with respect to each payment date up to
and including the payment date which
occurs on or prior to the date on which
the aggregate principal balance of the
adjustable rate loans is less than or
equal to [10]% of the sum of the aggregate
principal balance of the initial
adjustable rate loans as of the cut off
date and the Class A-F original pre-funded
amount, one-month LIBOR, as defined in
this prospectus supplement, plus ____% and
(b) with respect to each payment date
thereafter, one-month LIBOR plus ____% and
o ____% per annum.
Interest in respect of any payment date on
the Class A-F Notes will accrue on the
basis of a 360-day year consisting of
twelve 30-day months and on the Class A-V
Notes will accrue from the preceding
payment date, or, in the case of the first
payment date, from the closing date,
through the day preceding the payment date
on the basis of the actual number of days
in the interest period and a 360-day year.
With respect to each loan and each payment
date, the master servicer will be entitled
to a fee equal to 1/12 of the servicing
fee rate times the principal balance of
those loan as of the date. With respect to
each loan and each payment date, the
indenture trustee will be entitled to a
fee equal to 1/12 of the indenture trustee
fee rate times the principal balance of
the loan as of the date. For any payment
date, the servicing fee rate is equal to
_____% per annum, the indenture trustee
fee rate is equal to _____% per annum, the
owner trustee fee is $______ per annum,
payable on the payment date in ____ of
each year from each related payment
account, and the note insurer premium is
equal to 1/12 of the per annum rate
specified pursuant to the related
insurance agreement, times the note
principal balance of the Class A-F Notes
or the Class A-V Notes, as applicable.
With respect to each adjustable rate loan
and each payment date, the minimum spread
is equal to 1/12 of ____% per annum times
the principal balance of the loan as of
the date. The note insurance policies do
not cover prepayment interest shortfalls,
any relief act shortfalls, each as further
described in this prospectus supplement,
or with respect to the Class A-V Notes,
the carry-forward amount, nor do the
ratings assigned to the notes address the
payment of any prepayment interest
shortfalls, any relief act shortfalls or
with respect to the Class A-V Notes, the
carry-forward amount.
Principal Payments..................Principal payments will be payable on the
notes on each payment date in an aggregate
amount equal to the related principal
payment amount for the payment date. The
principal payment amount with respect to
the Class A-F Notes and the Class A-V
Notes will include, to the extent of the
Class A-F available funds and Class A-V
available funds, each as defined in this
prospectus supplement, and except as
otherwise described in this prospectus
supplement, the principal portion of all
scheduled monthly payments, to the extent
received, due from mortgagors in the
related loan group on the related due
date, and all unscheduled amounts in the
related loan group received during the
preceding calendar month that are
allocable to principal, including proceeds
of repurchases, principal and adjustments
in the case of substitutions, prepayments,
liquidations and insurance, but excluding
proceeds paid in respect of the related
note insurance policy, and may be reduced
as a result of overcollateralization in
excess of the required level, as described
in this prospectus supplement. In
addition, on any payment date, to the
extent of related funds available
therefor, Class A-F Noteholders and Class
A-V Noteholders will also be entitled to
receive payments generally equal to the
amount, if any, necessary to increase the
related subordination amount to the
related required subordination amount and
with respect to the payment date
immediately following the end of the
related funding period, any amounts in the
Class A-F pre-funding account and Class
A-V pre-funding account, as applicable,
after giving effect to any purchase of
fixed rate subsequent loans or adjustable
rate subsequent loans, as applicable.
Any loss on a liquidated loan, like a
realized loss, may or may not be allocated
to the related series of notes on the
payment date which immediately follows the
event of loss. However, the holders of the
notes are entitled to receive ultimate
recovery of any realized losses which
occur in the related loan group which
receipt will be no later than the payment
date occurring after the realized loss
creates an aggregate subordination
deficit, as described in this prospectus
supplement, and will be in the form of an
insured payment if not covered through net
monthly excess cashflow from the related
loan group or the other loan group. See "
--Note Insurance Policies" in this
prospectus supplement.
Insured payments do not include realized
losses until that time as the aggregate
cumulative realized losses have created an
aggregate subordination deficit.
Note Insurer........................_________________. See "____________" in
this prospectus supplement.
Note Insurance Policies.............On the closing date, the note insurer will
issue a note insurance policy in favor of
the indenture trustee for the benefit of
the holders of the Class A-F Notes and a
note insurance policy in favor of the
indenture trustee for the benefit of the
holders of the Class A-V Notes. On the
second business day preceding each payment
date, the indenture trustee will make a
claim on the related note insurance
policy, when necessary, to cover the sum
of:
o the amount by which the related interest
payment amount, net of any related
prepayment interest shortfalls, whether or
not the shortfalls are covered by the
master servicer by compensating interest,
as defined in this prospectus supplement,
and any relief act shortfalls, exceeds the
related available funds for the loan group
and any net monthly excess cashflow from
the other loan group available to cover
the shortfall as of the payment date and
o the amount of the excess, if any, of the
amount by which the lesser of the
subordination deficit with respect to the
related loan group and the aggregate
subordination deficit exceeds the related
available funds for the loan group and any
net monthly excess cashflow from the other
loan group available to cover the
shortfall as of the payment date.
While the note insurer is not obligated to
pay any losses on liquidated loans except
as set forth above, the note insurer may,
at its sole option, pay any losses on
liquidated loans in accordance with the
related note insurance policy. Each note
insurance policy will also insure the
payment of any related unpaid preference
amount. the note insurance policy with
respect to the Class A-V Notes does not
insure the payment of the carry-forward
amount. See "Description of the Notes --
Note Insurance Policies" in this
prospectus supplement and "Description of
Credit Support" in the prospectus.
The certificates....................Trust certificates, Series _____-F and
Trust certificates, Series ____-V. Each
series of certificates will be issued
pursuant to the related trust agreement
and will represent the beneficial
ownership interest in the related issuer.
The certificates are not offered hereby.
Credit Enhancement..................The credit enhancement provided for the
benefit of the Class A-F Noteholders and
the Class A-V Noteholders consists solely
of:
o the related net monthly excess cashflow,
as defined in this prospectus supplement,
o the related overcollateralization and
crosscollateralization and
o the related note insurance policy.
Net Monthly Excess Cashflow. Each
indenture requires that, on each payment
date, net monthly excess cashflow from the
related loan group, if any, be applied on
the payment date as an accelerated payment
of principal on the related notes but only
to the limited extent hereafter described.
The net monthly excess cashflow with
respect to the Class A-F Notes and the
Class A-V Notes for any payment date is
equal to the amount of related available
funds remaining after application to the
first through the third items under
"Description of the Notes--Class A-F
Notes--Priority of Payment" and "--Class
A-V Notes --Priority of Payment" in this
prospectus supplement. This application
has the effect of accelerating the
amortization of the Class A-F Notes and
the Class A-V Notes, as applicable,
relative to the amortization of the
related loans.
Overcollateralization. The subordination
and cash flow provisions of each indenture
result in a limited acceleration of the
Class A-F Notes or the Class A-V Notes, as
applicable, relative to the amortization
of the related loans. This acceleration
feature creates overcollateralization
which results from the excess of the
aggregate principal balance of the related
loans over the aggregate note principal
balance of the related notes. Once the
required level of overcollateralization is
reached, the acceleration feature will
cease, unless it becomes necessary to
maintain the required level of
overcollateralization. See "Description of
the Notes--Class A-F Notes--
Overcollateralization Provisions" and
"--Class A-V Notes --Overcollateralization
Provisions."
The actual level of overcollateralization
may increase or decrease over time as
described in this prospectus supplement.
An increase would result in a temporary
period of accelerated amortization of the
related notes to increase the actual level
of overcollateralization to its required
level; a decrease would result in a
temporary period of decelerated
amortization to reduce the actual level of
overcollateralization to its required
level.
Cross-collateralization. In addition, each
indenture provides that net monthly excess
cashflow generated by the related loan
group may be used to cover shortfalls in
available funds in the other loan group,
subject to prior distribution requirements
of available funds in the loan group.
See "Description of the Notes--Class A-F
Notes--Overcollateralization Provisions"
and "--Cross-collateralization Provisions"
and "Class A-V
Notes--Overcollateralization Provisions"
and "--Cross-collateralization Provisions"
in this prospectus supplement.
The note insurance policies. The Class A-F
Notes and the Class A-V Notes will each
have the benefit of a note insurance
policy, as discussed more fully in this
prospectus supplement. See "Description of
the Notes -- Note Insurance Policies" in
this prospectus supplement.
Mandatory Prepayments
on the Notes........................The Class A-F Notes and the Class A-V
Notes, as applicable, will be prepaid in
part on the payment date immediately
following the end of the related funding
period in the event that any amount
remains on deposit in the related
pre-funding account on the payment date
after the purchase by the related issuer
of the related subsequent loans, if any.
Although no assurance can be given, it is
anticipated that the principal amount of
the subsequent fixed rate loans and
subsequent adjustable rate loans purchased
by the related issuer will require the
application of substantially all of the
related original pre-funded amount and
that there should be no material amount of
principal prepaid to the Class A-F Notes
and the Class A-V Notes from the related
pre-funding account. However, it is
unlikely that the seller will be able to
sell subsequent fixed rate loans and
subsequent adjustable rate loans to the
related issuer with an aggregate principal
balance identical to the related original
pre-funded amount and, therefore, a
prepayment will likely occur. See
"Description of the Notes-- Mandatory
Prepayments on the Notes" in this
prospectus supplement.
Advances............................Prior to each payment date, the
sub-servicer is required under the
sub-servicing agreement, and the master
servicer is required under the servicing
agreement, to make advances in respect of
delinquent payments of interest on the
loans, subject to the limitations
described in this prospectus supplement.
See "Description of the Notes-- Advances"
in this prospectus supplement and
"Description of the Securities" in the
prospectus.
Optional Redemption of the Notes....The Class A-F Notes and the Class A-V
Notes may be redeemed in whole, but not in
part, by the holder of a majority of the
related certificates on any payment date
on or after the payment date on which the
aggregate principal balance of the fixed
rate loans and the adjustable rate loans
is less than or equal to [10]% and [10]%,
respectively, of the related original pool
balance. See "Description of the Notes--
Optional Redemption" in this prospectus
supplement and "Description of the
Securities-- Termination" in the
prospectus.
Special Prepayment
Considerations......................The rate and timing of principal payments
on the notes will depend, among other
things, on the rate and timing of
principal payments, including prepayments,
defaults, liquidations and purchases of
the related loans due to a breach of a
representation or warranty, on the related
loans. As is the case with mortgage-backed
securities generally, the notes are
subject to substantial inherent cash-flow
uncertainties because the loans may be
prepaid at any time; however, a prepayment
may subject the related mortgagor to a
prepayment charge with respect to
approximately _____% and _____% of the
initial fixed rate loans and initial
adjustable rate loans, respectively, each
by aggregate principal balance of the
related loan group as of the cut-off date.
Generally, when prevailing interest rates
increase, prepayment rates on mortgage
loans tend to decrease, resulting in a
slower return of principal to investors at
a time when reinvestment at the higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates
decline, prepayment rates on mortgage
loans tend to increase, resulting in a
faster return of principal to investors at
a time when reinvestment at comparable
yields may not be possible. Typically, the
initial loans with a prepayment charge
provision provide for a prepayment charge
for partial prepayments and full
prepayments. Prepayment charges may be
payable for a period of time ranging from
one to five years from origination.
Prepayment charges may reduce the rate of
prepayment on the loans.
Investors should be aware that _____% of
the initial fixed rate loans are secured
by second liens on the related mortgaged
properties. In addition, some of the
subsequent fixed rate loans may be secured
by second liens on the related mortgaged
properties. Generally, loans secured by
second liens are not viewed by mortgagors
as permanent financing. Accordingly, the
fixed rate loans may experience a higher
rate of prepayment than fixed rate loans
secured by first liens. none of the
adjustable rate loans are secured by
second liens.
See "Certain Yield and Prepayment
Considerations" in this prospectus
supplement, and "Maturity and Prepayment
Considerations" in the prospectus.
Special Yield Considerations........The yield to maturity on the notes will
depend on, among other things, the rate
and timing of principal payments,
including prepayments, defaults,
liquidations and purchases of the related
loans due to a breach of a representation
or warranty, on the related loans and the
allocation of those principal payments to
reduce the related note principal balance.
The yield to maturity on the notes will
also depend on the related note interest
rate and the purchase price for the notes.
If the notes are purchased at a premium
and principal payments on those notes
occur at a rate faster than anticipated at
the time of purchase, the investor's
actual yield to maturity will be lower
than that assumed at the time of purchase.
Conversely, if the notes are purchased at
a discount and principal payments on those
notes occur at a rate slower than that
assumed at the time of purchase, the
investor's actual yield to maturity will
be lower than that assumed at the time of
purchase. The notes were structured
assuming, among other things, a prepayment
rate and corresponding weighted average
lives as described in this prospectus
supplement. The prepayment, yield and
other assumptions to be used for pricing
purposes for the notes may vary as
determined at the time of sale. See
"Certain Yield and Prepayment
Considerations" in this prospectus
supplement and "Yield Considerations" in
the prospectus.
Material Federal Income Tax Consequences.
Upon the issuance of the notes, Brown &
Wood LLP, counsel to the depositor, will
deliver its opinion generally to the
effect that based on the application of
existing law and assuming compliance with
the related trust agreement for federal
income tax purposes:
o each of the Class A-F Notes and the
Class A-V Notes will be characterized
as indebtedness and not as
representing an ownership interest in
the related trust estate or an equity
interest in the related issuer or the
depositor, and
o each of the Series ____-F issuer and
the Series ____-V issuer will not be:
o classified as an association
taxable as a corporation for
federal income tax purposes,
o a taxable mortgage pool as defined
in Section 7701(i) of the Internal
Revenue Code, or
o a "publicly traded partnership" as
defined in Treasury Regulation
Section 1.7704-1. Each holder of a
note, by its acceptance of the
note, will agree to treat the
notes as indebtedness.
For further information regarding federal
income tax consequences of an investment
in the notes see "Material Federal Income
Tax Consequences" in this prospectus
supplement and "Material Federal Income
Tax Consequences" and "State Tax
Consequences" in the prospectus.
ERISA Considerations................A fiduciary of an employee benefit plan
and other retirement plans and
arrangements, including individual
retirement accounts and annuities, Keogh
plans, and collective investment funds and
separate accounts in which the plans,
accounts, annuities or arrangements are
invested, that is subject to the Employee
Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal
Revenue Code should carefully review with
its legal advisors whether the purchase or
holding of notes could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA
or Section 4975 of the Code or cause the
related loans securing the notes to be
treated as plan assets for purposes of
regulations of the Department of Labor set
forth in 29 C.F.R. 2510.3-101. Although
exceptions from the application of the
prohibited transaction rules and the plan
asset regulations exist, there can be no
assurance that any exception will apply
with respect to the acquisition of the
notes. Although not entirely free from
doubt, it is believed that, as of the date
of this prospectus supplement, the notes
will be treated as debt obligations
without significant equity features for
purposes of the plan asset regulations.
Accordingly, a plan that acquires the
notes should not be treated as having
acquired a direct interest in the assets
of the related issuer. However, there can
be no complete assurance that the notes
will be treated as debt obligations
without significant equity features for
purposes of the plan asset regulations.
Investors are advised to consult their
counsel and to review "ERISA
Considerations" in this prospectus
supplement and in the prospectus.
Legal Investment....................The notes will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984, as amended. Institutions whose
investment activities are subject to legal
investment laws and regulations or to
review by regulatory authorities may be
subject to restrictions on investment in
the notes. See "Legal Investment" in this
prospectus supplement.
Rating..............................It is a condition to the issuance of each
series of notes that each series of the
notes be rated "AAA" by Standard & Poor's,
a division of The McGraw-Hill Companies,
Inc. and "Aaa" by Moody's Investors
Service, Inc. 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. A security rating
does not address the frequency of
prepayments of loans, or the corresponding
effect on yield to investors. The ratings
issued by S&P and Moody's on payment of
principal and interest on the Class A-V
Notes do not cover the payment of the
carry-forward amount. See "Certain Yield
and Prepayment Considerations" and
"Ratings" in this prospectus supplement.
RISK FACTORS
You should consider, among other things, the items discussed under
"Risk Factors" in the prospectus and the following factors in connection with
the purchase of the notes:
There is a risk that defaults by obligors or declines in the values of
mortgaged properties will result in losses in to investors.
o Approximately ____% and ____% of the initial fixed rate loans and the
initial adjustable rate loans, respectively, each by aggregate principal
balance of the related loan group as of the cut off date, were thirty
days or more but less than sixty days delinquent in their monthly
payments as of the cut off date. None of the initial fixed rate loans and
the initial adjustable rate loans were sixty days or more delinquent in
their monthly payments as of the cut off date.
o Approximately ____% and ____% of the initial fixed rate loans and initial
adjustable rate loans, respectively, each by aggregate principal balance
of the related loan group as of the cut off date, are secured by
mortgaged properties located in the State of _______. In the event
________ experiences a decline in real estate values, losses on the loans
may be greater than otherwise would be the case.
o Approximately ____% and ____% of the initial fixed rate loans and initial
adjustable rate loans, respectively, each by aggregate principal balance
of the related loan group as of the cut off date, have loan-to-value
ratios, as defined in this prospectus supplement, in excess of ___%. None
of those loans are covered by a primary mortgage insurance policy and
consequently, those loans will be affected to a greater extent than loans
with a loan-to-value ratio, as defined in this prospectus supplement,
equal to or less than ___% by any decline in the value of the related
mortgaged property. 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 loans. If the residential real estate
market should experience an overall decline in property values so that
the outstanding balances of the 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.
o [Approximately ___% of the initial fixed rate loans are Balloon Loans, by
aggregate principal balance of the fixed rate loans as of the cut off
date, which require monthly payments of principal based on 30 year
amortization schedules and have scheduled maturity dates of 15 years from
the due date of the first monthly payment, in each case leaving a balloon
payment, which is a substantial portion of the original principal amount
due and payable on the respective scheduled maturity date. The Balloon
Loans entail a greater degree of risk for you because the ability of a
mortgagor to make a balloon payment typically will depend upon the
mortgagor's ability either to refinance the related Balloon Loan or to
sell the related mortgaged property. The mortgagor's ability to sell or
refinance will be affected by a number of factors, including the level of
prevailing mortgage rates at the time of sale or refinancing, the
mortgagor's equity in the related mortgaged property, the financial
condition and credit profile of the mortgagor, applicable tax laws and
general economic conditions. None of the depositor, the master servicer,
the indenture trustee, the seller or any of their respective affiliates,
nor any other person, is obligated to refinance any Balloon Loan. In
addition, the master servicer and the sub-servicer are not obligated to
make delinquent principal advances with respect to any balloon payment.
See "Description of the Servicing Agreements--Advances" in this
prospectus supplement.]
o Approximately ______% of the initial fixed rate loans, by aggregate
principal balance of the fixed rate loans as of the cut off date, are
secured by second liens on the related mortgaged properties, which liens
are subordinate to the rights of the mortgagee under the related first
lien. Accordingly, investors will be subject to a loss if the holder of a
first lien on the related mortgaged property is successful in foreclosure
of its mortgage since second liens or encumbrances do not survive a
foreclosure. Also, due to the priority of the first lien on the related
mortgaged property, the holder of a fixed rate loan secured by a second
lien may not be able to control the timing, method or procedure of any
foreclosure action relating to the mortgaged property. Investors should
be aware that any liquidation, insurance or condemnation proceeds
received in respect of those fixed rate loans will be available to
satisfy the outstanding balance of those fixed rate loans only to the
extent that the claims of those first liens have been satisfied in full,
including any related foreclosure costs. None of the adjustable rate
loans are secured by second liens.
There is a risk that subsequent loans will have different characteristics than
the initial loans.
o Subsequent loans may have characteristics different from those of the
initial loans. However, each subsequent loan must satisfy the eligibility
criteria referred to herein under "Description of the Home Equity Loan
Pool" at the time of its conveyance to the related trust estate and must
be underwritten in accordance with the criteria set forth in this
prospectus supplement under "Description of the Home Equity Loan Pool --
Underwriting."
There is a risk that the entire amount of a pre-funded account will not be
used to purchase subsequent mortgage loans; in which case there will be a
partial prepayment of the related notes.
o To the extent that amounts on deposit in the Class A-F pre-funding
account and the Class A-V pre-funding account have not been fully applied
to the purchase of related subsequent loans by the related issuer by the
end of the related funding period, the holders of the Class A-F Notes and
the Class A-V Notes, as applicable, will receive, as described in this
prospectus supplement, on the payment date immediately following the end
of the related funding period, any amounts in the related pre-funding
account after giving effect to any purchase of related subsequent loans.
Although no assurances can be given, the issuer intends that the
principal amount of subsequent loans sold to the related trust estate
will require the application of substantially all amounts on deposit in
the related pre-funding account and that there will be no material
principal payment to the Class A-F Notes and the Class A-V Notes on the
payment date.
There is a risk that home equity loan yield will reduce the note interest rate
on the Class A-V Notes
o The note interest rate on the adjustable rate loans is based upon, among
other factors as described in this prospectus supplement under
"Description of the Notes--Class A-V Notes--Interest Payments on the
Notes," the one-month LIBOR, as defined in this prospectus supplement. It
should be noted that the one-month LIBOR is different from the value of
the index applicable to the adjustable rate loans, which is the six-month
LIBOR, as defined in this prospectus, as described under "Description of
the Home Equity Loan Pool" in this prospectus supplement. The mortgage
rate of each adjustable rate loan adjusts semi-annually, commencing on
the related first adjustment date, each 2/28 and 2/13, 3/27 and 5/25 loan
will not have a first adjustment date until two years, three years and
five years, respectively, from the origination of each 2/28 or 2/13, 3/27
and 5/25 loan, based upon the index, whereas the Class A-V Note interest
rate adjusts monthly based upon one-month LIBOR plus ____%, or after the
payment date which occurs on or prior to the date on which the sum of the
aggregate principal balance of the adjustable rate loans is less than or
equal to 10% of the Class A-V original pool balance, one-month LIBOR plus
____%), limited by the maximum interest rate, as defined in this
prospectus supplement. In addition, one-month LIBOR and the index on the
adjustable rate loans may respond differently to economic and market
factors, and there is not necessarily any correlation between them.
Moreover, the adjustable rate loans are subject to periodic rate caps,
maximum mortgage rates and minimum mortgage rates, each, as defined in
this prospectus supplement. Thus, it is possible, for example, that
one-month LIBOR may rise during periods in which the index is stable or
falling or that, even if both one-month LIBOR and the index rises during
the same period, one-month LIBOR may rise much more rapidly than the
index. See "Description of the Notes-- Class A-V Notes-- Interest
Payments on the Notes."
There is a Glossary on page S-90 where you will find definitions of the
capitalized terms used in this prospectus supplement.
DESCRIPTION OF THE HOME EQUITY LOAN POOL
General
The statistical information presented in this prospectus supplement
describes only the initial fixed rate loans and the initial adjustable rate
loans included in the related trust estate as of the closing date and does not
include subsequent fixed rate loans and subsequent adjustable rate loans
purchased by the related issuer and included in the related trust estate after
the closing date.
Subsequent fixed rate loans and subsequent adjustable rate loans are
intended to be purchased by the related issuer from the seller from time to
time on or before _______, _____, from funds on deposit in the related
pre-funding account. The subsequent fixed rate loans and the subsequent
adjustable rate loans, if available, will be sold by the seller to the related
issuer for inclusion in the related trust estate. The related purchase
agreement will provide that the subsequent fixed rate loans and the adjustable
rate loans must conform to specified characteristics described under " --Fixed
Rate Loans--Conveyance of Subsequent Loans and the Pre-Funding Account" and "
--Adjustable Rate Loans--Conveyance of Subsequent Loans and the Pre-Funding
Account". In the sole discretion of the note insurer, subsequent loans with
characteristics varying from those described in this prospectus supplement may
be purchased by the related issuer and included in the related trust estate.
Fixed Rate Loans
General. The home equity loan pool with respect to the fixed rate loans
will consist of fixed rate, monthly payment, first and second lien mortgage
loans with terms to maturity of not more than 30 years from the date of
origination or modification. As of the cut off date, the principal balance of
the initial fixed rate loans was equal to $__________________. The depositor
will acquire the initial fixed rate loans to be included in the home equity
loan pool from _____________________, as seller, on the closing date pursuant
to a fixed rate loan purchase agreement between the depositor and the seller.
All of the fixed rate loans will be master serviced by ___________________, as
master servicer, and subserviced by ____________, as sub-servicer. The
depositor will convey the initial fixed rate loans to the related issuer on
the closing date pursuant to the related trust agreement. The seller and
________ will make representations and warranties with respect to the fixed
rate loans and, as more particularly described in the prospectus, each will
have repurchase or substitution obligations in connection with a breach of any
representation or warranty, or an omission or defect in respect of constituent
documents required to be delivered with respect to the fixed rate loans, if
the breach, omission or defect cannot be cured and it materially and adversely
affects the value of the related fixed rate loan or the interests of holders
of the Class A-F Notes or the note insurer. See "Description of the Agreements
-- Representations and Warranties; Repurchases" in the prospectus. The fixed
rate loans will have been originated or acquired by the seller in accordance
with the underwriting criteria described in this prospectus supplement. See "
-- Underwriting" in this prospectus supplement.
The representations and warranties made by the seller and _______ will be
pledged to the indenture trustee for the benefit of the Class A-F Noteholders
and the note insurer.
Approximately _____% of the initial fixed rate loans, by aggregate
principal balance of the fixed rate loans as of the cut off date, will have
loan-to-value ratios in excess of ___%. Initial fixed rate loans will not be
covered by a primary mortgage insurance policy. See "Description of the
Agreements -- Hazard Insurance Policies" in the prospectus.
With respect to each fixed rate loan, the loan-to-value ratio at any
given time generally will be the ratio, expressed as a percentage, the
numerator of which is the unpaid principal balance of the fixed rate loan, and
the denominator of which is the lesser of:
o the appraised value of the related mortgaged property as of the date
of the appraisal used by or on behalf of the seller to underwrite
the fixed rate loan or
o the sale price of the related mortgaged property if a sale occurred
at origination of the fixed rate loan.
As of the cut off date, the minimum and maximum loan-to-value ratios at
origination for the initial loans were approximately ____% and _____%,
respectively, and the weighted average loan-to-value ratio at origination of
the initial fixed rate loans was approximately _____% . As of the cut off
date, the minimum and maximum combined loan-to-value ratios at origination for
the initial fixed rate loans were approximately _____% and _____%,
respectively, and the weighted average combined loan-to-value ratio at
origination of the initial fixed rate loans was approximately ______%. With
respect to each fixed rate loan secured by a mortgaged property that is
subject to a second lien, the "combined loan-to-value ratio" at any given time
generally will be the ratio, expressed as a percentage, the numerator of which
is the sum of:
o the unpaid principal balance of the fixed rate loan plus
o the original principal balance of any second lien on the related
mortgaged property as of the date,
and the denominator of which is the lesser of:
o the appraised value of the related mortgaged property as of the date
of the appraisal used by or on behalf of the seller to underwrite
the fixed rate loan or
o the sale price of the related mortgaged property if a sale occurred
at origination of the fixed rate loan.
The fixed rate loans will contain a customary "due-on-sale" clause. See
"Certain Yield and Prepayment Considerations" in this prospectus supplement.
Pursuant to the terms of the related servicing agreement, the master servicer
or the sub-servicer, as the case may be, will be entitled to all late payment
charges and prepayment penalties received on the fixed rate loans as
additional servicing compensation and those amounts will not be available for
distribution on the Class A-F Notes.
Fixed Rate Loan Characteristics. All percentages of the initial fixed
rate loans described in this prospectus supplement are approximate
percentages, except as otherwise indicated, by aggregate principal balance of
the fixed rate loans as of the cut off date.
The initial fixed rate loans generally have original terms to stated
maturity of approximately 30 years.
Approximately ____% of the initial fixed rate loans, by aggregate
principal balance of the fixed rate loans as of the cut off date, are secured
by second liens on the related mortgaged properties.
As of the cut off date, each initial fixed rate loan will have an unpaid
principal balance of not less than $______ or more than $______ and the
average unpaid principal balance of the initial fixed rate loans will be
approximately $______. The latest stated maturity date of any of the initial
fixed rate loans will be in _______; however, the actual date on which any
initial fixed rate loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the initial
fixed rate loans will be approximately ___ months. The weighted average
original term to maturity of the initial fixed rate loans will be
approximately ___ months.
The earliest year of origination of any initial fixed rate loan is ____
and the latest month and year of origination is ______.
With respect to approximately _____% of the initial fixed rate loans, by
aggregate principal balance of the fixed rate loans as of the cut off date,
the related mortgagors have obtained secondary financing from Pacific on the
related mortgaged property, which second lien is not included in the related
trust estate. There can be no assurance, however, that the mortgagors have not
obtained or will not obtain secondary financing from sources other than the
seller and its affiliates.
Certain of the initial fixed rate loans provide for payment of a
prepayment charge. As to each fixed rate loan, the prepayment charge
provisions typically provide for payment of a prepayment charge for partial
prepayments and full prepayments. Prepayments may be payable for a period of
time ranging from one to five years from origination date. Prepayment charges
received on the fixed rate loans will be available for distribution on the
Class A-F Notes.
None of the initial fixed rate loans are Buydown Loans.
[Approximately ____% of the initial fixed rate loans are Balloon Loans.]
Set forth below is a description of additional characteristics of the
initial fixed rate loans as of the cut off date, except as otherwise
indicated. Dollar amounts and percentages may not add up to totals due to
rounding.
<TABLE>
<CAPTION>
Fixed Rate Loan Geographic Distribution of Mortgaged Properties
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
State Fixed Rate Loans Principal Balance Principal Balance
----- ---------------- ----------------- -----------------
<S> <C> <C>
[Alaska $ %
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Iowa
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Massachusetts
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Montana
North Carolina
Nebraska
New Hampshire
New Jersey
New Mexico
Nevada
New York
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Wyoming]
Total.......................... $ 100.00%
= =======
</TABLE>
No more than approximately _____% of the initial fixed rate loans will be
secured by mortgaged properties in any one zip code.
<TABLE>
<CAPTION>
Principal Balances of the Initial Fixed Rate Loans at Origination
Percentage of
Cut-off Date
Original Home Equity Number of Initial Aggregate Unpaid Aggregate
Loan Principal Balance ($) Fixed Rate Loans Principal Balance Principal Balance
-------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
0.01- 25,000.00 $ %
25,000.01- 50,000.00
50,000.01- 75,000.00
75,000.01- 100,000.00
100,000.01- 125,000.00
125,000.01- 150,000.00
150,000.01- 175,000.00
175,000.01- 200,000.00
200,000.01- 225,000.00
225,000.01- 250,000.00
250,000.01- 275,000.00
275,000.01- 300,000.00
300,000.01- 325,000.00
325,000.01- 350,000.00
400,000.01- 450,000.00
Total................................ $ 100.00%
=======
</TABLE>
The average principal balance of the initial fixed rate loans at
origination will be approximately $-------.
<TABLE>
<CAPTION>
Principal Balances of the Initial Adjustable Rate Loans at the Cut-off Date
Percentage of
Number of Initial Cut-off Date
Cut-off Date Home Equity Adjustable Aggregate Unpaid Aggregate
Loan Principal Balance ($) Rate Loans Principal Balance Principal Balance
-------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
0.01 - 25,000.00 $ %
25,000.01 - 50,000.00 ............
50,000.01 - 75,000.00 ............
75,000.01 - 100,000.00 ............
100,000.01 - 125,000.00 ............
125,000.01 - 150,000.00 ............
150,000.01 - 175,000.00 ............
175,000.01 - 200,000.00 ............
200,000.01 - 225,000.00 ............
225,000.01 - 250,000.00 ............
250,000.01 - 275,000.00 ............
275,000.01 - 300,000.00 ............
300,000.01 - 325,000.00 ............
325,000.01 - 350,000.00 ............
350,000.01 - 400,000.00 ............
400,000.01 450,000.00 ............
450,000.01 - 500,000.00 ............
500,000.01 - 550,000.00 ............
550,000.01 - 600,000.00 ............
600,000.01 - 650,000.00 ............
700,000.01 - 750,000.00 ............
Total........................... $ 100.00%
=======
</TABLE>
The average cut off date principal balance of the initial adjustable rate
loans will be approximately $---------.
Original Term to Maturity
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Original Term Rate Loans Principal Balance Principal Balance
------------- ---------- ----------------- -----------------
<S> <C> <C>
180..................................... $ %
360.....................................
Total.......................... $ 100.00%
= =======
</TABLE>
The weighted average original term to maturity at origination of the
initial adjustable rate loans will be approximately months. ----
Remaining Term to Maturity
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Remaining Term Rate Loans Principal Balance Principal Balance
-------------- ---------- ----------------- -----------------
<S> <C> <C>
121-180 $ %
301-360
Total......................... $ 100.00%
=======
</TABLE>
The weighted average remaining term to maturity at origination of the
initial adjustable rate loans will be approximately ____ months.
Documentation Type
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Documentation Type Rate Loans Principal Balance Principal Balance
------------------ ---------- ----------------- -----------------
<S> <C> <C>
Limited................................ $ %
Stated.................................
Full...................................
Total......................... $ 100.00%
=======
</TABLE>
Occupancy Types
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Occupancy (as indicated by borrower) Rate Loans Principal Balance Principal Balance
------------------------------------ ---------- ----------------- -----------------
<S> <C> <C>
Investor Non-Owner-Occupied............ $ %
Owner..................................
Secondary..............................
Total......................... $ 100.00%
=======
</TABLE>
Risk Categories of Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Risk Category Rate Loans Principal Balance Principal Balance
------------- ---------- ----------------- -----------------
<S> <C> <C>
A..................................... $ %
A-....................................
B.....................................
C.....................................
C-....................................
D.....................................
Other.................................
Total........................ $ 100.00%
=======
</TABLE>
See "-- Underwriting" for a description of the credit categories of the
loans.
Property Types
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Property Type Rate Loans Principal Balance Principal Balance
------------- ---------- ----------------- -----------------
<S> <C> <C>
Single Family Detached.................. $ %
Single Family Attached..................
Three- to Four-Family...................
Condominium.............................
Townhouse...............................
Manufactured Housing....................
Total.......................... $ 100.00%
=======
</TABLE>
Purposes of Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Purpose Rate Loans Principal Balance Principal Balance
------- ---------- ----------------- -----------------
<S> <C>
Refinance-Cashout..................... $ %
Rate and Term Refinance...............
Purchase..............................
Total........................ $ 100.00%
=======
</TABLE> See "-- Underwriting" for a description of loan purpose.
Original Loan-to-Value Ratios
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Original Loan-to-Value Ratios (%) Rate Loans Principal Balance Principal Balance
--------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
5.01 - 10.00 .................... $ %
15.01 - 20.00 ....................
25.01 - 30.00 ....................
30.01 - 35.00 ....................
35.01 - 40.00 ....................
40.01 - 45.00 ....................
45.01 - 50.00 ....................
50.01 - 55.00 ....................
55.01 - 60.00 ....................
60.01 - 65.00 ....................
65.01 - 70.00 ....................
70.01 - 75.00 ....................
75.01 - 80.00 ....................
80.01 - 85.00 ....................
85.01 - 90.00 ....................
90.01 - 95.00 ....................
Total..................... $ 100.00%
=======
</TABLE>
The weighted average loan-to-value ratio at origination of the initial
adjustable rate loans will be approximately ______%.
Mortgage Rates at Origination
for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Mortgage Rates (%) Rate Loans Principal Balance Principal Balance
------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
6.01 - 6.50 ....................... $ %
6.51 - 7.00 .......................
7.01 - 7.50 .......................
7.51 - 8.00 .......................
8.01 - 8.50 .......................
8.51 - 9.00 .......................
9.01 - 9.50 .......................
9.51 - 10.00 .......................
10.01 - 10.50 .......................
10.51 - 11.00 .......................
11.01 - 11.50 .......................
11.51 - 12.00 .......................
12.01 - 12.50 .......................
12.51 - 13.00 .......................
13.01 - 13.50 .......................
13.51 - 14.00 .......................
14.01 - 14.50 .......................
14.51 - 15.00 .......................
15.01 - 15.50 .......................
15.51 - 16.00 .......................
16.01 - 16.50 .......................
16.51 - 17.00 .......................
Total............................. $ 100.00%
=======
</TABLE>
The weighted average mortgage rate of the initial adjustable rate loans
at origination will be approximately ________% per annum.
Minimum Mortgage Rates at Cut-off Date
for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Minimum Mortgage Rates (%) Rate Loans Principal Balance Principal Balance
-------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
6.01 - 6.50.................... $ %
6.51 - 7.00....................
7.01 - 7.50....................
7.51 - 8.00....................
8.01 - 8.50....................
8.51 - 9.00....................
9.01 - 9.50....................
9.51 - 10.00....................
10.01 - 10.50....................
10.51 - 11.00....................
11.01 - 11.50....................
11.51 - 12.00....................
12.01 - 12.50....................
12.51 - 13.00....................
13.01 - 13.50....................
13.51 - 14.00....................
14.01 - 14.50....................
14.51 - 15.00....................
15.01 - 15.50....................
15.51 - 16.00....................
16.01 - 16.50....................
16.51 - 17.00....................
Total........................... $ 100.00%
=======
</TABLE>
The weighted average minimum mortgage rate of the initial adjustable rate
loans as of cut off date will be approximately _______% per annum.
Next Adjustment Date
for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Next Adjustment Date Rate Loans Principal Balance Principal Balance
-------------------- ---------- ----------------- -----------------
<S> <C> <C>
_______, ________..................... $ %
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
-------, --------.....................
Total........................... $ 100.00%
=======
</TABLE>
The weighted average remaining months to the next adjustment date of the
initial adjustable rate loans will be approximately __ months.
Maximum Mortgage Rate
for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Maximum Mortgage Rates (%) Rate Loans Principal Balance Principal Balance
-------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
12.51- 13.00 ...................... $ %
13.01- 13.50 ......................
13.51- 14.00 ......................
14.01- 14.50 ......................
14.51- 15.00 ......................
15.01- 15.50 ......................
15.51- 16.00 ......................
16.01- 16.50 ......................
16.51- 17.00 ......................
17.01- 17.50 ......................
17.51- 18.00 ......................
18.01- 18.50 ......................
18.51- 19.00 ......................
19.01- 19.50 ......................
19.51- 20.00 ......................
20.01- 20.50 ......................
20.51- 21.00 ......................
21.01- 21.50 ......................
21.51- 22.00 ......................
22.01- 22.50 ......................
22.51- 23.00 ......................
23.01- 23.50 ......................
Total....... $ 100.00%
=======
</TABLE>
The weighted average maximum mortgage rate of the initial adjustable rate
loans will be approximately _______% per annum.
Gross Margin
for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Gross Margin (%) Rate Loans Principal Balance Principal Balance
---------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
4.01 - 4.50 ......................... $ %
4.51 - 5.00 .........................
5.01 - 5.50 .........................
5.51 - 6.00 .........................
6.01 - 6.50 .........................
6.51 - 7.00 .........................
7.01 - 7.51 .........................
7.51 - 8.00 .........................
8.01 - 8.50 .........................
8.51 - 9.00 .........................
9.01 - 9.50 .........................
9.51 - 10.00 .........................
10.01 - 10.50 .........................
10.51 - 11.00 .........................
11.01 - 11.50 .........................
Total.............................. $ 100.00%
=======
</TABLE>
The weighted average gross margin of the initial adjustable rate loans
will be approximately _____% per annum.
Initial Periodic Rate Cap for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Initial Periodic Rate Cap Rate Loans Principal Balance Principal Balance
------------------------- ---------- ----------------- -----------------
<S> <C> <C>
1.500.................................. $ %
3.000..................................
Total............................ $ 100.00%
=======
</TABLE>
The weighted average initial Periodic Rate Cap of the initial adjustable
rate loans will be approximately %. -----
Periodic Rate Cap for Initial Adjustable Rate Loans
<TABLE>
<CAPTION>
Percentage of
Number of Initial Cut-off Date
Adjustable Aggregate Unpaid Aggregate
Periodic Rate Cap Rate Loans Principal Balance Principal Balance
----------------- ---------- ----------------- -----------------
<S> <C>
1.500.................................. $ %
Total............................ $ 100.00%
</TABLE>
Number of Days Delinquent
<TABLE>
<CAPTION>
Percentage of
Cut-off Date
Number of Initial Aggregate Unpaid Aggregate
Number of Days Delinquent Adjustable Rate Loans Principal Balance Principal Balance
------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
0-29 Days............................... $ %
30-59 Days..............................
Total.......................... $ 100.00%
=======
</TABLE>
Conveyance of Subsequent Loans and the Pre-Funding Account. Under the
adjustable rate purchase agreement, following the initial issuance of the
Class A-V Notes, the Series ____-V issuer will be obligated to purchase from
the seller for inclusion in the related trust estate during the Class A-V
funding period, subject to the availability of those notes, the subsequent
adjustable rate loans secured by first liens on fee simple interests in one-
to four-family residential real properties. Each subsequent adjustable rate
loan will have been underwritten in accordance with the criteria set forth in
this prospectus supplement under "Description of the Home Equity Loan Pool --
Underwriting." subsequent adjustable rate loans will be transferred to the
Series ____-V issuer pursuant to subsequent transfer instruments between the
seller and the Series ____-V issuer. In connection with the purchase of
subsequent adjustable rate loans on the subsequent transfer dates, the Series
____-V issuer will be required to pay to the seller from amounts on deposit in
the Class A-V pre- funding account a cash purchase price of 100% of the
principal balance. In each instance in which subsequent adjustable rate loans
are transferred pursuant to a subsequent transfer instrument, the Series
___________ -V issuer will designate the subsequent cut-off date with respect
to the subsequent adjustable rate loans acquired on that date. The amount paid
from the Class A-V pre-funding account on each subsequent transfer date will
not include accrued interest on the subsequent adjustable rate loans.
Following each subsequent transfer date, the aggregate principal balance of
the adjustable rate loans will increase by an amount equal to the aggregate
principal balance of the subsequent adjustable rate loans so acquired and the
amount in the Class A-V pre- funding account will decrease accordingly.
On the closing date, approximately $_______, which is the Class A-V
original pre-funded amount, will be deposited in the Class A-V pre-funding
account, which account will be in the name of the indenture trustee and shall
be part of the related trust estate and which amount will be used to acquire
subsequent adjustable rate loans. During the Class A-V funding period, as
defined in this prospectus supplement, the Class A-V original pre-funded
amount will be reduced by the amount of the Class A-V original pre-funded
amount used to purchase subsequent adjustable rate loans. It should be noted
that on any date of determination, the related Class A-V original pre-funded
amount as so reduced is referred in this prospectus supplement as the Class
A-V pre-funded amount. The "Class A-V funding period" is the period commencing
on the closing date and ending on the earlier to occur of:
o the date on which the amount on deposit in the Class A-V Funding
Account is less than $[10,000] and
o _____, _____.
Any conveyance of subsequent adjustable rate loans on a subsequent
transfer date is subject to conditions including, but not limited to:
o each subsequent adjustable rate loan must satisfy the
representations and warranties specified in the related subsequent
transfer instrument and the adjustable rate purchase agreement;
o the seller will select the subsequent adjustable rate loans in a
manner that it reasonably believes is not adverse to the interests
of the Class A-V Noteholders or the note insurer;
o the seller will deliver opinions of counsel acceptable to the note
insurer and the indenture trustee with respect to the validity of
the conveyance of the subsequent adjustable rate loans; and
o as of each subsequent cut-off date, each subsequent adjustable rate
loan will satisfy the following criteria:
o the subsequent adjustable rate loan may not be 30 or more days
contractually delinquent as of the related subsequent cut-off
date;
o the remaining stated term to maturity of the subsequent
adjustable rate loan will not exceed 360 months;
o the subsequent adjustable rate loan must have an outstanding
principal balance of at least $[20,000] and no more than
$[500,000] as of the subsequent cut-off date;
o the subsequent adjustable rate loan will be underwritten in
accordance with the criteria set forth under "Description of
the Home Equity Loan Pool -- Underwriting" in this prospectus
supplement;
o the subsequent adjustable rate loan must have a loan-to-value
ratio at origination of no more than -------%;
o the stated maturity of the subsequent adjustable rate loan will
be no later than 360 months;
o the subsequent adjustable rate loan shall not provide for
negative amortization;
o the subsequent adjustable rate loan must have a gross margin of
at least ____%; and
o following the purchase of the subsequent adjustable rate loans
by the related issuer, the adjustable rate loans included in
the related trust estate must have a weighted average interest
rate, a weighted average remaining term to maturity and a
weighted average loan-to-value ratio at origination, as of each
respective subsequent cut-off date, which does not vary
materially from the initial adjustable rate loans included
initially in the related trust estate.
In addition, the indenture trustee shall not agree to any transfer of
subsequent adjustable rate loans without a signed certification from the note
insurer that the subsequent adjustable rate loans are acceptable to the note
insurer in its sole discretion. Subsequent adjustable rate loans with
characteristics varying from those set forth above may be purchased by related
issuer and included in the trust estate in the sole discretion of the note
insurer. Upon the end of the Class A-V funding period, under some
circumstances, the note insurer may adjust the related required subordination
amount.
Underwriting
[Description of seller's underwriting].
Additional Information
Prior to the issuance of a series of notes, initial loans may be removed
from the either trust estate as a result of incomplete documentation or
otherwise, if the depositor deems the removal necessary or appropriate. A
limited number of other loans may be included in each loan group prior to the
issuance of the related notes. The depositor believes that the information set
forth herein will be substantially representative of the characteristics of
each loan group as it will be constituted at the time the related notes are
issued, although the range of mortgage rates and maturities and other
characteristics of the loans in the related loan group may vary, although the
variance will not be material.
THE SELLER
The information set forth in the following paragraphs has been provided
by the seller. None of the depositor, the underwriter, the owner trustee, the
indenture trustee, the note insurer, the sub-servicer, the Series _____-F
issuer, the Series _____-V issuer or any of their respective affiliates has
made or will make any representation as to the accuracy or completeness of the
information provided by the seller.
[Description of the seller].
No person other than the seller and ___________ is obligated with respect
to the representations and warranties respecting the loans and the remedies
for any breach of those representations and warranties that are assigned to
the indenture trustee for the benefit of the related noteholders and the note
insurer. Moreover, as discussed above, the seller and ________ have only
limited assets available to perform its repurchase obligations in respect of
any breach of those representations and warranties, relative to the potential
amount of repurchase liability, and the total potential amount of repurchase
liability is expected to increase over time as _________ continues to
originate, acquire and sell mortgage loans. There can be no assurance that the
seller will continue to generate operating earnings, or that it will be
successful under its current business plan. Therefore, you should consider the
possibility that the seller and _________ will not have sufficient assets with
which to satisfy its repurchase obligations in the event that a substantial
amount of loans are required to be repurchased due to breaches of
representations and warranties.
The seller does not have sufficient historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of mortgage loans
similar to the loans.
THE SERIES _______-F ISSUER
Home Equity Loan Trust Series _______-F is a business trust formed under
the laws of the State of Delaware pursuant to the trust agreement, dated as of
_________, ____, between the depositor and ________________ as the owner
trustee for the transactions described in this prospectus supplement. The
trust agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the Series
_____-F issuer will not engage in any activity other than:
o acquiring and holding the fixed rate loans and the other assets
of the Series _____-F issuer and proceeds from those fixed rate
loans,
o issuing the Class A-F Notes and the related certificates,
o making payments on the Class A-F Notes and the related
certificates and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the specified obligations or are
incidental to the specified obligations or connected with those
obligations.
The Series _____-F issuer is not expected to have any significant assets other
than those pledged as collateral to secure the Class A-F Notes.
The assets of the Series ____-F issuer will consist of the fixed rate
loans and related assets pledged to secure the Class A-F Notes.
The Series ____-F issuer's principal offices are in Wilmington, Delaware,
in care of _______________, as owner trustee.
THE SERIES ____-V ISSUER
Home Equity Loan Trust Series ____-V is a business trust formed under the
laws of the State of Delaware pursuant to the trust agreement, dated as of
_______, ____, between the depositor and Wilmington Trust Company as the owner
trustee for the transactions described in this prospectus supplement. The
trust agreement constitutes the "governing instrument" under the laws of the
State of Delaware relating to business trusts. After its formation, the Series
____-V issuer will not engage in any activity other than:
o acquiring and holding the adjustable rate loans and the other
assets of the Series ____-V issuer and proceeds from those
adjustable rate loans,
o issuing the Class A-V Notes and the related certificates,
o making payments on the Class A-V Notes and the related
certificates and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the specified obligations or are
incidental to the specified obligations or connected with those
obligations.
The Series ____-V issuer is not expected to have any significant assets other
than those pledged as collateral to secure the Class A-V Notes.
The assets of the Series ____-V issuer will consist of the adjustable
rate loans and related assets pledged to secure the Class A-V Notes.
The Series ____-V issuer's principal offices are in Wilmington, Delaware,
in care of __________________, as owner trustee.
THE OWNER TRUSTEE
______________________ is the owner trustee under each trust agreement.
The owner trustee is a Delaware ____________________ and its principal offices
are located in Wilmington, Delaware.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the Series ____-F issuer, the
Series ____-V issuer, or the noteholders under the related trust agreement
under any circumstances, except for the owner trustee's own misconduct, gross
negligence, bad faith or grossly negligent failure to act or in the case of
the inaccuracy of representations made by the owner trustee in the related
trust agreement. All persons into which the owner trustee may be merged or
with which it may be consolidated or any person resulting from the merger or
consolidation shall be the successor of the owner trustee under the related
trust agreement.
THE INDENTURE TRUSTEE
___________________________________, a _______________________, will act
as indenture trustee under each indenture. A copy of the indentures will be
provided by the issuer without charge upon written request. Requests should be
addressed to the indenture trustee at _______________________________________,
Attention: Home Equity Loan Trust Series ____-F or Attention: Home Equity Loan
Trust Series ____-V, as applicable.
-----------------------
The following information has been supplied by ____________________, as
note insurer, for inclusion in this prospectus supplement.
General
[Note insurer information].
The principal executive offices of the note insurer are located at
_________________________________________, and its telephone number at that
location is (___) ___-____.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the note insurer or any
of its domestic operating insurance company subsidiaries are reinsured among
the companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the note insurer reinsures a portion of its
liabilities under some of its financial guaranty insurance policies with other
reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Reinsurance is utilized by the note insurer
as a risk management device and to comply with statutory and rating agency
requirements; it does not alter or limit the note insurer obligations under
any financial guaranty insurance policy.
Rating of Claims-Paying Ability
The note insurer's claims-paying ability is rated ["Aaa" by Moody's and
"AAA" by S&P]. The rating reflects only the view of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by the rating agencies. See
"Ratings."
Capitalization
The following table sets forth the capitalization of the note insurer and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of ______________, ____, in thousands:
<TABLE>
<CAPTION>
----------, ----
(unaudited)
------------------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums).......................... $
Shareholder's Equity:
Common Stock...................................................................
Additional Paid-in Capital.....................................................
Unrealized Gain on Investments (net of deferred income taxes)..................
Accumulated Earnings...........................................................
Total Shareholder's Equity..............................................................
Total Deferred Premium Revenue and Shareholder's Equity................................. $
=
</TABLE>
For further information concerning the note insurer, see the consolidated
financial statements of the note insurer and subsidiaries, and the notes to
those financial statements, incorporated by reference in this prospectus
supplement. Copies of the statutory quarterly and annual statements filed with
the State of New York Insurance Department by the note insurer are available
upon request to the State of New York Insurance Department.
Incorporation of Certain Documents by Reference
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the consolidated financial
statements of the note insurer and subsidiaries included in or as exhibits to
the following documents which have been filed with the Securities and Exchange
Commission are hereby incorporated by reference in this prospectus supplement,
which together with the prospectus, forms a part of the depositor's
registration statement:
o the annual report on Form 10-K for the year ended ____________, ____
and
o the quarterly report on Form 10-Q for the three-month period ended
_____________, ____.
All financial statements of the note insurer and subsidiaries included in
documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the
notes shall be deemed to be incorporated by reference into this prospectus
supplement and to be a part hereof from the respective dates of filing the
documents.
The depositor will provide without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request of the
person, a copy of any or all of the financial statements incorporated by
reference. Requests for the copies should be directed to the Secretary,
Merrill Lynch Mortgage Investors, Inc., 4 World Financial Center, Floor #10,
New York, NY 10080.
Insurance Regulation
The note insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the note insurer and its insurance
subsidiaries are subject to regulations by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, the note insurer is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each insurer to financial
guaranty insurance and related lines, requires that each insurer maintain a
minimum surplus to policy holders, establishes contingency, loss and unearned
premium reserve requirements for each insurer, and limits the size of
individual transactions and the volume of transactions that may be
underwritten by each insurer. Other provisions of the New York Insurance Law,
applicable to non-life insurance companies like the note insurer, regulate,
among other things, permitted investments, payment of dividends, transactions
with affiliates, mergers, consolidation, acquisitions or sale of assets and
incurrence of liability for borrowing.
DESCRIPTION OF THE NOTES
General
The Class A-F Notes will be issued pursuant to the indenture dated as of
__________ 1, ____, between the Series ____-F issuer and __________________,
as indenture trustee. The Class A-F Certificates, together with the Class A-F
Notes, the "Series ____-F Securities," will be issued pursuant to the trust
agreement dated as of __________, 1998, between the depositor and
___________________, as owner trustee. The notes, which refers to the Class
A-V Notes together with the Class A-F Notes, will be issued pursuant to the
indenture dated as of ___________ 1, ____, between the Series ____-V issuer
and ________________________, as indenture trustee. The Series ____-V
Securities, which refers to the Class A-V Certificates together with the Class
A-V Notes, will be issued pursuant to the trust agreement dated as of
________, _____, between the depositor and ______________________, as owner
trustee. The following summaries describe the material provisions of each of
the Class A-F securities, the Class A-V securities, the indentures, the trust
agreements and the servicing agreements. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. Only the notes are offered hereby.
The notes will be secured by the pledge by the related issuer of its
assets to the indenture trustee pursuant to the related indenture. The pledged
assets forming the trust estate will consist of the following:
o the fixed rate loans or the adjustable rate loans, as applicable;
o collections in respect of principal and interest of the fixed rate
loans or the adjustable rate loans, as applicable, received after
the cut off date or subsequent cut-off date, as applicable, other
than payments due on or before the cut off date or the subsequent
cut-off date, as applicable;
o the amounts on deposit in any collection account, as defined in the
prospectus, including the payment account in which amounts are
deposited prior to payment to the Class A-F Noteholders or the Class
A-V Noteholders, as applicable, including net earnings on those
collection accounts;
o insurance policies maintained by the mortgagors or by or on behalf
of the master servicer or any related subservicer in respect of the
fixed rate loans or the adjustable rate loans, as applicable;
o an assignment of the depositor's rights under the related purchase
agreement;
o an assignment of the related issuer's rights under the related
servicing agreement;
o amounts on deposit in the related interest coverage account and the
related pre-funding account and
o proceeds of the pledged assets.
Each series of notes represents the right to receive payments from funds
available to be distributed with respect to the related loan group, as
described in this prospectus supplement; provided that in the limited
circumstances described in this prospectus supplement under "Description of
the Notes," excess cash flow from the loan group related to a series of notes
may be available for shortfalls on the other series of notes.
The notes will be issued in denominations of $25,000 and integral
multiples of $1,000 in excess of $25,000. See " -- Book-Entry Notes" below.
Book-Entry Notes
General. Security owners may elect to hold their notes through the DTC in
the United States, or Clearstream or Euroclear, in Europe if they are
participants of those systems, or indirectly through organizations which are
participants in those systems. The book-entry notes will be issued in one or
more securities which equal the aggregate principal balance of the notes and
will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold those positions in customers' securities accounts in the
depositaries' names on the books of DTC. Investors may hold the beneficial
interests in the book-entry notes in minimum denominations representing
security balances of $25,000 and in integral multiples of $1,000 in excess of
$25,000. Notwithstanding any provision in this prospectus supplement, no
beneficial owner will be entitled to receive a definitive note, which is a
physical certificate representing the security. Unless and until definitive
notes are issued, it is anticipated that the only "holder" of the notes will
be Cede & Co., as nominee of DTC. Security owners will not be holders as that
term is used in the indenture.
The beneficial owner's ownership of a book-entry note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary that maintains the beneficial owner's account for that purpose.
In turn, the financial intermediary's ownership of those book-entry notes will
be recorded on the records of DTC, or of a participating firm that acts as
agent for the financial intermediary, whose interest will in turn be recorded
on the records of DTC, if the beneficial owner's financial intermediary is not
a DTC Participant and on the records of Clearstream or Euroclear, as
appropriate.
Security owners will receive all payments of principal of, and interest
on, the notes from the indenture trustee through DTC and DTC participants.
While the notes are outstanding, notwithstanding the circumstances in this
prospectus supplement, 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 notes
and is required to receive and transmit payments of principal of, and interest
on, the notes.
Participants and indirect participants with whom security owners have
accounts with respect to notes are similarly required to make book-entry
transfers and receive and transmit those payments on behalf of their
respective security owners. Accordingly, although security owners will not
possess physical certificates, the rules provide a mechanism by which security
owners will receive payments and will be able to transfer their interest.
Security owners will not receive or be entitled to receive definitive
notes representing their respective interests in the notes, except under the
limited circumstances described in this prospectus supplement. Unless and
until definitive notes are issued, security owners who are not participants
may transfer ownership of notes only through participants and indirect
participants by instructing those participants and indirect participants to
transfer the notes, by book-entry transfer, through DTC for the account of the
purchasers of those notes, which account is maintained with their respective
participants. Under the rules and in accordance with DTC's normal procedures,
transfers of ownership of notes will be executed through DTC and the accounts
of the respective participants at DTC will be debited and credited. Similarly,
the participants and indirect participants will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing security
owners.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since the payments will be
forwarded by the indenture trustee to Cede & Co. Payments with respect to
notes 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 the
relevant depositary. The payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC
can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry notes to persons or entities that do not
participate in the depositary system, or otherwise take actions in respect of
those book-entry notes, may be limited due to the lack of physical
certificates for those book-entry notes. In addition, issuance of the
book-entry notes in book-entry form may reduce the liquidity of those notes in
the secondary market since potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
DTC has advised the indenture trustee that, unless and until definitive
notes are issued, DTC will take any action permitted to be taken by the
holders of the book-entry notes under the indenture only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry
notes are credited, to the extent that those actions are taken on behalf of
financial intermediaries whose holdings include those book-entry notes.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by noteholders under the indenture on behalf of a
Clearstream participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to effect those actions on its behalf through DTC. DTC may take
actions, at the direction of the related participants, with respect to some
notes which conflict with actions taken with respect to other notes.
Definitive Notes. Definitive notes will be issued to security owners or
their nominees, respectively, rather than to DTC or its nominee, only under
the limited conditions set forth in the prospectus under "Description of the
Securities -- Book-Entry Registration and Definitive Securities."
Upon the occurrence of an event described in the prospectus in the
seventh paragraph under "Description of the Securities -- Form of Book-Entry
Registration and Definitive Securities," the indenture trustee is required to
notify, through DTC, participants who have ownership of book-entry notes as
indicated on the records of DTC of the availability of definitive notes for
their book-entry notes. Upon surrender by DTC of the definitive certificates
representing the book-entry notes and upon receipt of instructions from DTC
for re-registration, the indenture trustee will reissue the book-entry notes
as definitive notes issued in the respective principal amounts owned by
individual security owners, and thereafter the indenture trustee will
recognize the holders of those definitive notes as noteholders under the
indenture.
Although DTC, Clearstream and Euroclear have agreed to the procedures in
order to facilitate transfers of notes among participants of DTC, Clearstream
and Euroclear, they are under no obligation to perform or continue to perform
those procedures and those procedures may be discontinued at any time. See
Annex I to this prospectus supplement.
In addition, security owners will receive all payments of principal and
interest on the related book-entry notes from the paying agent, as defined in
the prospectus, through DTC and participants. Accordingly, security owners may
experience delays in their receipt of payments. Unless and until definitive
notes are issued for the related book-entry notes, it is anticipated that the
only registered noteholder of those book-entry notes will be Cede & Co., as
nominee of DTC. Security owners will not be recognized by the indenture
trustee or the master servicer as noteholders, as the term is used in the
indenture, and security owners will be permitted to receive information
furnished to noteholders and to exercise the rights of noteholders only
indirectly through DTC, its participants and intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
notes among participants and to receive and transmit payments of principal of,
and interest on, those book-entry notes. Participants and Intermediaries with
which security owners have accounts with respect to those book-entry notes
similarly are required to make book-entry transfers and receive and transmit
those payments on behalf of their respective security owners. Accordingly,
although security owners will not possess physical certificates evidencing
their interests in the book-entry notes, the rules provide a mechanism by
which security owners, through their participants and Intermediaries, will
receive payments and will be able to transfer their interests in the
book-entry notes.
None of the depositor, the master servicer, the note insurer, the owner
trustee, the issuer, the sub-servicer or the indenture trustee will have any
liability for any actions taken by DTC or its nominee, Clearstream or
Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of security ownership
interests in the book-entry notes held by Cede & Co., as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
For additional information regarding DTC and the book-entry notes, see
"Description of the Securities -- Book-Entry Registration and Definitive
Securities" in the prospectus.
Payments
Payments on the notes will be made by the indenture trustee or the paying
agent on the [25th] day of each month or, if that day is not a business day,
then the next succeeding business day, commencing in ________________.
Payments on the notes will be made to the persons in whose names those notes
are registered at the close of business on the day prior to each payment date
or, if the notes are no longer book-entry notes, on the record date. See
"Description of the Securities -- Distributions" in the prospectus. Payments
will be made by check or money order mailed, or upon the request, at least
five business days prior to the related record date, of a holder owning notes
having denominations aggregating at least $5,000,000, by wire transfer or
otherwise, to the address of the person entitled to those payments, which, in
the case of book-entry notes, will be DTC or its nominee, as it appears on the
security register on the related record date. However, the final payment in
respect of the notes will be made only upon presentation and surrender of
those notes at the office or the agency of the indenture trustee specified in
the notice to holders of the final payment. A "business day" is any day other
than:
o a Saturday or Sunday or
o ________ a day on which banking institutions in New York City,
__________ or Delaware or in the city in which the corporate trust
offices of the indenture trustee or the principal office of the note
insurer are located, are required or authorized by law to be closed.
Class A-F Notes
Available Funds. The "available funds" for the Class A-F Notes for any
payment date will equal the amount received by the indenture trustee and
available in the Class A-F payment account on each payment date. The available
funds for the Class A-F Notes will generally be equal to the amount on deposit
in the Class A-F payment account on the payment date and available for
distribution to the Class A-F Noteholders, minus:
o the related administrative fee and the related indenture trustee fee
and
o if the Class A-F Notes have been declared due and payable following
an event of default on that payment date, any amounts owed by the
related issuer to the indenture trustee or note insurer pursuant to
the related indenture.
In addition, on the payment date relating to the due period in which the
termination of the related funding period occurred, available funds will
include the amount on deposit in the Class A-F pre-funding account at that
time, plus on the payment dates in ________ and __________ ______, available
funds will include the amount, if any, withdrawn from the Class A-F interest
coverage account. With respect to any payment date:
o the "due date" is the first day of the month in which the payment
date occurs, and
o the "determination date" is the 15th day of the month in which the
payment date occurs, or if the day is not a business day, the
immediately preceding business day.
Interest Payments. On each payment date, holders of the Class A-F Notes
will be entitled to receive the Class A-F interest payment amount equal to
interest accrued on the Class A-F Note principal balance of those notes
immediately prior to the payment date at the Class A-F Note interest rate for
the related interest period. With respect to each payment date, interest
payable on the Class A-F Notes will accrue during the interest period.
Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months. If payments are not made as required under the related
note insurance policy, additional interest shortfalls may be allocated to the
Class A-F Notes. See "Description of the Notes -- Note Insurance Policies."
On each payment date, the Class A-F Note interest rate will be ___% per
annum.
With respect to each fixed rate loan and each payment date, the master
servicer will be entitled to a servicing fee equal to 1/12 of the servicing
fee rate times the principal balance of those fixed rate loan as of that date.
With respect to each fixed rate loan and each payment date, the indenture
trustee will be entitled to a fee equal to 1/12 of the indenture trustee fee
rate times the principal balance of that fixed rate loan as of that date. For
any payment date, the servicing fee rate is equal to ____% per annum, the
indenture trustee fee rate is equal to _____% per annum, the owner trustee fee
is $______ per annum, payable on the payment date in __________ of each year,
and the "note insurer premium" is equal to 1/12 of the per annum rate
specified pursuant to the related insurance agreement times the note principal
balance. The note insurance policy with respect to the Class A-F Notes does
not cover any Prepayment Interest Shortfalls or any Relief Act Shortfalls,
each as defined in this prospectus supplement, nor do the ratings assigned to
the Class A-F Notes address the payment of any Prepayment Interest Shortfalls
or any Relief Act Shortfalls. "Relief Act Shortfalls" for any payment date are
any shortfalls relating to the Soldiers' and Sailors' Civil Relief Act of
1940, as amended or similar legislation or regulations.
As described in this prospectus supplement, the interest payment amount
is based on the Class A-F Note principal balance. The Class A-F Note principal
balance as of any date of determination is equal to the related initial
principal balance of those notes as of the closing date reduced by all amounts
allocable to the Class A-F principal payment amount and the subordination
increase amount previously distributed with respect to the Class A-F Note.
The "principal balance" of any loan is, at any given time, the principal
balance as of the cut off date or subsequent cut-off date, as applicable, of
the loan, minus:
o the sum of all amounts paid or advanced with respect to that loan
with respect to principal and
o the principal portion of any losses with respect to those losses for
any previous payment date.
Principal Payments. The "Class A-F principal payment amount" for the
Class A-F Notes:
o on any payment date, other than the final scheduled payment date,
will be equal to the lesser of:
o the sum of the available funds with respect to the Class A-F
Notes remaining after distributions pursuant to " --Class A-F
Notes --Priority of Payment" below and any portion of any
insured payment, as defined in this prospectus supplement, for
the payment date representing principal and
o the sum of:
o the principal portion of all scheduled monthly payments on
the fixed rate loans received on the fixed rate loans with
respect to the related due date;
o the principal portion of all proceeds of the repurchase of
a fixed rate loan , or, in the case of a substitution,
amounts representing a principal adjustment, pursuant to
the related servicing agreement or the fixed rate purchase
agreement received during the preceding calendar month;
o the principal portion of all other unscheduled collections
received on the fixed rate loans during the related
prepayment period, or deemed to be received during the
related prepayment period, including, without limitation,
full and partial principal prepayments made by the
respective mortgagors, liquidation proceeds and insurance
proceeds, excluding proceeds paid in respect of the note
insurance policy, to the extent not distributed in the
preceding month;
o any insured payment made with respect to principal plus the
lesser of:
o the net monthly excess cashflow relating to the Class A-V
Notes, or, if the Class A-V Notes have been retired, the
amount in the Class A-F escrow account, minus the amount
by which the Class A-F interest payment amount exceeds the
Class A-F available funds and
o the subordination deficit relating to the Class A-F Notes;
o with respect to the payment date immediately following the end
of the related funding period, any amounts in the related
pre-funding account after giving effect to any purchase of
subsequent fixed rate loans;
minus
o the amount of any related subordination reduction amount for
the payment date; and
o with respect to the final scheduled payment date, the amount
necessary to reduce the Class A-F Note principal balance to zero.
In no event will the Class A-F principal payment amount with respect to
any payment date be less than zero or greater than the then outstanding Class
A-F Note principal balance.
Priority of Payment. On each payment date, available funds with respect
to the Class A-F Notes and, if necessary, any available net monthly excess
cashflow relating to the other series of notes and any insured payment with
respect to that payment date, provided that insured payments will be applied
only for the purposes set forth below, will be allocated to the Class A-F
Notes in the following order of priority, in each case to the extent of
available funds with respect to the Class A-F Notes remaining:
o to the Class A-F Noteholders, the Class A-F interest payment amount
with respect to the payment date net of any prepayment shortfalls
not covered by the master servicer by compensating interest and any
Relief Act Shortfalls;
o to the Class A-F Noteholders, the Class A-F principal payment amount
with respect to that payment date;
o to the note insurer, the sum of:
o all amounts previously paid by the note insurer under the Class
A-F Note insurance policy which have not previously been
reimbursed,
o any other amounts due to the note insurer pursuant to the
agreement pursuant to which the Class A-F Note insurance policy
is issued and
o interest on any amounts due as set forth in the insurance
agreement from the date the reimbursement amounts became due
until paid in full;
o to Class A-V Notes, if necessary, any amounts to pay:
o the amount by which the Class A-V interest payment amount
exceeds Class A-V available funds for the related loan group on
the payment date and
o any realized loss relating to the Class A-V Notes on the
payment date or any previous payment date;
o to the note insurer, the sum of:
o all payments previously paid by the note insurer under the note
insurance policy relating to the Class A-V Notes which have not
previously been reimbursed,
o any other amounts due to the note insurer pursuant to the
Series ____-V insurance agreement, as defined in this
prospectus supplement, to the extent not previously paid or
reimbursed and
o interest on any amounts due as set forth in the ____-V
insurance agreement from the date the amounts become due until
paid in full;
o to the Class A-F Noteholders, the subordination increase amount, as
defined in "--Class A-F Notes --Overcollateralization Provisions" in
this prospectus supplement, in reduction of the Class A-F Note
principal balance, until the Class A-F Note principal balance has
been reduced to zero;
o to the Class A-F Noteholders, Prepayment Interest Shortfalls not
covered by the master servicer by compensating interest and Relief
Act Shortfalls for the payment date;
o to the indenture trustee, for any amounts owing to the indenture
trustee;
o to the master servicer, any amounts owing to the master servicer
pursuant to the servicing agreement in connection with the indemnity
by the Series ____-F issuer under the servicing agreement; and
o any remaining amounts to the holders of the related certificates;
provided, however, that if the Class A-F Notes have been retired and
the Class A-V subordination amount is less than the Class A-V
required subordination amount, those amounts shall be transferred to
the Class A-V escrow account.
Overcollateralization Provisions. Overcollateralization Resulting from
Cash Flow Structure. With respect to any payment date, the "subordination
amount" is the excess, if any, of:
o the sum of the aggregate principal balances of the fixed rate loans
as of the close of business on the last day of the period commencing
on the second day of the month preceding the month of that payment
date, or, with respect to the first payment date, the day following
the cut off date, and ending on the related due period date and the
amount of funds in the Class A-F pre-funding account as of that
payment date over
o the Class A-F Note Principal balance as of that payment date, and
following the making of all payments made on that payment date.
The related indenture requires that, on each payment date, the net monthly
excess cashflow, if any, for the Class A-F certificates be applied on that
payment date as an accelerated payment of principal on the Class A-F Notes,
but only to the limited extent hereafter described. The "net monthly excess
cashflow" for the Class A-F Notes for any payment date is equal to the amount
of related available funds remaining after application under " -- Class A-F
Notes -- Priority of Payment" in this prospectus supplement. This application
has the effect of accelerating the amortization of the Class A-F Notes
relative to the amortization of the fixed rate loans. The related indenture
requires that the net monthly excess cashflow for the Class A-F Notes not used
to make payments in respect of the Class A-V Notes be applied as an
accelerated payment of principal on the Class A-F Notes until the
subordination amount has increased to a level equal to the required
subordination amount for that payment date.
Any amount of net monthly excess cashflow for the Class A-F Notes
actually applied as an accelerated payment of principal is a "subordination
increase amount." The "required subordination amount" is the required level of
the subordination amount with respect to a payment date on that payment date.
The related indenture generally provides that the required subordination
amount may, over time, decrease, or increase, subject to floors, caps and
triggers with respect to the fixed rate loans or the adjustable rate loans.
In the event that the required subordination amount is permitted to
decrease or "step down" on a payment date in the future, the related indenture
provides that a portion of the principal payment which would otherwise be
distributed to the holders of the Class A-F Notes on that payment date shall
be distributed to the holders of the related certificates on that payment
date, subject to prior applications, as described under "--Class A-F
Notes--Cross-collateralization." This has the effect of decelerating the
amortization of the Class A-F Notes relative to the amortization of the fixed
rate loans, and of reducing the subordination amount. With respect to any
payment date, the difference, if any, between:
o the subordination amount that would result on that payment date
after taking into account all payments to be made on that payment
date, exclusive of any reductions attributable to subordination
reduction amounts on that payment date, and
o the required subordination amount for that payment date is the
"excess subordination amount" with respect to that payment date.
With respect to any payment date, an amount equal to the lesser of:
o the excess subordination amount and
o the principal collections received by the master servicer with
respect to the prior due period is the "subordination reduction
amount."
In addition, a subordination reduction amount may result even before the
occurrence of any decrease or "step down" in the required subordination
amount. This is because the holders of the Class A-F Notes will generally be
entitled to receive 100% of collected principal, even though the Class A-F
Note principal balance will represent less than 100% of the fixed rate loans'
principal balance. In the absence of the provisions relating to the
subordination reduction amount, the preceding may otherwise increase the
subordination amount above the required subordination amount even without the
application of any net monthly excess cashflow.
The related indenture provides that, on any payment date, all unscheduled
collections on account of principal, other than any amount applied to the
payment of a subordination reduction amount, with respect to loans during the
calendar month preceding the calendar month in which that payment period date
occurs will be distributed to the holders of the Class A-F Notes on that
payment date. If any loan became a liquidated loan during that prepayment
period, the net Liquidation Proceeds, as defined in the prospectus, related to
the liquidated loan and allocated to principal may be less than the principal
balance of the related loan; the amount of any insufficiency is generally
defined as a "Realized Loss." A "liquidated loan" is, in general, a defaulted
loan as to which the master servicer has determined that all amounts that it
expects to recover on that loan have been recovered, exclusive of any
possibility of a deficiency judgment. The principal balance of any loan after
it becomes a liquidated loan shall equal zero. The related indenture does not
contain any provision which requires that the amount of any Realized Loss
should be distributed to the holders of the Class A-F Notes on the payment
date which immediately follows the event of loss; i.e., the related indenture
does not require the current recovery of losses. However, the occurrence of a
Realized Loss will reduce the subordination amount, which, to the extent that
the reduction causes the subordination amount to be less than the required
subordination amount applicable to the related payment date, will require the
payment of a subordination increase amount on that payment date, or, if
insufficient funds are available on that payment date, on subsequent payment
dates, until the subordination amount equals the required subordination
amount. The effect is to allocate losses to overcollateralization by reducing,
or eliminating entirely, payments of net monthly excess cashflow and of
subordination reduction amounts which the holders of the related certificates
would otherwise receive. While the note insurer is not obligated to pay any
losses on liquidated loans unless those losses would create an aggregate
subordination deficit, the note insurer may, at its sole option, pay any
losses on liquidated loans in accordance with the related note insurance
policy.
Overcollateralization and the Related Note Insurance Policy. The related
indenture defines a "subordination deficit" with respect to a payment date to
be the amount, if any, by which:
o the aggregate Class A-F Note principal balance as of that payment
date, and following the making of all payments to be made on that
payment date, except for any payment to be made as to principal from
proceeds of the note insurance policy, exceeds
o the sum of the aggregate principal balances of the fixed rate loans
as of the close of business on the due date preceding that payment
date and the amount of funds in the related pre-funding account on
that payment date.
The "aggregate subordinate deficit" is the Class A-F subordination deficit, if
any, plus the Class A-V subordination deficit, if any, minus the Class A-F
subordination amount, if any, minus the Class A-V subordination amount, if
any. The related indenture requires the indenture trustee to make a claim for
an insured payment under the related note insurance policy not later than the
second business day prior to any payment date as to which the indenture
trustee has determined that an aggregate subordination deficit will occur for
the purpose of applying the proceeds of the insured payment as a payment of
principal to the holders of the Class A-F Notes on that payment date. The
amount of the claim will be the lesser of the Class A-F subordination deficit
and the aggregate subordination deficit reduced by any net excess cashflow
available to pay those amounts. Investors in the Class A-F Notes should
realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no payments of principal.
Cross-collateralization. On each payment date, an amount equal to net
monthly excess cashflow remaining after application of the first through the
third items under "--Class A-F Notes--Priority of Payment" in this prospectus
supplement shall be available to cover any shortfalls in amounts to pay the
Class A-V interest payment amount and any subordination deficit relating to
that payment date and any net monthly excess cashflow remaining after
application of the first through the eighth items under "--Class A-F Notes
--Priority of Payments" in this prospectus supplement shall be available to
reimburse the note insurer for an insured payment and other reimbursements
owed to the insurer. After retirement of the Class A-F Notes, if the Class A-V
subordination amount is less than the Class A-V required subordination amount,
amounts payable pursuant to the tenth item under "--Class A-F Notes--Priority
of Payment" will be paid to the Class A-V escrow account. Amounts in the Class
A-V escrow account will be treated, on future payment dates, as net monthly
excess cashflow on the Class A-F Notes and will be available to make the
payments described in the preceding sentence in respect of the Class A-V
Notes.
Class A-V Notes
Available Funds. The "available funds" for the Class A-V Notes for any
payment date will equal the amount received by the indenture trustee and
available in the related Class A-V payment account on each payment date. The
available funds for the Class A-V Notes will generally be equal to the amount
on deposit in the Class A-V payment account on the payment date and available
for distribution to the Class A-V Noteholders, minus:
o the related administrative fee and the related indenture trustee fee
and
o if the Class A-V Notes have been declared due and payable following
an event of default on the payment date, any amounts owed by the
related issuer to the indenture trustee or note insurer pursuant to
the related indenture.
In addition, on the payment date relating to the due period in which the
termination of the related funding period occurred, available funds will
include the amount on deposit in the Class A-V pre-funding account at that
time, plus on the payment dates in July and August, 1998, available funds will
include the amount, if any, withdrawn from the Class A-V interest coverage
account.
Interest Payments. On each payment date, holders of the Class A-V Notes
will be entitled to receive a Class A-V interest payment amount equal to the
lesser of:
o interest accrued on the Class A-V Note principal balance immediately
prior to that payment date at the Class A-V Note interest rate for
the related interest period and
o the guaranteed interest payment amount.
With respect to each payment date, interest payable on the Class A-V
Notes will accrue during the interest period. Interest will be calculated on
the basis of the actual number of days in the interest period and a 360-day
year. Notwithstanding any provisions in this prospectus supplement, if
payments are not made as required under the related note insurance policy,
additional interest shortfalls may be allocated to the Class A-V Notes. See
"Description of the Notes -- Note Insurance Policies."
On each payment date, the "Class A-V Note interest rate" will be a
floating rate equal to the lesser of:
o
o with respect to each payment date up to and including the
payment date which occurs on or prior to the date on which the
aggregate principal balance of the adjustable rate loans is
less than or equal to [10]% of the Class A-V original pool
balance, one-month LIBOR, as defined in this prospectus
supplement, plus ____, and
o with respect to each payment date thereafter, one-month LIBOR
plus ____% and
o _____ % per annum
As further described in this prospectus supplement, with respect to the
Class A-V Notes and any payment date, to the extent that the amount calculated
pursuant to the definition of interest payment amount with respect to the
Class A-V Notes exceeds the guaranteed interest payment amount, as defined in
this prospectus supplement, the holders of the Class A-V Notes will be paid
the amount of the carry-forward amount with interest on that amount, to the
extent permitted by applicable law, at the note interest rate for the Class
A-V Notes applicable from time to time after payments to the holders of the
Class A-V Notes, the Class A-F Notes and the note insurer to the extent of
available funds. The "guaranteed interest payment amount" for any payment date
is equal to the amount of interest that accrued on the aggregate outstanding
principal balance of the adjustable rate loans payable on the related due date
minus the aggregate amount of each related servicing fee, the indenture
trustee fee, the owner trustee fee, the note insurer premium and the minimum
spread. With respect to each adjustable rate loan and each payment date, the
master servicer will be entitled to a servicing fee equal to 1/12 of the
servicing fee rate times the principal balance of that adjustable rate loan as
of that date. With respect to each adjustable rate loan and each payment date,
the indenture trustee will be entitled to a fee equal to 1/12 of the indenture
trustee fee rate times the principal balance of that adjustable rate loan as
of that date. For any payment date, the servicing fee rate is equal to ____%
per annum, the indenture trustee fee rate is equal to _____% per annum, the
owner trustee Fee is $______ per annum, payable on the payment date in July of
each year, and the "note insurer premium" is equal to 1/12 of the per annum
rate specified pursuant to the related insurance agreement times the note
principal balance. With respect to each adjustable rate loan and each payment
date, the "minimum spread" is equal to 1/12 of ____% per annum times the
principal balance of that adjustable rate loan as of that date. The note
insurance policy with respect to the Class A-V Notes does not cover any
Prepayment Interest Shortfalls, any Relief Act Shortfalls or the carry-forward
amount, nor do the ratings assigned to the Class A-V Notes address the payment
of any Prepayment Interest Shortfalls, any Relief Act Shortfalls or the
carry-forward amount.
As described in this prospectus supplement, the Class A-V interest
payment amount is based on the Class A-V Note principal balance. The "Class
A-V Note principal balance" as of any date of determination is equal to the
initial principal balance as of the closing date reduced by all amounts
allocable to the Class A-V principal payment amount and the related
subordination increase amount previously distributed with respect to that
Class A-V Note.
Calculation of One-Month LIBOR. The indenture trustee will determine the
London interbank offered rate for one-month United States dollar deposits, or
one-month LIBOR, for each interest period for the Class A-V Notes on the basis
of the offered rates of the Reference Banks for one-month United States dollar
deposits, as the rates appear on the Telerate Page 3750, as of 11:00 a.m.,
London time, on the related interest determination date. "Interest
determination date" shall mean:
o with respect to the payment date occurring in ___________, the
second business day preceding the closing date and,
o with respect to each payment date after the closing date, on the
second business day preceding the related interest period.
If the rate does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant interest period, commencing on the first day of that
interest period. The indenture trustee will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If
at least two quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided
as requested, the rate for that day will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the indenture trustee, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
interest period, commencing on the first day of that interest period.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service, or any other page as may replace that page on
that service for the purpose of displaying comparable rates or prices, and
"Reference Banks" means leading banks selected by the indenture trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
The establishment of one-month LIBOR on each interest determination date
by the indenture trustee and the indenture trustee's calculation of the rate
of interest applicable to the Class A-V Notes for the related interest period
shall, in the absence of manifest error, be final and binding.
Principal Payments. The "Class A-V principal payment amount":
o any payment date, other than the final scheduled payment date, will
be equal to the lesser of
o the sum of the Class A-V available funds remaining after
distributions pursuant to " --Class A-V Notes --Priority of
Payment" and any portion of any insured payment, as defined in
this prospectus supplement, for that payment date representing
principal and
o the sum of:
o the principal portion of all scheduled monthly payments on the
adjustable rate loans received on the adjustable rate loans
with respect to the related due date;
o the principal portion of all proceeds of the repurchase of
a adjustable rate loan, or, in the case of a substitution,
amounts representing a principal adjustment, pursuant to
the related servicing agreement or the Class A-V purchase
agreement received during the preceding calendar month;
o the principal portion of all other unscheduled collections
received on the adjustable rate loans during the related
prepayment period, or deemed to be received during the
related prepayment period, including, without limitation,
full and partial principal prepayments made by the
respective mortgagors, liquidation proceeds and insurance
proceeds, but excluding proceeds paid in respect of the
note insurance policy, to the extent not distributed in
the preceding month;
o any insured payment made with respect to principal plus the
lesser of:
o the net monthly excess cashflow relating to the Class A-F
Notes, or, if the Class A-F Notes have been retired, the
amount in the Class A-V escrow account, minus the amount
by which the Class A-V interest payment amount exceeds the
Class A-V available funds and
o the subordination deficit relating to the Class A-V Notes;
o with respect to the payment date immediately
following the end of the related funding period, any
amounts in the related pre-funding account after
giving effect to any purchase of subsequent
adjustable rate loans;
minus
o the amount of any related subordination reduction
amount for that payment date; and
o with respect to the final scheduled payment date, the
amount necessary to reduce the Class A-V Note principal
balance to zero.
In no event will the Class A-V principal payment amount with respect to
any payment date be less than zero or greater than the then outstanding Class
A-V Note principal balance.
Priority of Payment. On each payment date, available funds with respect
to the Class A-V Notes and, if necessary, any available net monthly excess
cashflow relating to the other series of notes and any insured payment with
respect to that payment date, provided that insured payments will be applied
only for the purposes set forth in the first two clauses below, will be
allocated to the Class A-V Notes in the following order of priority, in each
case to the extent of available funds with respect to the Class A-V Notes
remaining:
o to the Class A-V Noteholders, the Class A-V interest payment
amount with respect to that payment date net of any prepayment
shortfalls not covered by the master servicer by compensating
interest and any Relief Act Shortfalls;
o to the Class A-V Noteholders, the Class A-V principal payment
amount with respect to that payment date;
o to the note insurer, the sum of:
o all amounts previously paid by the note insurer under the Class
A-V Note insurance policy which have not previously been
reimbursed,
o any other amounts due to the note insurer pursuant to the
agreement pursuant to which the Class A-V Note insurance policy
is issued and
o interest on any amounts due as set forth in the insurance
agreement from the date that reimbursement amounts became due
until paid in full;
o to Class A-F Notes, if necessary, any amounts to pay:
o the amount by which the Class A-F interest payment amount
exceeds Class A-F available funds for the related loan group on
that payment date and
o any Realized Loss relating to the Class A-F Notes on that
payment date or any previous payment date;
o to the note insurer, the sum of:
o all payments previously paid by the note insurer under the note
insurance policy relating to the Class A-F Notes which have not
previously been reimbursed,
o any other amounts due to the note insurer pursuant to the
____-F insurance agreement to the extent not previously paid or
reimbursed and
o interest on any amounts due as set forth in the ____-F
insurance agreement from the date the amounts become due until
paid in full;
o to the Class A-V Noteholders, the subordination increase amount, as
defined in " --Class A-V Notes --Overcollateralization Provisions,"
in reduction of the Class A-V Note principal balance, until the
Class A-V Note principal balance has been reduced to zero;
o to the Class A-V Noteholders, Prepayment Interest Shortfalls not
covered by the master servicer by compensating interest, Relief Act
Shortfalls and carry forward amounts for that payment date;
o to the indenture trustee, for any amounts owing to the indenture
trustee;
o to the master servicer, any amounts owing to the master servicer
pursuant to the servicing agreement in connection with the indemnity
by the Series ____-V issuer under the servicing agreement; and
o any remaining amounts to the holders of the related certificates;
provided, however, that if the Class A-V Notes have been retired and
the Class A-F subordination amount is less than the Class A-F
required subordination amount, those amounts shall be transferred to
the Class A-F escrow account.
Overcollateralization Provisions. Overcollateralization Resulting from
Cash Flow Structure. With respect to any payment date, the "subordination
amount" is the excess, if any, of:
o the sum of the aggregate principal balances of the adjustable rate
loans as of the close of business on the last day of the period
commencing on the second day of the month preceding the month of
that payment date, or, with respect to the first payment date, the
day following the cut off date, and ending on the related due period
date and the amount of funds in the Class A-V pre-funding account as
of that payment date over:
o the Class A-V Note principal balance as of that payment date, and
following the making of all payments made on that payment date.
The related indenture requires that, on each payment date, the net monthly
excess cashflow, if any, for the Class A-V certificates not used to make
payments in respect of the Class A-F Notes be applied on that payment date as
an accelerated payment of principal on the Class A-V Notes, but only to the
limited extent hereafter described. The "net monthly excess cashflow" for the
Class A-V Notes for any payment date is equal to the amount of related
available funds remaining after application to the first through third items
under " -- Class A-V Notes -- Priority of Payment" in this prospectus
supplement. This application has the effect of accelerating the amortization
of the Class A-V Notes relative to the amortization of the adjustable rate
loans. The related indenture requires that the net monthly excess cashflow for
the Class A-V Notes be applied as an accelerated payment of principal on the
Class A-V Notes until the subordination amount has increased to a level equal
to the required subordination amount for that payment date.
Any amount of net monthly excess cashflow for the Class A-V Notes
actually applied as an accelerated payment of principal is a "subordination
increase amount." The required level of the subordination amount with respect
to a payment date is the "required subordination amount" with respect to that
payment date. The related indenture generally provides that the required
subordination amount may, over time, decrease, or increase, subject to floors,
caps and triggers with respect to the adjustable rate loans or the fixed rate
loans.
In the event that the required subordination amount is permitted to
decrease or "step down" on a payment date in the future, the related indenture
provides that a portion of the principal payment which would otherwise be
distributed to the holders of the Class A-V Notes on that payment date shall
be distributed to the holders of the related certificates on that payment
date, subject to prior applications as described under "Class A-V
Notes--Cross-collateralization." This has the effect of decelerating the
amortization of the Class A-V Notes relative to the amortization of the
adjustable rate loans, and of reducing the subordination amount. With respect
to any payment date, the difference, if any, between:
o the subordination amount that would result on that payment date
after taking into account all payments to be made on that payment
date, exclusive of any reductions attributable to subordination
reduction amounts, on that payment date, and
o the required subordination amount for that payment date is the
"excess subordination amount" with respect to that payment date.
With respect to any payment date, an amount equal to the lesser of:
o the excess subordination amount and
o the principal collections received by the master servicer with
respect to the prior due period is the "subordination reduction
amount."
In addition, a subordination reduction amount may result even prior to the
occurrence of any decrease or "step down" in the required subordination
amount. This is because the holders of the Class A-V Notes will generally be
entitled to receive 100% of collected principal, even though the Class A-V
Note principal balance will represent less than 100% of the adjustable rate
loans' principal balance. In the absence of the provisions relating to the
subordination reduction amount, the preceding may otherwise increase the
subordination amount above the required subordination amount even without the
application of any net monthly excess cashflow.
The related indenture provides that, on any payment date, all unscheduled
collections on account of principal, other than any amount applied to the
payment of a subordination reduction amount, with respect to loans during the
calendar month preceding the calendar month in which that payment date occurs
will be distributed to the holders of the Class A-V Notes on that payment
date. If any loan became a liquidated loan during that prepayment period, the
net Liquidation Proceeds, as defined in the prospectus, related to the
liquidated loan and allocated to principal may be less than the principal
balance of the related loan; the amount of any insufficiency is generally
defined as a "Realized Loss." The principal balance of any loan after it
becomes a liquidated loan shall equal zero. The related indenture does not
contain any provision which requires that the amount of any Realized Loss
should be distributed to the holders of the Class A-V Notes on the payment
date which immediately follows the event of loss; i.e., the related indenture
does not require the current recovery of losses. However, the occurrence of a
Realized Loss will reduce the subordination amount, which, to the extent that
the reduction causes the subordination amount to be less than the required
subordination amount applicable to the related payment date, will require the
payment of a subordination increase amount on that payment date, or, if
insufficient funds are available on that payment date, on subsequent payment
dates, until the subordination amount equals the required subordination
amount. The effect of these provisions is to allocate losses to
overcollateralization by reducing, or eliminating entirely, payments of net
monthly excess cashflow and of subordination reduction amounts which the
holders of the related certificates would otherwise receive. While the note
insurer is not obligated to pay any losses on liquidated loans unless those
losses would create an aggregate subordination deficit, the note insurer may,
at its sole option, pay any losses on liquidated loans in accordance with the
related note insurance policy.
Overcollateralization and the Related Note Insurance Policy. The related
indenture defines a "subordination deficit" with respect to a payment date to
be the amount, if any, by which:
o the aggregate Class A-V Note principal balance of the Class A-V
Notes as of that payment date, and following the making of all
payments to be made on that payment date, except for any payment to
be made as to principal from proceeds of the note insurance policy,
exceeds
o the sum of the aggregate principal balances of the adjustable rate
loans as of the close of business on the due date preceding that
payment date and the amount of funds in the related pre-funding
account on that payment date.
The aggregate subordination deficit is defined in this prospectus supplement
under "Class A-F Notes--Overcollateralization and the Related Note Insurance
Policy." The related indenture requires the indenture trustee to make a claim
for an insured payment under the related note insurance policy not later than
the second business day prior to any payment date as to which the indenture
trustee has determined that an aggregate subordination deficit will occur for
the purpose of applying the proceeds of the insured payment as a payment of
principal to the holders of the Class A-V Notes on that payment date. The
amount of the claim will be the lesser of the Class A-V subordination deficit
and the aggregate subordination deficit reduced by any net excess cashflow
available to pay those amounts. Investors in the Class A-V Notes should
realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no payments of principal.
Cross-collateralization. On each payment date, an amount equal to net
monthly excess cashflow remaining after the application of "--Class A-V
Notes--Priority of Payment" in this prospectus supplement shall be available
to cover any shortfalls in amounts to pay the Class A-F interest payment
amount and any subordination deficit relating to that payment date and any net
monthly excess cashflow remaining after the application of "--Class A-V
Notes--Priority of Payments" in this prospectus supplement shall be available
to reimburse the note insurer for an insured payment and other reimbursements
owed to the insurer. After retirement of the Class A-V Notes, if the Class A-F
subordination amount is less than the Class A-F required subordination amount,
amounts payable under "--Class A-V Notes--Priority of Payment" will be paid to
the Class A-F escrow account. Amounts in the Class A-F escrow account will be
treated, on future payment dates, as net monthly excess cashflow on the Class
A-V Notes and will be available to make the payments described in the
preceding sentence in respect of the Class A-F Notes.
Note Insurance Policies
The following summary of the terms of the note insurance policies does
not purport to be complete and is qualified in its entirety by reference to
the note insurance policies. A form of the note insurance policies may be
obtained, upon request, from the depositor.
Simultaneously with the issuance of the notes, the note insurer will
deliver a note insurance policy with respect to the Class A-F Notes and a note
insurance policy with respect to the Class A-V Notes to the indenture trustee
for the benefit of the related noteholders. Under each note insurance policy,
the note insurer will irrevocably and unconditionally guarantee payment on
each payment date to the indenture trustee for the benefit of the related
noteholders the full and complete payment of insured payments with respect to
the Class A-F Notes or Class A-V Notes, as applicable, calculated in
accordance with the original terms of the related notes when issued and
without regard to any amendment or modification of the related notes or the
related indenture except amendments or modifications to which the note insurer
has given its prior written consent. "Insured payments" shall mean with
respect to the Class A-F Notes or Class A-V Notes, as applicable,
o as of any payment date,
o the amount by which related interest payment amount, which is
the net of any related Prepayment Interest Shortfalls, whether
or not those shortfalls are covered by the master servicer by
compensating interest, as defined in this prospectus
supplement, and any Relief Act Shortfalls, exceeds the related
available funds for that loan group and any net monthly excess
cashflow from the other loan group available to cover the
shortfall as of that payment date, and
o the amount by which the lesser of the subordination deficit
with respect to the related loan group and the aggregate
subordination deficit exceeds the related available funds for
that loan group and any net monthly excess cashflow from the
other loan group available to cover those amounts and
o without duplication of the amount specified above, the aggregate
note principal balance of the Class A-F Notes and Class A-V Notes,
as applicable, to the extent unpaid on the payment date in
____________, after giving effect to all other amounts distributable
and allocable to principal on that payment date. The note insurance
policy with respect to the Class A-V Notes does not guarantee the
payment of the carry-forward amount nor does either note insurance
policy cover Prepayment Interest Shortfalls or Relief Act
Shortfalls.
If any insured payment is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law, the note
insurer will pay the amount out of funds of the note insurer on the later of:
o the date when due to be paid pursuant to the order referred to below
or
o the first to occur of
o the fourth business day following receipt by the note insurer
from the indenture trustee of
o a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the
effect that a noteholder is required to return principal
or interest distributed with respect to a note during the
term of the related note insurance policy because those
distributions were avoidable preferences under applicable
bankruptcy law,
o a certificate of the holder of notes that the order has
been entered and is not subject to any stay, and
o an assignment duly executed and delivered by that
noteholder, in that form as is reasonably required by the
note insurer and provided to that noteholder by the note
insurer, irrevocably assigning to the note insurer all
rights and claims of that noteholder against the debtor
which made that preference payment or otherwise with
respect to that preference payment, or
o the date of receipt by the note insurer from the indenture
trustee of the items referred to above if, at least four
business days prior to that date of receipt, the note insurer
shall have received written notice from the indenture trustee
that the items were to be delivered on that date and that date
was specified in the notice.
The payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the order and not to
the indenture trustee or noteholder directly, unless a noteholder has
previously paid that amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the order, in which case that payment shall
be disbursed to the indenture trustee for distribution to that noteholder upon
proof of that payment reasonably satisfactory to the note insurer. The note
insurer shall have the rights provided pursuant to the related indenture.
Payment of claims under either note insurance policy will be made by the
note insurer following receipt by the note insurer of the appropriate notice
for payment of the later to occur of:
o 12:00 noon, New York City time, on the second business day following
receipt of the notice for payment, and
o 12:00 noon, New York City time, on the relevant payment date.
The terms "receipt" and "received," with respect to the note insurance
policies, mean actual delivery to the note insurer and to its fiscal agent
appointed by the note insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a business day; delivery either on a day that is not a
business day or after 12:00 p.m., New York City time, shall be deemed to be
receipt on the next succeeding business day. If any notice or certificate
given under either note insurance policy by the indenture trustee is not in
proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been received, and the note insurer or the fiscal agent
shall promptly so advise the indenture trustee and the indenture trustee may
submit an amended notice.
Under each note insurance policy, "business day" means any day other
than:
o a Saturday or Sunday or
o a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate
trust office of the indenture trustee is located, are authorized or
obligated by law or executive order to be closed.
The note insurer's obligations under each note insurance policy to make
insured payments shall be discharged to the extent funds are transferred to
the indenture trustee as provided in the note insurance policy, whether or not
those funds are properly applied by the indenture trustee.
"Term of the note insurance policy" means, with respect to each note
insurance policy, the period from and including the date of issuance of the
note insurance policy to and including the date on which the principal
balances of the related notes are zero, plus the additional period, to the
extent specified in the note insurance policy, during which any payment on the
related notes could be avoided in whole or in part as a preference payment.
The note insurer shall be subrogated to the rights of the related
noteholders to receive payments of principal and interest, as applicable, with
respect to distributions on the related notes to the extent of any payment by
the note insurer under each note insurance policy. To the extent the note
insurer makes insured payments, either directly or indirectly, as by paying
through the indenture trustee, to the noteholders, the note insurer will be
subrogated to the rights of the Class A-F Noteholders and Class A-V
Noteholders, as applicable, with respect to the insured payment and shall be
deemed to the extent of the payments so made to be a registered noteholder for
purposes of payment.
Claims under the note insurance policies constitute direct unsecured and
unsubordinated obligations of the note insurer, and will rank equally with any
other unsecured and unsubordinated obligations of the note insurer except for
obligations in respect to tax and other payments to which preference is or may
become afforded by statute. The terms of the note insurance policies cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the depositor. The note insurance
policies by their terms may not be canceled or revoked prior to distribution
in full of all insured payments, as defined in this prospectus supplement. The
note insurance policies are governed by the laws of the State of New York. The
note insurance policies are not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the note insurer
agrees under each note insurance policy not to assert, and waives, for the
benefit of each related noteholder, all its rights, whether by counterclaim,
setoff or otherwise, and defenses, including, without limitation, the defense
of fraud, whether acquired by subrogation, assignment or otherwise, to the
extent that those rights and defenses may be available to the note insurer to
avoid payment of its obligations under that note insurance policy in
accordance with the express provisions of that note insurance policy.
Pursuant to the terms of each indenture, unless a note insurer default
exists, the note insurer will be entitled to exercise rights of the related
noteholders, without the consent of the noteholders, and the noteholders may
exercise those rights only with the prior written consent of the note insurer.
With respect to the Class A-F Notes and the Class A-V Notes,
respectively, the related issuer, the seller and the note insurer will enter
into a related insurance agreement pursuant to which the related issuer and
the seller will agree to reimburse, with interest, the note insurer for
amounts paid pursuant to claims under the related note insurance policy. The
depositor and the seller will further agree to pay the note insurer all
reasonable charges and expenses which the note insurer may pay or incur
relative to any amounts paid under the related note insurance policy or
otherwise in connection with the transaction and to indemnify the note insurer
against liabilities. Except to the extent provided in this prospectus
supplement, amounts owing under each insurance agreement will be payable
solely from the trust estates. An event of default by the master servicer
under either insurance agreement will constitute an event of default by the
master servicer under the indentures and allow the note insurer, among other
things, to direct the indenture trustee to terminate the master servicer. An
"event of default" by the master servicer under each insurance agreement
includes:
o the master servicer's failure to pay when due any amount owed under
the insurance agreement or other documents,
o the master servicer's untruth or incorrectness in any material
respect of any representation or warranty of the master servicer in
the insurance agreement, the related indenture, in its capacity as
master servicer, or other documents,
o the master servicer's failure to perform or to observe any covenant
or indenture in the insurance agreement, the related indenture, in
its capacity as master servicer, and other documents,
o the master servicer's failure to pay its debts in general or the
occurrence of an event of insolvency or bankruptcy with respect to
the master servicer, and
o the occurrence of an event of default under the related indenture or
other documents.
Advances
Prior to each payment date, the sub-servicer is required under each
sub-servicing agreement, and the master servicer is required under the related
servicing agreement, to make "advances," out of its own funds, advances made
by any subservicer, or funds held in the related collection account, as
described in the prospectus, for future payment or withdrawal, with respect to
any payments of interest, net of the servicing fee, which were due on the
fixed rate loans or the adjustable rate loans on the immediately preceding due
date and which are delinquent on the business day next preceding the related
determination date. With respect to Balloon Loans, the master servicer is not
obligated to make advances with respect to the balloon payment, but shall
advance interest on the Balloon Loan as if the mortgage loan was an amortized
loan.
Advances are required to be made by the master servicer and sub-servicer
only to the extent they are deemed by the master servicer and sub-servicer,
respectively, to be recoverable from related late collections, insurance
proceeds, or Liquidation Proceeds. The purpose of making those advances is to
maintain a regular cash flow to the noteholders, rather than to guarantee or
insure against losses. Any failure by the master servicer to make an advance
as required under the related servicing agreement will constitute an event of
default under the servicing agreement, in which case the indenture trustee, as
successor master servicer, will be obligated to make any advance, in
accordance with the terms of the related servicing agreement.
All advances will be reimbursable to the master servicer or sub-servicer,
as the case may be, on a first priority basis from late collections, insurance
proceeds or Liquidation Proceeds from the related loan as to which the
unreimbursed advance was made. In addition, any advances previously made which
are deemed by the master servicer or sub-servicer to be nonrecoverable from
related late collections, insurance proceeds and Liquidation Proceeds may be
reimbursed to the master servicer or the sub-servicer, as the case may be, out
of any funds in the related collection account prior to payments on the
related notes.
The paying agent
The paying agent shall initially be the indenture trustee. The paying
agent shall have the revocable power to withdraw funds from the related
payment account for the purpose of making payments to the noteholders.
Optional Redemption
The Class A-F Notes may be redeemed in whole, but not in part, by the
holder of a majority of the related certificates on any payment date on or
after the payment date on which the aggregate principal balance of the fixed
rate loans is less than or equal to [10]% of the Class A-F Original Pool
Balance. The Class A-V Notes may be redeemed in whole, but not in part, by the
holder of a majority of the related certificates on any payment date on or
after the payment date on which the aggregate principal balance of the
adjustable rate loans is less than or equal to [10]% of the Class A-V original
pool balance. The purchase price will be equal to 100% of the aggregate
outstanding Class A-F or Class A-V Note principal balance of the Class A-F
Notes or the Class A-V Notes, as applicable, and accrued and unpaid interest
on the outstanding principal balance, including any carry-forward amount with
respect to the Class A-V Notes, at the related note interest rate through the
date on which the Class A-F Notes or the Class A-V Notes, as applicable, are
redeemed in full together with all amounts due and owing, including any
amounts due and owing in connection with the redemption, to the note insurer,
the master servicer and the indenture trustee. The "final scheduled payment
date" is the payment date occurring in ______________ with respect to the
Class A-F Notes and the Class A-V Notes.
Mandatory Prepayments on the Notes
The Class A-F Notes and the Class A-V Notes, as applicable, will be
partially prepaid on the payment date immediately following the end of the
related funding period to the extent that any amount remains on deposit in the
related pre-funding account on that payment date. Although no assurance can be
given, it is anticipated that the principal amount of subsequent fixed rate
loans and subsequent adjustable rate loans sold by the seller to the related
issuer and included in the related trust estate will require the application
of substantially all of the related original pre-funded amount and that there
should be no material amount of principal prepaid to the Class A-F Notes and
the Class A-V Notes from the related pre-funding account. However, it is
unlikely that the seller will be able to deliver subsequent fixed rate loans
and subsequent adjustable rate loans with an aggregate principal balance
identical to the related original pre-funded amount.
Interest Coverage Account
On the closing date, a portion of the sales proceeds of the Class A-F
Notes and the Class A-V Notes will be deposited in an interest coverage
account for application by the indenture trustee to cover shortfalls in the
related interest payment amount attributable to the pre-funding feature during
the related funding period. The shortfall initially will exist during the
related funding period because the aggregate principal balance of the Class
A-F Notes and the Class A-V Notes, and interest accrued on the principal
balance, during the related funding period will be greater than the aggregate
principal balance of the related loans, and interest accrued on the principal
balance, during that period. On the first business day following the first
payment date following the termination of the related funding period, funds
remaining on deposit in the related interest coverage account will be paid to
the seller.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a series of notes will depend on the price paid
by the holder for the note, the related note interest rate and the rate and
timing of principal payments, including payments in excess of required
installments, prepayments or terminations, liquidations and repurchases, on
the related loans and the allocation of those payments. The yield may be
adversely affected by a higher or lower than anticipated rate of principal
payments on the related loans and the amount, if any, distributed from the
related pre-funding account at the end of the related funding period. The rate
of principal payments on the loans will in turn be affected by the
amortization schedules of the loans, the rate and timing of principal
prepayments thereon by the Mortgagors and liquidations of defaulted loans, and
purchases of loans due to breaches of representations and warranties and
optional repurchases of delinquent loans by the master servicer. The timing of
changes in the rate of prepayments, liquidations and repurchases of the loans
may, and the timing of losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the loans will depend on future events and on a variety
of factors, as described more fully in this prospectus supplement and in the
prospectus under "Yield Considerations", no assurance can be given as to the
rate or the timing of principal payments on the notes.
The loans generally may be prepaid in full or in part at any time;
however, with respect to ______% and _____% of the initial fixed rate loans
and the initial adjustable rate loans, respectively, prepayment will subject
the mortgagor to a prepayment charge. Investors should be aware that _____% of
the fixed rate loans are secured by second liens on the related mortgaged
properties. Generally, loans secured by second liens are not viewed by
mortgagors as permanent financing. Accordingly, the loans may experience a
higher rate of prepayment than first lien mortgage loans. None of the
adjustable rate loans are secured by second liens. [The adjustable rate loans
generally are assumable under some circumstances if, in the sole judgment of
the master servicer, the prospective purchaser of a mortgaged property is
creditworthy and the security for the adjustable rate loan is not impaired by
the assumption. The fixed rate loans each contain a customary "due on sale"
provision.] The master servicer shall enforce any due-on-sale clause contained
in any mortgage note or mortgage, to the extent permitted under applicable law
and governmental regulations; provided, however, if the master servicer
determines that it is reasonably likely that any mortgagor will bring, or if
any mortgagor does bring, legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any mortgage note or
mortgage, the master servicer shall not be required to enforce the due-on-sale
clause or to contest the action. The extent to which the loans are assumed by
purchasers of the mortgaged properties rather than prepaid by the related
mortgagors in connection with the sales of the mortgaged properties will
affect the weighted average life of the related notes and may result in a
prepayment experience on the loans that differs from that on other loans. See
"Yield Considerations" in the prospectus. Prepayments, liquidations and
purchases of the loans will result in payments to holders of the notes of
principal amounts which would otherwise be distributed over the remaining
terms of the loans. Factors affecting prepayment, including defaults and
liquidations, of loans include changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates and servicing decisions.
The rate of defaults on the loans will also affect the rate and timing of
principal payments on the loans. In general, defaults on loans are expected to
occur with greater frequency in their early years. Increases in the monthly
payments of the Class A-V loans to an amount in excess of the monthly payment
required at the time of origination may result in a default rate higher than
that on level payment loans, particularly since the mortgagor under each
adjustable rate loan was qualified on the basis of the mortgage rate in effect
at origination. The repayment of the adjustable rate loans will be dependent
on the ability of the mortgagor to make larger monthly payments as the
mortgage rate increases. With respect to the fixed rate loans that are secured
by second liens on the related mortgaged properties, the loans are subordinate
to the rights of the mortgagee under the related first lien. Accordingly,
investors will be subject to a loss if the holder of a first lien on the
related mortgaged property is successful in foreclosure of its mortgage since
no second lien or encumbrances survive a foreclosure. In addition, the rate of
default on loans which are refinance or limited documentation loans, and on
loans with high loan-to-value ratios, may be higher than for other types of
loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the loans will be affected by the general economic condition
of the region of the country in which the related mortgaged 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. See "Yield Considerations" in the prospectus.
To the extent that the related original pre-funded amount has not been
fully applied to the purchase of subsequent fixed rate loans and subsequent
adjustable rate loans by the related issuer by the end of the related funding
period, the holders of the Class A-F Notes and the Class A-V Notes, as
applicable, will receive on the first payment date following the termination
of the related funding period a prepayment of principal in an amount equal to
the lesser of:
o the related pre-funded amount remaining in the related pre-funding
account and
o the outstanding note principal balance of the Class A-F Notes and
the Class A-V Notes, as applicable.
Although no assurance can be given, it is anticipated by the depositor that
the principal amount of subsequent fixed rate loans and subsequent adjustable
rate loans sold to the related issuer for inclusion in the related trust
estate will require the application of substantially all amounts on deposit in
the related pre-funding account and that there will be no material amount of
principal prepaid to the related noteholders. However, it is unlikely that the
seller will be able to deliver subsequent fixed rate loans and subsequent
adjustable rate loans with an aggregate principal balance identical to the
related pre-funded amount and therefore, some prepayment is expected on the
notes.
In addition, the yield to maturity of each series of notes will depend
on, among other things, the price paid by the holders of the related notes and
the then applicable related note interest rate. The extent to which the yield
to maturity of a note is sensitive to prepayments will depend, in part, upon
the degree to which it is purchased at a discount or premium. In general, if a
note is purchased at a premium and principal payments thereon occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of purchase.
Conversely, if a note is purchased at a discount and principal payments on the
notes occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the
time of purchase. For additional considerations relating to the yield on the
notes, see "Yield Considerations" in the prospectus.
Furthermore, the yield to maturity on the notes may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the notes at the related note interest rate is greater than the amount of
interest accrued on the loans at the related mortgage rates less the sum of
the servicing fee rate, the indenture trustee fee rate and the administrative
fees. In that event, the resulting shortfall will only be payable to the
extent that on any future payment date interest accrued on the loans at the
related mortgage rates less the rates is greater than the interest accrued on
the notes, and only to the extent of available funds following distributions
to the noteholders and the note insurer pursuant to the first through the
fourth clauses under "Description of the Securities-Priority of Payment."
The Class A-V Note interest rate is based upon, among other factors as
described in this prospectus supplement under "Description of the Notes --
Class A-V Notes -- Interest Payments," the value of an index, which is the
one-month LIBOR, as defined in this prospectus supplement, which is different
from the value of the index applicable to the adjustable rate loans, which is
the six-month LIBOR. The mortgage rate for each adjustable rate loan adjusts
semi-annually, commencing on the related first adjustment date, based upon the
index, whereas the Class A-V Note interest rate on the Class A-V Notes adjusts
monthly based upon one-month LIBOR plus _____%, or after the payment date
which occurs on or prior to the date on which the aggregate principal balance
of the sum of the adjustable rate loans is less than or equal to [10]% of the
Class A-V original pool balance, one-month LIBOR plus ____%, limited by the
maximum interest rate. In addition, one-month LIBOR and the index on the
adjustable rate loans may respond differently to economic and market factors,
and there is not necessarily any correlation between them. Moreover, the
adjustable rate loans are subject to periodic rate caps, maximum mortgage
rates and minimum mortgage rates, each, as defined in this prospectus
supplement. Thus, it is possible, for example, that one-month LIBOR may rise
during periods in which the index are stable or falling or that, even if both
one-month LIBOR and the index rise during the same period, one-month LIBOR may
rise much more rapidly than the index.
Although the mortgage rates on the adjustable rate loans will adjust
semi-annually, the increases and decreases may be limited by the Periodic Rate
Cap, the maximum mortgage rate and the minimum mortgage rate, if applicable,
on each adjustable rate loan, and will be based on the applicable index, which
may not rise and fall consistently with prevailing mortgage rates, plus the
related gross margin, which may be different from the prevailing margins on
other adjustable rate loans. As a result, the mortgage rates on the adjustable
rate loans at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
adjustable rate loans have maximum mortgage rates, if prevailing mortgage
rates were to increase above the maximum mortgage rates, the rate of
prepayment on the adjustable rate loans may be slower than would otherwise be
the case. In general, if prevailing mortgage rates fall significantly below
the mortgage rates on the adjustable rate loans, the rate of prepayments,
including refinancings, will be expected to increase. Conversely, if
prevailing mortgage rates rise significantly above the mortgage rates on the
adjustable rate loans, the rate of prepayment on the adjustable rate loans
will be expected to decrease.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of payment to the
investor of each dollar distributed in reduction of principal of the security,
assuming no losses. The weighted average life of the notes will be influenced
by, among other things, the rate at which principal of the related loans is
paid, which may be in the form of scheduled amortization, prepayments or
liquidations. Because the amortization schedule of each Class A-V loan will be
recalculated semi-annually after the initial adjustment date for the
adjustable rate loan, any partial prepayments of the loan will not reduce the
term to maturity of the adjustable rate loan. In addition, an increase in the
mortgage rate on a adjustable rate loan will result in a larger monthly
payment and in a larger percentage of the monthly payment being allocated to
interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the mortgage rate on the adjustable rate loan will
result in a lower monthly payment and in a larger percentage of each monthly
payment being allocated to principal and a smaller percentage being allocated
to interest.
Class A-F Notes
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement with respect
to the Class A-F Notes, the Conditional Prepayment Rate model, assumes that
the outstanding principal balance of a pool of loans prepays each month at a
specified annual rate or Conditional Prepayment Rate. In generating monthly
cash flows, this annual rate is converted to an equivalent monthly rate. With
respect to the fixed rate loans, the prepayment model assumes a Conditional
Prepayment Rate of 2% in the first month of the life of the fixed rate loans
and an additional 2% per annum in each month thereafter until the tenth month;
beginning in the tenth month and in each month thereafter, the Prepayment
Assumption model assumes a Conditional Prepayment Rate of 20%. The levels of
Conditional Prepayment Rate used above in defining the Prepayment Assumption
represent 100% of the Prepayment Assumption. To assume a Conditional
Prepayment Rate percentage in either prepayment model is to assume that the
stated percentage of the outstanding principal balance of the pool would be
prepaid over the course of a year. No representation is made that the loans
will prepay at the percentages of Conditional Prepayment Rate specified in
either prepayment model.
The table set forth below has been prepared on the basis of assumptions
regarding the weighted average characteristics of the fixed rate loans that
are expected to be included in the related trust estate as described under
"Description of the Home Equity Loan Pool" in this prospectus supplement and
the performance of the fixed rate loans. The table assumes, among other
things, that:
o the fixed rate loans have the following characteristics:
Fixed Rate Loans
<TABLE>
<CAPTION>
Original Remaining Original
Term to Term to Amortization Mortgage
Principal Maturity Maturity Term Interest Amortization
Balance (in months) (in months) (in months) Rate Method
------- ----------- ----------- ----------- ------ ------
<S> <C>
Initial Loans
%
%
%
%
Subsequent Loans
%
%
%
%
</TABLE>
o payments on the Class A-F Notes are based upon a 360-day year
consisting of twelve 30-day months and are received, in cash, on the
25th day of each month, commencing in ___________;
o there are no delinquencies or losses on the loans, and principal
payments on the loans are timely received together with prepayments,
if any, at the respective constant percentages of Conditional
Prepayment Rate or Prepayment Assumption set forth in the following
table;
o there are no repurchases of the loans;
o the scheduled monthly payment for the fixed rate loan is calculated
based on its principal balance, mortgage rate and remaining term to
maturity so that the Class A-F loan will amortize in amounts
sufficient to repay the remaining principal balance of the Class A-F
loan by its remaining term to maturity;
o payments on the fixed rate loans earn no reinvestment return;
o the note insurer premium is the rate set forth in the related
insurance agreement, the indenture trustee fee rate is _______% per
annum and the servicing fee rate is _____% per annum;
o there are additional ongoing trust estate expenses of approximately
$_________ per month payable out of the related trust estate;
o the fixed rate loans experience no prepayment penalties;
o there are no investment earnings on amounts in any related
collection account, including the related payment account, and no
other miscellaneous servicing fees are passed through to the Class
A-F Noteholders;
o the subsequent fixed rate loans are purchased by __________, ____
and are assumed to have their first scheduled monthly payment due in
_________; and
o the notes will be purchased on _________ , ____.
The actual characteristics and performance of the fixed rate loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense
of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the fixed rate loans will
prepay at a constant level of Conditional Prepayment Rate until maturity or
that all of the fixed rate loans will prepay at the same level of Conditional
Prepayment Rate or Prepayment Assumption. Moreover, the diverse remaining
terms to stated maturity of the fixed rate loans could produce slower or
faster principal payments than indicated in the table at the various constant
percentages of Conditional Prepayment Rate specified, even if the weighted
average remaining term to stated maturity of the fixed rate loans is as
assumed. Any difference between the assumptions and the actual characteristics
and performance of the fixed rate loans, or actual prepayment experience, will
affect the percentages of initial note principal balance outstanding over time
and the weighted average life of the Class A-F Notes. Subject to the previous
discussion and assumptions, the following table indicates the weighted average
life of the notes, and sets forth the percentages of the Initial Class A-F
Note principal balance that would be outstanding after each of the dates shown
at various percentages of Conditional Prepayment Rate. With respect to the
information set forth in the table below, percentages are rounded to the
nearest whole percentage. In addition, the fixed rate loans are determined as
a percentage of the Prepayment Assumption. The weighted average life of the
Class A-F Note assumes the seller exercises its option to redeem the Class A-F
Notes when the aggregate principal balance of the fixed rate loans remaining
is less than or equal to [10]% of the Class A-F original pool balance, under
"Description of the Notes -- Optional Redemption" in this prospectus
supplement, and that the Class A-F Notes remain outstanding to their maturity
date. The weighted average life of a Class A-F Note is determined by:
o multiplying the amount of each distribution of principal on a note
by the number of years from the date of issuance of the Class A-F
Note to the related payment date,
o adding the results, and
o dividing the sum by the Initial Class A-F Note principal balance of
the Class A-F Note.
<TABLE>
<CAPTION>
Percent of Initial Class A-F Note Principal Balance Outstanding
at the Specified Percentages of Conditional Prepayment Rate or the Prepayment Assumption
Scenario
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans................................ 0% 25% 75% 100% 125% 175% 200%
Payment Date
------------
Initial Percentage.............................. 100% 100% 100% 100% 100% 100% 100%
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
_____ 25, ____..................................
Weighted Average Life in Years..................
Weighted Average Life in Years..................
</TABLE>
This table has been prepared based on the assumptions described in the second
paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the fixed rate loans which differ from the
actual characteristics and performance of those fixed rate loans, and should
be read in conjunction with those fixed rate loans.
Class A-V Notes
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement with respect
to the Class A-V Notes, the Conditional Prepayment Rate model, assumes that
the outstanding principal balance of a pool of loans prepays each month at a
specified annual rate or Conditional Prepayment Rate. In generating monthly
cash flows, this annual rate is converted to an equivalent monthly rate. With
respect to the adjustable rate loans, the Prepayment Assumption model assumes
a constant Conditional Prepayment Rate of 25%. The levels of Conditional
Prepayment Rate used above in defining the Prepayment Assumption represent
100% of the Prepayment Assumption. To assume a Conditional Prepayment Rate
percentage in either prepayment model is to assume that the stated percentage
of the outstanding principal balance of the pool would be prepaid over the
course of a year. No representation is made that the loans will prepay at the
percentages of Conditional Prepayment Rate specified in either prepayment
model.
The table set forth below has been prepared on the basis of assumptions
regarding the weighted average characteristics of the adjustable rate loans
that are expected to be included in the related trust estate as described
under "Description of the Home Equity Loan Pool" in this prospectus supplement
and the performance of those adjustable rate loans. The table assumes, among
other things, that:
o the adjustable rate loans have the following characteristics:
Adjustable Rate Loans
<TABLE>
<CAPTION>
Original Remaining
Term to Term to Mortgage Months
Principal Maturity Maturity Interest Gross to Rate Life Life Periodic Initial
Balance (in months) (in months) Rate Margin Change Cap Floor Cap Cap
---------- ----------- ----------- ---- ------ ------ --- ----- --- ---
<S> <C>
Initial Loans
$
Subsequent Loans
$
</TABLE>
o one-month LIBOR remains constant at _______%;
o payments on the Class A-V Notes are based upon the actual number of
days in the month and a 360-day year and are received, in cash, on
the [25]th day of each month, commencing in ____________;
o there are no delinquencies or losses on the adjustable rate loans,
and principal payments on the adjustable rate loans are timely
received together with prepayments, if any, at the respective
constant percentages of Conditional Prepayment Rate or Prepayment
Assumption set forth in the following table;
o there are no repurchases of the adjustable rate loans;
o the scheduled monthly payment for the adjustable rate loan is
calculated based on its principal balance, mortgage rate and
remaining term to maturity that the adjustable rate loan will
amortize in amounts sufficient to repay the remaining principal
balance of the adjustable rate loan by its remaining term to
maturity;
o the index remains constant at _____% and the mortgage rate on each
adjustable rate loan is adjusted on the next adjustment date, and on
subsquent adjustment dates, as necessary, to equal the index plus
the applicable gross margin, subject to the maximum mortgage rate
and minimum mortgage rate listed below and the related Periodic Rate
Cap;
o with respect to each adjustable rate loan, the monthly payment on
the adjustable rate loan is adjusted on the due date immediately
following the next related adjustment date, and on subsquent
adjustment dates, as necessary, to equal a fully amortizing payment
as described above;
o payments on the adjustable rate loans earn no reinvestment return;
o the note insurer premium is the rate set forth in the related
insurance agreement, the indenture trustee fee rate is ____% per
annum and the servicing fee rate is ____% per annum;
o there are additional ongoing trust estate expenses of approximately
$________ per month payable out of the related trust estate;
o the adjustable rate loans experience no prepayment penalties;
o there are no investment earnings on amounts in any related
collection account, including the related payment account, and no
other miscellaneous servicing fees are passed through to the Class
A-V Noteholders;
o the subsequent adjustable rate loans are purchased by _____________
and are assumed to have their first scheduled monthly payment due in
____________; and
o the Class A-V Notes will be purchased on ___________, _____.
The actual characteristics and performance of the adjustable rate loans
will differ from the assumptions used in constructing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the adjustable rate loans
will prepay at a constant level of Conditional Prepayment Rate until maturity
or that all of the adjustable rate loans will prepay at the same level of
Conditional Prepayment Rate or Prepayment Assumption. Moreover, the diverse
remaining terms to stated maturity of the adjustable rate loans could produce
slower or faster principal payments than indicated in the table at the various
constant percentages of Conditional Prepayment Rate specified, even if the
weighted average remaining term to stated maturity of the adjustable rate
loans is as assumed. Any difference between the assumptions and the actual
characteristics and performance of the adjustable rate loans, or actual
prepayment experience, will affect the percentages of initial note principal
balance outstanding over time and the weighted average life of the Class A-V
Notes. Subject to the previous discussion and assumptions, the following table
indicates the weighted average life of the Class A-V Notes, and sets forth the
percentages of the Initial Class A-V Note principal balance that would be
outstanding after each of the dates shown at various percentages of
Conditional Prepayment Rate. With respect to the information set forth in the
table below, percentages are rounded to the nearest whole percentage. In
addition, the adjustable rate loans are determined on the Conditional
Prepayment Rate. The weighted average life of the Class A-V Note assumes the
seller exercises its option to redeem the Class A-V Notes when the aggregate
principal balance of the adjustable rate loans remaining is less than or equal
to [10]% of the Class A-V original pool balance, under "Description of the
Notes -- Optional Redemption" in this supplement, and that the Class A-V Notes
remain outstanding to their maturity date. The weighted average life of a
Class A-V Note is determined by:
o multiplying the amount of each distribution of principal on a Class
A-V Note by the number of years from the date of issuance of the
Class A-V Note to the related payment date,
o adding the results, and
o dividing the sum by the initial Class A-V Note principal balance of
the Class A-V Note.
<TABLE>
<CAPTION>
Percent of Initial Class A-V Note Principal Balance Outstanding
at the Specified Percentages of Conditional Prepayment Rate or the Prepayment Assumption
Scenario
Adjustable Rate Loans 0% 10% 20% 25% 30% 40% 50%
----- ---- ---- ---- ---- ---- ----
Payment Date
------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................ 100% 100% 100% 100% 100% 100% 100%
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
_____ 25, ____....................................
Weighted Average Life in Years....................
Weighted Average Life in Years....................
</TABLE>
This table has been prepared based on the assumptions described in the second
paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the adjustable rate loans which differ from
the actual characteristics and performance of those adjustable rate loans, and
should be read in conjunction with those adjustable rate loans.
DESCRIPTION OF THE SERVICING AGREEMENTS
The following summary describes terms of the servicing agreements, with
respect to the fixed rate loans and the adjustable rate loans, dated as of
_________ 1, ____, between the related issuer, the indenture trustee and the
master servicer. The summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of the
servicing agreements. Whenever particular sections or defined terms of the
servicing agreements are referred to, those sections or defined terms are
thereby incorporated in this prospectus supplement by reference.
The Master Servicer
___________________________, as master servicer, will act as master
servicer for the fixed rate loans and the adjustable rate loans pursuant to
the related servicing agreements. The master servicer will initially delegate
its servicing obligations to the sub-servicer.
Any servicing default, including performance test violations, under one
servicing agreement will constitute an event of default under the other
servicing agreement and as provided in the servicing agreements, the master
servicer may be then removed under the servicing agreement.
The sub-servicer will meet eligibility requirements, as set forth in each
servicing agreement, and each sub-servicing agreement shall require that the
fixed rate loans and the adjustable rate loans be serviced in a manner that is
consistent with the terms of the related servicing agreement. The master
servicer will not be released of its servicing obligations and duties with
respect to any subserviced loans, notwithstanding the delegation of duties to
the sub-servicer.
The Sub-Servicer
The information set forth in the following paragraphs has been provided
by the sub-servicer. None of the depositor, the master servicer, the seller,
the indenture trustee, the note insurer, the owner trustee or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
______________________, as sub-servicer, will act as sub-servicer for the
fixed rate loans and the adjustable rate loans pursuant to the related
sub-servicing agreement.
[sub-servicer information].
The notes will not represent an interest in or obligation of, nor are the
loans guaranteed by, the sub-servicer.
Delinquency and Loss Experience of the Sub-Servicer
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience
of the sub-servicer for its owned and managed servicing portfolio for the
quarter ended _________, ____, and for each of the four prior years ended
____________. The sub-servicer's "owned and managed servicing portfolio"
consists of the sub-servicer's servicing portfolio of fixed and variable rate
home equity loans excluding loans serviced by the sub-servicer that were not
originated or purchased and reunderwritten by the sub-servicer or any
affiliate of that sub-servicer. In addition to the owned and managed servicing
portfolio, the sub-servicer serviced as of _________, ____, approximately
________ mortgage loans with an aggregate principal balance as of that date of
approximately $_________, the loans were not originated by the sub-servicer or
any affiliate of that sub-servicer and, with respect to those in the Third
Party Servicing Portfolio, are being serviced for third parties on a contract
servicing basis. No loans in the Third-Party Servicing Portfolio are included
in the tables set forth below.
With respect to the information set forth in the table below, the period
of delinquency is based on the number of days payments are contractually past
due. The delinquency statistics for the period exclude loans in foreclosure.
"Foreclosure rate" is the number of home equity loans or the dollar amount of
home equity loans in foreclosure as a percentage of the total number of home
equity loans or the dollar amount of home equity loans, as the case may be, as
of the date indicated. In addition, REO properties, or "real-estate owned
properties," are properties relating to mortgage foreclosed or for which deeds
in lieu of foreclosure have been accepted, and held by the sub-servicer
pending disposition. REO properties percentages are calculated using the
number of loans, not the dollar amount.
Delinquency and Foreclosure Experience of
the Sub-Servicer's Owned and Managed Servicing Portfolio
<TABLE>
<CAPTION>
Year Ending ,
-------------
Three Months Ending
March 31, 1998 ____ ____ ____ ____
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
<S> <C>
Portfolio...........
Delinquency
Percentage
30-59 days.....
60-89 days.....
90 days or more.
Total...............
Foreclosure Rate....
REO Properties......
</TABLE>
With respect to the information set forth in the table below, "average
amount outstanding" during the period is the arithmetic average of the
principal balances of the home equity loans outstanding on the last business
day of each month during the period. "Gross losses" are amounts which have
been determined to be uncollectible relating to home equity loans for each
respective period. "Recoveries" are recoveries from liquidation proceeds and
deficiency judgments. "Net losses" represents "gross losses" minus
"recoveries". For the three months ended __________, _____, "net losses as a
percentage of average amount outstanding" was annualized by multiplying net
losses by four before calculating the percentage of "net losses as a
percentage of average amount outstanding." In addition, managed portfolio
statistics is restated to exclude interest advances on serviced portfolio to
be consistent with presentation of owned portfolio.
Loan Loss Experience of the Sub-Servicer's Owned and
Managed Servicing Portfolio of Loans
<TABLE>
<CAPTION>
Year Ending December 31,
Three Months
Ending
________,
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding $ $ $ $ $
Gross losses...... $ $ $ $ $
Recoveries......... $ $ $ $ $
Net losses......... $ $ $ $ $
Net losses as a percentage of average
amount outstanding % % % % %
</TABLE>
There can be no assurance that the delinquency experience of the loans
will correspond to the delinquency experience of the sub-servicer's servicing
portfolio set forth in the tables. The statistics shown above represent the
delinquency experience for the sub-servicer's servicing portfolio only for the
periods presented, whereas the aggregate delinquency experience on the loans
will depend on the results obtained over the life of the loans. The
sub-servicer's servicing portfolio includes loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the loans. It
should be noted that if the residential real estate market should experience
an overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the
sub-servicer. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
loans and, accordingly, the actual rates of delinquencies and foreclosures
with respect to the loans.
Servicer Loan Modifications
Each servicing agreement provides that the master servicer may approve a
change in the loan rate of a loan or extend a final maturity date on a loan if
the mortgagor requests the modification and the note insurer consents to the
modification; provided, however, if the note insurer does not object in
writing to the change or extension specified in the notice to the note insurer
within five (5) business days after its receipt of the notice, the master
servicer may effectuate the change or extension and the note insurer shall be
deemed to approve the action; provided further, however, in no event shall the
master servicer modify the loan if at the time the aggregate amount of all the
modified loans equals or exceeds [5]% of the related original pool balance.
Servicing and Other Compensation
The servicing fee for each loan is payable out of the interest payments
on that loan. The servicing fee rate in respect of each loan will be equal to
____% per annum of the outstanding principal balance of that loan. The master
servicer will pay the fees of any sub-servicer out of the amounts it receives
as the servicing fee. The master servicer or the sub-servicer will be entitled
to additional servicing compensation in the form of prepayment penalties, late
payment charges, modification fees, assumption fees and other miscellaneous
fees and those amounts will not be included in related available funds.
With respect to any payment date and determined separately for each
series of notes, Prepayment Interest Shortfalls in full during the preceding
calendar month will be offset by the sub-servicer or the master servicer, but
only to the extent the Prepayment Interest Shortfalls do not exceed an amount
equal to the servicing fee payable to the master servicer with respect to that
payment date and the related loan group. It should be noted that any payments
by the sub-servicer or the master servicer is "compensating interest."
Prepayment Interest Shortfalls resulting from partial prepayments will not be
offset by the servicing fee, any other servicing compensation or otherwise.
The Prepayment Interest Shortfall for any payment date is equal to the
aggregate shortfall, if any, in collections of interest resulting from
mortgagor prepayments in full or in part on the loans during the preceding
calendar month. Shortfalls will result because interest on prepayments in full
is paid only to the date of prepayment, and because no interest is paid on
prepayments in part, as those prepayments in part are applied to reduce the
outstanding principal balance of the related loans as of the due date in the
month of prepayment. No assurance can be given that compensating interest will
be sufficient to cover Prepayment Interest Shortfalls in full for any payment
date. The servicing fee or any other servicing compensation shall not be used
to offset shortfalls arising from application of the Relief Act.
THE INDENTURES
The following summary describes terms of the indentures related to the
Series ____-F issuer and the Series ____-V issuer. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the trust agreements and indentures. Whenever
particular defined terms of the indenture are referred to, those defined terms
are thereby incorporated in this prospectus supplement by reference. See "The
Agreements" in the prospectus.
Control by Note Insurer
Pursuant to each indenture, unless a note insurer default exists:
o the note insurer 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, subject to limitation, and
o the indenture trustee may take actions which would otherwise be at
its option or within its discretion, including the actions referred
to under " -- Events of Default" and " -- Rights Upon Event of
Default," only at the direction of the note insurer and
o the note insurer shall be deemed to be the holder of the related
notes for most purposes, other than with respect to payment on the
related notes, and will be entitled to exercise all rights of the
noteholders under the indenture, without the consent of those
noteholders, and the related noteholders may exercise those rights
only with the prior written consent of the note insurer.
A "note insurer default" means the existence and continuation of:
o a failure of the note insurer to make a payment under the note
insurance policy in accordance with its terms or
o bankruptcy or insolvency actions by or against the note insurer.
Events of Default
An "Event of Default" with respect to the notes is defined in each
indenture as follows:
o the failure of the related issuer to pay:
o the interest payment amount or the principal payment amount
with respect to a payment date on that payment date, provided
that for purposes of this clause, payment by the indenture
trustee from proceeds of the related note insurance policy
shall not be considered payment by the related issuer with
respect to the related notes, or
o any subordination increase amount or carry-forward amount, but
only to the extent funds are available to make that payment as
described under "Description of the Notes --Class A-F Notes
--Priority of Payment" or "--Class A-V Notes --Priority of
Payment," as applicable, provided that for purposes of this
clause, payment by the indenture trustee from proceeds of the
related note insurance policy shall not be considered payment
by the related issuer with respect to the related notes;
o the failure by the related issuer on the final scheduled payment
date to reduce the note principal balance to zero;
o a default in the observance or performance of any covenant or
agreement of the related issuer in the indenture, and the
continuation of any default for a period of thirty days after notice
to the related issuer by the indenture trustee or to the related
issuer and the indenture trustee by the note insurer, or if a note
insurer default exists, by the holders of at least 25% of the note
principal balance of the related notes;
o any representation or warranty made by the related issuer in the
indenture or in any certificate or other writing delivered pursuant
to the indenture having been incorrect in a material respect as of
the time made, and the circumstance in respect of which the
representation or warranty is incorrect not having been cured within
thirty days after notice is given to the related issuer by the
indenture trustee or to the related issuer and the indenture trustee
by the note insurer, or, if a note insurer default exists, by
noteholders representing at least 25% of the note principal balance
of the related notes; or
o events of bankruptcy, insolvency, receivership or reorganization of
the issuer.
Rights Upon Event of Default
In case an event of default should occur and be continuing with respect
to the Class A-F Notes or Class A-V Notes, the indenture trustee may, with the
prior written consent of the note insurer, and, upon the written direction of
the note insurer or, if a note insurer default exists, related noteholders
representing more than 50% of the note principal balance of the related notes
shall, declare the principal of the notes to be immediately due and payable.
The declaration may under some circumstances be rescinded by the note insurer,
or if a note insurer default exists, related noteholders representing more
than 50% of the note principal balance of the notes.
If, following an event of default, the notes have been declared to be due
and payable, the indenture trustee may, in its discretion, provided that the
note insurer or, if a note insurer default exists, the noteholders
representing more than 50% of the note principal balance of the notes, have
not directed the indenture trustee to sell the assets included in the related
trust estate, refrain from selling the assets and continue to apply all
amounts received on those assets to payments due on the notes in accordance
with their terms, notwithstanding the acceleration of the maturity of the
notes. In addition, upon an event of default the indenture trustee may, with
the consent of the note insurer, sell all or part of the assets included in
the related trust estate, in which event the collections on, or the proceeds
from the sale of, those assets will be applied as provided below; provided,
however, that any proceeds of a claim under the related note insurance policy
shall be used only to pay interest and principal on the notes:
o to the payment of the fees of the indenture trustee which have not
been previously paid;
o to the note insurer, any note insurer premium then due, provided no
note insurer default exists;
o to the noteholders, the amount of interest then due and unpaid on
the notes, but not including any carry-forward amount in the case of
the Class A-V Notes, without preference or priority of any kind;
o to the related noteholders, the amount of principal then due and
unpaid on those notes, without preference or priority of any kind;
o to the payment of the amounts due and owing to the note insurer, to
the extent not previously reimbursed;
o to the related noteholders, the amount of any carry-forward amount
in the case of the Class A-V Notes not previously paid; and
o to the owner trustee for distribution to the holders of the
certificates; provided, however, that if the related subordination
amount with respect to the other series of notes is less than the
related required subordination amount with respect to those other
series, those amounts shall be transferred to the related escrow
account.
Subject to the provisions of each indenture relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing,
the indenture trustee shall be under no obligation to exercise any of the
rights and powers under the indenture at the request or direction of any of
the related noteholders, unless the noteholders shall have offered to the
indenture trustee reasonable security or indemnity satisfactory to it against
the costs, expenses and liabilities which might be incurred by it in
compliance with that request or direction. Subject to the provisions for
indemnification and limitations contained in the indenture, the note insurer,
or if a note insurer default exists, noteholders representing more than 50% of
the note principal balance of the related notes shall have the right to direct
the time, method, and place of conducting any proceeding or any remedy
available to the indenture trustee or exercising any trust or power conferred
on the indenture trustee with respect to the notes; and the note insurer, or
if a note insurer default exists, noteholders representing more than 50% of
the note principal balance of the related notes may, in some cases, waive any
default with respect to the identure, 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 the
holder of each outstanding note affected thereby.
Limitation on Suits
No noteholder will have any right to institute any proceedings with
respect to the related indenture unless:
o the noteholder has previously given written notice to the indenture
trustee of a continuing event of default;
o noteholders representing not less than 25% of the note principal
balance of the related notes have made written request to the
indenture trustee to institute proceedings in respect of the event
of default in its own name as indenture trustee;
o the noteholders have offered to the indenture trustee reasonable
indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with that request;
o for 60 days after its receipt of the notice of, request and offer of
indemnity the indenture trustee has failed to institute any
proceedings;
o no direction inconsistent with the written request has been given to
the indenture trustee during the 60-day period by the noteholders
representing more than 50% of the note principal balance of the
related notes; and
o the noteholders have the consent of the note insurer, unless a note
insurer default exists.
The Indenture Trustee
The indenture trustee may resign at any time under either indenture, in
which event the related issuer will be obligated to appoint, with the consent
of the note insurer, a successor indenture trustee. The indenture trustee also
may be removed under either indenture at any time by the note insurer, or if a
note insurer default exists, then by noteholders representing more than 50% of
the note principal balance of the related notes. The related issuer shall,
with the consent of the note insurer, so long as no note insurer default
exists, remove the indenture trustee if the indenture trustee ceases to be
eligible to continue under the related indenture or if the indenture trustee
becomes incapable of acting, bankrupt, insolvent or if a receiver or public
officer takes charge of the indenture trustee or its property. Any resignation
or removal of the indenture trustee and appointment of a successor indenture
trustee will not become effective until acceptance of the appointment by the
successor indenture trustee.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the notes, Brown & Wood LLP, counsel to the
depositor, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the related trust
agreement, for federal income tax purposes:
o the notes issued under each of the Series ____-F issuer and the
Series ____-V issuer will be characterized as indebtedness and not
as representing an ownership interest in the related trust estate or
an equity interest in the related issuer or the depositor, and
o each of the Series ____-F issuer and the Series ____-V issuer will
not be:
o classified as an association taxable as a corporation for
federal income tax purposes,
o a taxable mortgage pool as defined in Section 7701(i) of the
Code, or
o a "publicly traded partnership" as defined in Treasury
Regulation Section 1.7704-1.
The notes will not be treated as having been issued with "original issue
discount," as defined in the prospectus. The prepayment assumption that will
be used in determining the rate of amortization of market discount and
premium, if any, for federal income tax purposes will be based on the
assumption that, subsequent to the date of any determination the adjustable
rate loans will prepay at a rate equal to 25% Conditional Prepayment Rate and
the fixed rate loans will prepay at a rate equal to 2% Conditional Prepayment
Rate in the first month of the life of the fixed rate loans and an additional
2% Conditional Prepayment Rate per annum in each month thereafter until the
tenth month; beginning in the tenth month and in each month thereafter, the
fixed rate loans will prepay at a rate equal to 20% Conditional Prepayment
Rate. No representation is made that the loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Consequences" in the
prospectus.
The notes 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. In addition, interest on the notes will not be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code. The notes will also not be treated as "qualified
mortgages" under Section 860G(a)(3)(C) of the Code.
You should see "Material Federal Income Tax Consequences" and "State Tax
Consequences" in the prospectus for a discussion of the application of federal
income and state and local tax laws to the issuer and purchasers of the notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement dated __________, ____ with respect to the Class A-F Notes and an
underwriting agreement with respect to the Class A-V Notes, each between the
depositor and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
underwriter, the depositor has agreed to sell the notes to the underwriter and
the underwriter has agreed to purchase the notes from the depositor. It is
expected that delivery of the notes will be made only in book-entry form
through the same day funds settlement system of DTC, on or about ___________,
_____, against payment for those notes in immediately available funds.
The notes will be purchased from the depositor by the underwriter and
will be offered by the underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the depositor from the sale of the Class A-F
Notes are expected to be approximately $___________, before deducting expenses
plus accrued interest from the cut off date and the proceeds to the depositor
from the sale of the Class A-V Notes are expected to be approximately
$___________, before deducting expenses. The underwriter may effect those
transactions by selling the notes to or through dealers, and those dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the underwriter. In connection with the sale of the notes,
the underwriter may be deemed to have received compensation from the depositor
in the form of underwriting compensation. The underwriter and any dealers that
participate with the underwriter in the distribution of the notes may be
deemed to be underwriters and any profit on the resale of the notes positioned
by them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The underwriting agreements provide that the depositor will indemnify the
underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against civil liabilities under the Securities Act of
1933, or contribute to payments required to be made in respect of those
underwriting agreements.
There can be no assurance that a secondary market for the notes will
develop or, if it does develop, that it will continue or provide the
noteholders with sufficient liquidity of investment. The primary source of
information available to investors concerning the notes will be the monthly
statements discussed in the prospectus under "Description of the Securities --
Reports to Securityholders," which will include information as to the
outstanding principal balance of the notes. There can be no assurance that any
additional information regarding the notes will be available through any other
source. In addition, the depositor is not aware of any source through which
price information about the notes will be generally available on an ongoing
basis. The limited nature of the information regarding the notes may adversely
affect the liquidity of the notes, even if a secondary market for the notes
becomes available.
LEGAL OPINIONS
Certain legal matters relating to the notes will be passed upon for the
seller and the master servicer by ________________, and for the depositor and
the underwriter by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition of the issuance of each series of the notes that each
series of notes be rated ["AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. and "Aaa" by Moody's Investors
Service, Inc.].
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by noteholders of payments required under the
indenture. S&P's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the notes, and the
extent to which the payment stream in the mortgage pool is adequate to make
payments required under the notes. S&P's rating on the notes does not,
however, constitute a statement regarding frequency of prepayments on the
mortgages. See "Certain Yield and Prepayment Considerations" in this
prospectus supplement. The ratings issued by S&P on payment of principal and
interest do not cover the payment of any Prepayment Interest Shortfalls,
Relief Act Shortfalls or any carry-forward amount.
The rating process of Moody's addresses the structural and legal aspects
associated with the notes, including the nature of the underlying loans. The
ratings assigned to the notes do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that noteholders might suffer a lower than anticipated yield. The
ratings do not address the likelihood that Class A-V Noteholders will be paid
the carry-forward amount.
The depositor has not requested a rating on the notes by any rating
agency other than S&P and Moody's. However, there can be no assurance as to
whether any other rating agency will rate the notes, or, if it does, what
rating would be assigned by any other rating agency. A rating on the notes by
another rating agency, if assigned at all, may be lower than the ratings
assigned to the notes by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the ratings Initially assigned to
the notes are subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the notes.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
The depositor makes no representations as to the proper characterization
of the notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
notes. Accordingly, all institutions whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, and the
Code impose requirements on employee benefit plans and other retirement plans
and arrangements, including, but not limited to, individual retirement
accounts and annuities, as well as on collective investment funds and separate
and general accounts of insurance companies in which the plans or arrangements
are invested and on persons who are fiduciaries with respect to those Plans.
ERISA and the Code prohibit transactions involving the assets of a Plan and
"disqualified persons" and "parties in interest" who have specified
relationships to the Plan. Accordingly, prior to making an investment in the
notes, investing Plans should determine whether the related issuer, the
depositor, the seller, the related trust estate, the underwriter, any other
underwriter, the owner trustee, the indenture trustee, the master servicer,
the sub-servicer, any other servicer, any administrator, any provider of
credit support, or any insurer or any of their affiliates is a party in
interest or disqualified person with respect to the Plan and, if so, whether
the transaction is subject to one or more statutory or administrative
exemptions. Additionally, an investment of the assets of a Plan in securities
may cause the assets included in the related trust fund to be deemed "plan
assets" of that Plan, and any person with specified relationships to the
related trust fund to be deemed a party in interest or disqualified person.
The U.S. Department of Labor has promulgated regulations at 29 C.F.R. Section
2510.3-101 defining the term "plan assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code. Under the plan
asset regulations, generally, when a Plan acquires an "equity interest" in
another entity, like the trust fund, the underlying assets of that entity may
be considered to be plan assets. The plan asset regulations provide that the
term "equity interest" means any interest in an entity other than an
instrument which is treated as indebtedness under applicable local law and
which has no "substantial equity features." Although not entirely free from
doubt, it is believed that, as of the date of this prospectus supplement, the
notes will be treated as debt obligations without significant equity features
for the purposes of the plan asset regulations. Because of the factual nature
of the above-described provisions of ERISA, the Code and the plan asset
regulations, Plans or persons investing plan assets should carefully consider
whether an investment might constitute or give rise to a prohibited
transaction under ERISA or the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the notes should consult with its counsel with
respect to the potential consequences under ERISA and the Code of the Plan's
acquisition and ownership of the notes.
EXPERTS
The consolidated balance sheets of ___________________________ and its
subsidiaries as of _____________, _____ and _____________________, _____ and
the related consolidated statements of income, changes in shareholder's
equity, and cash flows for each of the three years in the period ended
_______________, ____, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance
on the report of ____________________ independent accountants, given on the
authority of that firm as experts in accounting and auditing.
Glossary
Whenever used in this prospectus supplement, the following terms have the
following meanings:
"Balloon Loans" means fixed rate mortgage loans having original or
modified terms to maturity of 5 or 7 years in most cases, with level monthly
payments of principal and interest based on a 30 year amortization schedule.
"Buydown Loan" means a loan subject to a temporary buydown plan.
"Relief Act Shortfalls" means, for any distribution date, any shortfall
attributable to the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"Conditional Prepayment Rate" means a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
loans for the life of the loans.
"Liquidation Proceeds" means amounts collected by the subservicer in
connection with the liquidation of a mortgage loan, by foreclosure or
otherwise.
"Plan" means employee benefit plans and other retirement plans and
arrangements, including, but not limited to, individual retirement accounts
and annuities, as well as collective investment funds and separate general
accounts in which the plans or arrangements are invested, which have
requirements imposed upon them under ERISA and the Code.
"Prepayment Assumption" means, for federal income tax purposes any
security, the rate of prepayments assumed in pricing the security.
"Prepayment Interest Shortfall" means with respect to a mortgage loan
that is subject to a mortgage prepayment or liquidation, the amount that
equals the difference between a full month's interest due with respect to that
mortgage loan and the amount of interest paid or recovered with respect
hereto.
"Realized Loss" means as to any defaulted mortgage loan that is finally
liquidated, the amount of loss realized, if any, as described in the related
pooling and servicing agreement, will equal the portion of the stated
principal balance remaining after application of all amounts recovered, net of
amounts reimbursable to the master servicer for related advances and expenses,
towards interest and principal owing on the mortgage loan. With respect to a
mortgage loan the principal balance of which has been reduced in connection
with bankruptcy proceedings, the amount of the reduction will be treated as a
Realized Loss.
[LOGO]
$----------
Home Equity Loan
Asset-Backed Notes,
Series ____-F, Class A-F
$----------,
Home Equity Loan
Asset-Backed Notes,
Series ____-V, Class A-V
----------------
Seller and Master Servicer
Merrill Lynch
Mortgage Investors, Inc.
Depositor
Prospectus Supplement
Merrill Lynch & Co.
-------------, ----
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, that information or representation must not
be relied upon. This prospectus supplement and the prospectus do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the notes offered hereby, nor an offer of the notes in
any state or jurisdiction in which, or to any person to whom, that offer would
be unlawful. The delivery of this prospectus supplement or the prospectus at
any time does not imply that information in this prospectus supplement or in
the prospectus is correct as of any time subsequent to its date; however, if
any material change occurs while this prospectus supplement or the prospectus
is required by law to be delivered, this prospectus supplement or the
prospectus will be amended or supplemented accordingly.
Until 90 days after the date of this prospectus supplement, all dealers
selling the notes, whether or not participating in this distribution, will
deliver a prospectus supplement and the prospectus to which it relates. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus supplement and prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ISSUER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the SEC
is effective. This prospectus is not an offer to sell these secruities and it
is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
-------------------------------------------------------------------------------
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 in this prospectus and in the related
prospectus supplement.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
-------------------------------------------------------------------------------
The Securities
Merrill Lynch Mortgage Investors, Inc., as depositor, will sell the
securities, which may be in the form of asset backed certificates or asset
backed notes. Each issue of securities will have its own series designation
and will evidence either:
o ownership interests in assets in a trust fund or
o debt obligations secured by assets in a trust fund.
o Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments
on the assets in the related trust fund. In each case, the specified portion
may equal from 0% to 100%. A series may include one or more classes of
securities that are senior in right of payment to one or more other classes.
One or more classes of securities may be entitled to receive distributions of
principal, interest or both prior to one or more other classes, or before or
after specified events have occurred. The related prospectus supplement will
specify each of these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o one or more segregated pools of various types of mortgage loans
and/or closed-end and/or revolving home equity loans, or balances of
these loans, in each case secured by first and/or junior liens on
one- to five-family residential properties, or security interests in
shares issued by cooperative housing corporations, including mixed
residential and commercial structures;
o home improvement installment sales contracts or installment loan
agreements originated by a home improvement contractor and secured
by a mortgage on the related mortgaged property that is junior to
other liens on the mortgaged property; and
o mortgage pass-through certificates or mortgage-backed securities
evidencing interests in mortgage loans or secured thereby or direct
obligations of the United States, agencies of the United States or
agencies created thereby.
Each trust fund may be subject to early termination in some
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 ______, 2000.
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the following
documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that series.
If the prospectus supplement contains information about a particular
series that differs from the information contained in this
prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying prospectus supplement.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home improvement
contracts and/or securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home improvement contracts and/or securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or all
of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Merrill Lynch Mortgage Investors, Inc., 4 World
Financial Center Floor #10, New York NY 10080, 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.
RISK FACTORS
You should consider the following information carefully, since it identifies
significant sources of risk associated with an investment in the securities.
There is a risk that the securities will have limited liquidity.
At the time a series of securities is issued, there will not be a
secondary market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated
currently expects to make a secondary market in the offered securities, but it
is not required to. We cannot assure you that a secondary market for the
securities of any series will develop or, if it does develop, that it will
provide holders of those securities with liquidity of investment or will
continue while those securities remain outstanding.
There is a risk associated with limited assets and that those assets will not
be sufficient to pay the securities in full.
o The securities will not represent an interest in or obligation of
the depositor, the master servicer or any of their affiliates.
o The only obligations with respect to the securities or the assets
securing them will be the obligations, if any, of any warranting
party, as further described in this prospectus, pursuant to 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 advances in those event of delinquencies on the
mortgage loans, but only to the extent they deem those advances
recoverable, and, if described in the related prospectus supplement,
limited obligations of the master servicer in connection with an
agreement to purchase or act as remarketing agent with respect to a
convertible adjustable-rate mortgage loan, as more fully described
in this prospectus, upon conversion to a fixed rate or a different
index.
o Since representations and warranties with respect to the mortgage
assets may have been made and/or assigned in connection with
transfers of the mortgage assets before the closing date, the rights
of the trustee and the securityholders with respect to those
representations or warranties will be limited to their rights as an
assignee of those mortgage assets.
o Unless otherwise specified in the related prospectus supplement,
none of the depositor, the master servicer or any of their
affiliates will have any obligation with respect to representations
or warranties made by any other entity.
o Unless otherwise specified in the related prospectus supplement,
neither the securities nor the underlying assets will be guaranteed
or insured by any governmental agency or instrumentality, or by the
depositor, the master servicer, any sub-servicer or any of their
affiliates.
o Proceeds of the assets included in the related trust fund for each
series of securities, including the assets and any form of credit
enhancement, will be the sole source of payments on the securities,
and there will be no recourse to the depositor or any other entity
in the event that these proceeds are insufficient or otherwise
unavailable to make all payments provided for under the securities.
o Unless otherwise specified in the related prospectus supplement, a
series of securities will not have any claim against or security
interest in the trust funds for any other series. If the related
trust fund is insufficient to make payments on these securities, no
other assets will be available for payment of the deficiency.
Additionally, amounts remaining in funds or accounts, including the
collection account and any accounts maintained as credit support,
may be withdrawn under some conditions, as described in the related
prospectus supplement. In the event of a withdrawal, those amounts
will not be available for future payment of principal of or interest
on the securities.
o If provided in the prospectus supplement for a series of securities
consisting of one or more classes of subordinate securities, on any
distribution date in respect of which losses or shortfalls in
collections on the assets have been incurred, the amount of those
losses or shortfalls will be borne first by one or more classes of
the subordinate securities, and, thereafter, by the remaining
classes of securities in the priority and manner and subject to the
limitations specified in that prospectus supplement.
We refer you to "Description of the Trust Funds" for further information.
There is a risk that prepayments on the assets in a trust fund will adversely
affect the average life and yields of the related securities.
o Prepayments, including those caused by defaults, on the assets in
any trust fund generally will result in a faster rate of principal
payments on one or more classes of the related securities than if
payments on these assets were made as scheduled. Thus, the
prepayment experience on the assets may affect the average life of
each class of related securities. The rate of principal payments on
pools of mortgage loans varies between pools and from time to time
is influenced by a variety of economic, demographic, geographic,
social, tax, legal and other factors. We can't assure you as to the
rate of prepayment on the assets in any trust fund or that the rate
of payments will conform to any model we describe here or in any
prospectus supplement. If prevailing interest rates fall
significantly below the applicable mortgage interest rates,
principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by the mortgage loans
underlying or comprising the mortgage assets in any trust fund. As a
result, the actual maturity of any class of securities evidencing an
interest in a trust fund containing mortgage assets could occur
significantly earlier than expected.
o A series of securities may include one or more classes of securities
with priorities of payment and, as a result, yields on other classes
of securities, including classes of offered securities, of those
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 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 from amounts
attributable to interest accrued but not currently distributable on
one or more classes of accrual securities and, as a result, yields
on those securities will be sensitive to the provisions of those
accrual securities relating to the timing of distributions of
interest and if those accrual securities accrue interest at a
variable or adjustable pass-through rate or interest rate, changes
in the rate.
We refer you to "Yield Considerations" in the prospectus and, if applicable,
in the related prospectus supplement for further information.
There is a risk that defaults by obligors or declines in the values of
mortgaged properties will result in losses to investors.
o An investment in securities like 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 so 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 those mortgage loans
could be increased to an amount equal to or in excess of the value
of the underlying mortgaged properties, thereby increasing the
likelihood of default.
o To the extent that these losses are not covered by the applicable
credit support, if any, holders of securities of the series
evidencing interests in the related mortgage loans will bear all
risk of loss resulting from default by mortgagors and will have to
look primarily to the value of the mortgaged properties for recovery
of the outstanding principal and unpaid interest on the defaulted
mortgage loans. Certain of the types of mortgage loans may involve
additional uncertainties not present in traditional types of loans.
o For example, some 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 the payments increase and thus the likelihood of default will
increase.
o In addition, some 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 some series of securities may be
concentrated in these regions, and this concentration may present
risk considerations in addition to those generally present for
similar mortgage-backed securities without this concentration.
o Further, the rate of default on mortgage loans that are refinance or
limited documentation mortgage loans, and on mortgage loans with
high loan-to-value ratios, may be higher than for other types of
mortgage loans. Additionally, a decline in the value of the
mortgaged properties will increase the risk of loss particularly
with respect to any related junior mortgage loans.
We refer you to "--There is a risk that there will be reduced or no proceeds
available when junior lien mortgage loans are liquidated." in this prospectus
for further information.
o In addition, a prospectus supplement may specify that the
loan-to-value ratios for the mortgage loans in the related trust
will exceed 100%. The related mortgaged properties will thus be
highly unlikely to provide adequate security for these mortgage
loans. To the extent specified in that prospectus supplement, the
assessment of the credit history of a borrower and that borrower's
capacity to make payments on the related mortgage loan will have
been the primary considerations in underwriting the mortgage loans
included in that trust. The evaluation of the adequacy of the
loan-to-value ratio, if so specified in the related prospectus
supplement, will have been given less consideration, and in some
cases no consideration, in underwriting those mortgage loans.
There is a risk that there will be reduced or no proceeds available when
junior lien mortgage loans are liquidated.
o Mortgage loans may be secured by junior liens and the related first
and other senior liens, if any, may not be included in the mortgage
pool.
o The primary risk to holders of mortgage loans secured by junior
liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior lien to satisfy
fully both the senior lien and the mortgage loan. If a holder of the
senior lien forecloses on a mortgaged property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of
court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due
and owing to the holder of the senior lien. The claims of the holder
of the senior lien will be satisfied in full out of proceeds of the
liquidation of the mortgage loan, if these proceeds are sufficient,
before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
o If the master servicer were to foreclose on any mortgage loan, it
would do so subject to any related senior lien. In order for the
debt related to the mortgage loan to be paid in full at the 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 the 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 some
jurisdictions. In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject
to the senior mortgage.
We refer you to "Certain Legal Aspects of the Mortgage Loans -- Junior
Mortgages" in this prospectus for further information.
There is a risk that any applicable credit support will not cover all losses.
o The prospectus supplement for a series of certificates will describe
any credit support in the related trust fund, which may include
letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or combinations of these. Any credit
support will be subject to the conditions and limitations described
here and in the related prospectus supplement. Moreover, this credit
support may not cover all potential losses or risks; for example,
credit support may or may not cover fraud or negligence by a
mortgage loan or other parties.
o A series of securities may include one or more classes of
subordinate securities, which may include offered securities, if we
provide for that in the related prospectus supplement. Although
subordination is designed to reduce the risk to holders of senior
securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under some
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, a covered
trust is a form of credit support covers more than one series of
securities, and 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 the classes of securities
based on an assumed level of defaults, delinquencies, other losses
or other factors. We can't assure you, however, that the loss
experience on the related assets will not exceed these assumed
levels.
o Regardless of the form of credit enhancement, the amount of coverage
will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The
master servicer will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series
of securities, if the applicable rating agency indicates that the
then-current rating of those securities will not be adversely
affected.
o The rating agency rating a series of securities may lower their
rating following the initial issuance of the securities if the
obligations of any applicable credit support provider have been
downgraded, or as a result of losses on the related assets
substantially in excess of the levels contemplated by that rating
agency when they performed their initial rating analysis. None of
the depositor, the master servicer or any of their affiliates will
have any obligation to replace or supplement any credit support or
to take any other action to maintain any rating of any series of
securities.
We refer you to "--There are risks in relying on the limited nature of
ratings.", "Description of the Securities" and "Description of Credit Support"
for further information.
There is a risk to holders of subordinate securities that losses will have a
greater impact on them.
o The rights of subordinate securityholders to receive distributions
to which they would otherwise be entitled with respect to the assets
will be subordinate to the rights of the master servicer, to the
extent that the master servicer is paid its servicing fee, including
any unpaid servicing fees with respect to one or more prior due
periods, and is reimbursed for unreimbursed advances and
unreimbursed liquidation expenses, and the senior securityholders to
the extent described in the related prospectus supplement. As a
result, investors must be prepared to bear the risk that they may be
subject to delays in payment and may not recover their initial
investments in the subordinate securities.
We refer you to "Description of the Securities -- General" and "-- Allocation
of Losses and Shortfalls" in this prospectus for further information.
o The yields on the subordinate securities may be extremely sensitive
to the loss experience of the assets and the timing of any losses.
If the actual rate and amount of losses experienced by the assets
exceed the rate and amount of the 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 are balloon loans, which, as of the cut-off
date, may not be fully amortizing over their terms to maturity, and, thus,
will require substantial principal payments, or balloon payments, at their
stated maturity. Mortgage loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related mortgaged property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related mortgaged property, the financial
condition of the mortgagor, the value of the mortgaged property, tax laws,
prevailing general economic conditions and the availability of credit for
single family or multifamily real properties generally.
There is a possibility, if the related prospectus supplement provides for it,
that upon an optional termination of a trust fund, the proceeds may be less
than the outstanding principal amount of the securities plus accrued interest.
o If specified in the related prospectus supplement, a series of
securities may be subject to optional early termination through the
repurchase of the assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and
in the manner set forth in the prospectus supplement. 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 in the
prospectus supplement will solicit bids for the purchase of all
assets of the trust fund, or of a sufficient portion of the assets
to retire the class or classes or purchase the 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 in the
prospectus supplement.
o In either 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 securityholders could
incur a loss on their investment.
There are risks relating to federal income tax considerations regarding REMIC
residual certificates.
o Holders of REMIC residual certificates must report on their federal
income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of
their receipt of cash payments, as described in "Material Federal
Income Tax Consequences -- REMICs." Under some circumstances,
holders of offered securities that are REMIC residual certificates
may have taxable income and tax liabilities arising from the
investment during a taxable year in excess of the cash received
during the period. Individual holders of REMIC residual certificates
may be limited in their ability to deduct servicing fees and other
expenses of the REMIC.
o In addition, REMIC residual certificates are subject to 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 "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 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 some
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.
There is a Glossary on Page 139 where you will find definitions of the
capitalized terms used in this prospectus.
THE TRUST FUNDS
Assets
The primary assets of each trust fund will include:
o one- to five-family mortgage loans, or balances of these loans,
including without limitation, home equity loans and home improvement
contracts,
o pass-through certificates or other mortgage-backed securities, like
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 or
o government obligations, which are direct obligations of the United
States, agencies of the United States or agencies created thereby,
include:
o interest-bearing securities,
o non-interest-bearing securities,
o originally interest-bearing securities from which coupons
representing the right to payment of interest have been removed, or
o interest-bearing securities from which the right to payment of
principal has been removed.
As used in this prospectus, mortgage loans refers to both mortgage loans,
or balances of these loans, and mortgage loans underlying mortgage backed
securities. Mortgage loans that secure, or interests in which are evidenced
by, mortgage backed securities are sometimes referred to as underlying
mortgage loans. Mortgage loans, or balances of these loans, that are not
underlying mortgage loans are sometimes referred to as whole loans. Also, any
pass-through certificates or other asset-backed certificates in which a
mortgage backed security evidences an interest or which secure a mortgage
backed security are sometimes referred to in this prospectus as mortgage
backed securities or as underlying mortgage backed securities. Mortgage loans
and mortgage backed securities are sometimes referred to in this prospectus as
mortgage assets. The mortgage assets will not be guaranteed or insured by
Merrill Lynch Mortgage Investors, Inc., as 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 an asset seller, which is the
prior holder. The asset seller may be an affiliate of the depositor and, with
respect to assets, the prior holder may or may not be the originator of the
mortgage loan or the issuer of the mortgage backed securities.
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:
o a lien on a mortgaged property consisting of a one- to five-family
residential property or
o a security interest in shares issued by cooperatives, which are
private cooperative housing corporations. If so specified in the
related prospectus supplement, a mortgaged property may include some
commercial use.
Mortgaged properties will be located, unless otherwise specified in the
related prospectus supplement, in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any U.S. possession. To the
extent specified in the related prospectus supplement, the mortgage loans will
be secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on mortgaged property.
The mortgaged properties may include apartments owned by cooperatives and
leasehold interests in properties, the title to which is held by third party
lessors. Unless otherwise specified in the prospectus supplement, the term of
any 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 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, or mortgage notes, secured by mortgages, deeds
of trust or other security instruments 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:
o the appraised value determined in an appraisal obtained by the
originator at origination of the loan and
o the sales price for the 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 of the mortgaged
property 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 the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o 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,
o the type of property securing the mortgage loans,
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the mortgage loans,
o the earliest and latest origination date and maturity date of the
mortgage loans,
o the range of the loan-to-value ratios at origination of the mortgage
loans,
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans,
o the state or states in which most of the mortgaged properties are
located,
o information with respect to the prepayment provisions, if any, of
the mortgage loans,
o with respect to mortgage loans with adjustable mortgage rates, or
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 of that
mortgage rate and over the life of the ARM loan and
o 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 of those securities and will be filed as part of a current report on
Form 8-K with the Securities and Exchange Commission within fifteen days after
the initial issuance.
The related prospectus supplement may specify whether the mortgage loans
include closed-end and/or revolving home equity loans or balances of these
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 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 that 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 those balances. Those 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. The purchase of
additional mortgage loans may be made to the extent that they 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 the additional mortgage loans will be required to meet. The
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:
o have individual principal balances at origination of not less than
$25,000,
o have original terms to maturity of not more than 40 years and
o provide for payments of principal, interest or both, on due dates
that occur monthly, quarterly or semi-annually or at the 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 on the mortgage loan at an interest rate, or mortgage rate, that is
fixed over its term or that adjusts from time to time. In addition, each
mortgage loan may be converted from an adjustable to a fixed mortgage rate or
a different adjustable mortgage rate, or from a fixed to an adjustable
mortgage rate, from time to time pursuant to an election or as otherwise
specified on the related mortgage note, in each case as described in the
related prospectus supplement. Each mortgage loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the mortgage rate or to reflect the occurrence of 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.
Mortgage Backed Security
Any mortgage backed security will have been issued pursuant to a mortgage
backed security agreement, which includes a pooling and servicing agreement, a
participation agreement, a trust agreement, an indenture or similar agreement.
A mortgage backed security issuer, which is the seller, and/or a mortgage
backed security servicer of the underlying mortgage loans will have entered
into the mortgage backed security agreement with a trustee or a custodian
under the mortgage backed security agreement, if any, or with the original
purchaser of the interest in the underlying mortgage loans or mortgage backed
securities evidenced by the mortgage backed security.
Distributions of any principal or interest, as applicable, will be made
on mortgage backed securities on the dates specified in the related prospectus
supplement. The mortgage backed securities 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
mortgage backed securities by the mortgage backed security trustee or the
mortgage backed security servicer. The mortgage backed security issuer or the
mortgage backed security servicer or another person specified in the related
prospectus supplement may have the right or obligation to repurchase or
substitute assets underlying the mortgage back securities after a 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 mortgage backed
securities. The type, characteristics and amount of the credit support, if
any, will be a function of the characteristics of the underlying mortgage
loans or underlying mortgage backed securities evidenced by or securing the
mortgage backed securities and other factors. Generally, the type,
characteristics and amount of the credit support will have been established
for the mortgage backed securities on the basis of requirements of either any
rating agency that may have assigned a rating to the mortgage backed
securities or the initial purchasers of the mortgage backed securities.
The prospectus supplement for a series of securities evidencing interests
in mortgage assets that include mortgage backed securities will specify, to
the extent available to the depositor:
o the aggregate approximate initial and outstanding principal amount
or notional amount, as applicable, and type of the mortgage backed
securities to be included in the trust fund,
o the original and remaining term to stated maturity of the mortgage
backed securities, if applicable,
o whether those mortgage backed securities are entitled only to
interest payments, only to principal payments or to both,
o the pass-through or bond rate of the mortgage backed securities or
formula for determining the rates, if any,
o the applicable payment provisions for the mortgage backed
securities, including, but not limited to, any priorities, payment
schedules and subordination features,
o the mortgage backed securities issuer, mortgage backed securities
servicer and mortgage backed securities trustee, as applicable,
o characteristics of the credit support, if any, including
subordination, reserve funds, insurance policies, letters of credit
or guarantees relating to the related underlying mortgage loans, the
underlying mortgage backed securities or directly to the mortgage
backed securities,
o the terms on which the related underlying mortgage loans or
underlying mortgage backed securities for the mortgage backed
securities or the mortgage backed securities may, or are required
to, be purchased prior to their maturity,
o the terms on which mortgage loans or underlying mortgage backed
securities may be substituted for those originally underlying the
mortgage backed securities,
o the servicing fees payable under the mortgage backed securities
agreement,
o 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 mortgage backed securities described in
this paragraph,
o the characteristics of any cash flow agreements that are included as
part of the trust fund evidenced or secured by the mortgage backed
securities and
o whether the mortgage backed securities is in certificated form or
held through a depository like DTC or the participants' trust
company.
Each mortgage backed securities will be either:
o a security exempted from the registration requirements of the
Securities Act,
o a security that has been previously registered under the Securities
Act or
o a security that is eligible for sale under Rule 144(k) under the
Securities Act.
In the case of the first and second clause above, the security will be
acquired in a secondary market transaction not from the issuer of that
security or an affiliate of that 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,
o 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,
o the original and remaining terms to stated maturity of the
government securities,
o whether the government securities are entitled only to interest
payments, only to principal payments or to both,
o the interest rates of the government securities or the formula to
determine the interest rates, if any,
o the applicable payment provisions for the government securities and
o 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 availability, 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 conditions described in the
applicable agreement, 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 those series of securities having an
aggregate principal balance approximately equal to the amount on deposit in
the Pre-Funding Account for that series on the date of that issuance.
Accounts
Each trust fund will include one or more accounts established and
maintained on behalf of the securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
in this prospectus and in the prospectus supplement, deposit all payments and
collections received or advanced with respect to the assets and other assets
in the trust fund. The collection account or related account may be maintained
as an interest bearing or a non-interest bearing account, and funds held in
the account may be held as cash or invested in 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 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 the
series and/or by one or more other types of credit support, including a letter
of credit, insurance policy, guarantee, reserve fund or other types of
consistent credit support, or a combination of those types of 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 consistent agreements. The principal terms of any cash
flow agreement, including, without limitation, provisions relating to the
timing, manner and amount of payments in the agreement and provisions relating
to the termination of that agreement, will be described in the prospectus
supplement for the related series. In addition, the related prospectus
supplement will provide information with respect to the obligor under any 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 the purchase, and to pay for expenses incurred in
connection with the purchase of assets and sale of securities. The depositor
expects to sell the securities from time to time, but the timing and amount of
offerings of securities will depend on a number of factors, including the
volume of assets acquired by the depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any offered security will depend on the price paid by the
securityholder, the pass-through rate or interest rate of the security, the
receipt and timing of receipt of distributions on the security and the
weighted average life of the assets in the related trust fund, which may be
affected by prepayments, defaults, liquidations or repurchases. See "Risk
Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable pass-through rates or interest rates, which may or may not be based
upon the interest rates borne by the assets in the related trust fund. The
prospectus supplement with respect to any series of securities will specify
the pass-through rate or interest rate for each class of the 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 the security because, while interest may
accrue on each asset during a period, the distribution of the 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 that 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
those securities may be lower than the yield that would result if the interest
accrual period ended on the 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, those
mortgage loans are likely to be the subject of higher principal prepayments
than if prevailing rates remain at or above the rates borne by those mortgage
loans. In this regard, it should be noted that assets may consist of mortgage
loans with different mortgage rates and the stated pass-through or pay-through
interest rate of mortgage backed securities may be a number of percentage
points higher or lower than 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
prepayment premium 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 the 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 the
classes.
Unless otherwise specified in the related prospectus supplement, when a
full prepayment is made on a mortgage loan, the obligor is charged interest on
the principal amount of the mortgage loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related prospectus supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of securities entitled to payments of interest because interest on the
principal amount of any mortgage loan so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in the
related prospectus supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related mortgage loan as
of the due date in the month in which that 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 the
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
the 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
those 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 is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable
to that series set forth in the prospectus supplement.
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
the 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
that 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 those
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 those assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, like the Constant Prepayment Rate prepayment model or the
Standard Prepayment Assumption prepayment model. The Constant Prepayment Rate
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 the
loans. The Standard Prepayment Assumption 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 the Standard Prepayment
Assumption assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of the 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 the Standard Prepayment Assumption assumes a
constant prepayment rate of 6% per annum each month.
Neither the Constant Prepayment Rate nor the Standard Prepayment
Assumption 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 the series and the percentage of
the initial security balance of each class that would be outstanding on
specified distribution dates based on the assumptions stated in the 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 the Constant Prepayment Rate, the Standard Prepayment
Assumption, or any other standard specified in the prospectus supplement. The
tables and assumptions in the prospectus supplement 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
the Constant Prepayment Rate, the Standard Prepayment Assumption, 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 mortgage loans, including ARM loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to those mortgage loans 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 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, mortgage loans may
be subject to temporary buydown plans 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 on those mortgage loans. 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 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, the amount of interest accruing on the principal balance of
mortgage loans may exceed the amount of the minimum scheduled monthly payment
on those mortgage loans. It should be noted that initial mortgage rates are
generally lower than the sum of the applicable index at origination and the
related margin over the applicable index at which interest accrues. As a
result, a portion of the accrued interest on negatively amortizing mortgage
loans may be added to the principal balance of the mortgage loans and will
bear interest at the applicable mortgage rate. The addition of any deferred
interest to the principal balance of any related class or classes of
securities will lengthen the weighted average life of those securities and may
adversely affect yield to holders of those securities, depending upon the
price at which those securities were purchased. In addition, with respect to
ARM loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly
payment on an ARM loan would exceed the amount of scheduled principal and
accrued interest on the principal balance of that ARM loan, and since that
excess will be applied to reduce the principal balance of the related class or
classes of securities, the weighted average life of those securities will be
reduced and may adversely affect yield to holders of those securities,
depending upon the price at which those 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 on those mortgage loans and permitting a new loan secured by a
mortgage on the same property. In the event of refinancing, the new loan would
not be included in the related trust fund and, therefore, the 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. These 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 defaulted mortgage loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of the transfer of
underlying mortgaged property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant prospectus supplement. A number of the mortgage loans comprising or
underlying the assets may include due-on-sale clauses that allow the holder of
the mortgage loans to demand payment in full of the remaining principal
balance of the mortgage loans upon sale, transfer or conveyance of the related
mortgaged property. With respect to any whole loans, unless otherwise provided
in the related prospectus supplement, the master servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying mortgaged property and it
is entitled to do so under applicable law; provided, however, that the master
servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the agreements--Due-on-Sale
Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the depositor are located at 4 World Financial Center
Floor #10, New York NY 10080. 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 in this prospectus, will represent the entire beneficial ownership
interest in the trust fund created pursuant to the related agreement. If a
series of securities includes notes, the notes will represent indebtedness of
the related trust fund and will be issued and secured pursuant to an
indenture. Each series of securities will consist of one or more classes of
securities that may:
o provide for the accrual of interest on each security based on fixed,
variable or adjustable rates;
o be senior securities or subordinate securities to one or more other
classes of securities in respect of distributions on the securities;
o be Stripped Principal Securities, which are entitled to principal
distributions, with disproportionately low, nominal or no interest
distributions;
o be Stripped Interest Securities, which are entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions;
o be accrual securities, which provide for distributions of accrued
interest commencing only following the occurrence of events, like
the retirement of one or more other classes of securities of the
series;
o provide for payments of principal as described in the related
prospectus supplement, from all or only a portion of the assets in
the trust fund, to the extent of available funds, in each case as
described in the related prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of those series 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 balances of those mortgage loans, that
will be transferred to the Trust from time to time and/or, in the case of
revolving home equity loans or balances of those home equity loans, any
additional balances advanced to the borrowers under the revolving home equity
loans during specified 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. Any 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 those securities may be exchanged without the payment of any
service charge payable in connection with the registration of transfer or
exchange, but the depositor or the trustee or any agent of the depositor or
trustee 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, the definitive securities, or in book-entry form,
as provided in the related prospectus supplement. See "Risk
Factors--Book-Entry Registration" and "Description of the
Securities--Book-Entry Registration and Definitive Securities." Definitive
securities will be exchangeable for other securities of the same class and
series of a like aggregate security balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "--Limited Assets."
Distributions
Distributions on the securities of each series will be made by or on
behalf of the trustee on each distribution date as specified in the related
prospectus supplement from the available distribution amount for those series
on that 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 as of the
record date, which is the close of business on the last business day of the
month preceding the month in which the distribution date occurs. The amount of
each distribution will be determined as of the determination date, which is
the close of business on the date specified in the related prospectus
supplement. All distributions with respect to each class of securities on each
distribution date will be allocated pro rata among the outstanding securities
in each 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 to
receive payment, if the securityholder has so notified the trustee or other
person required to make the 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 in the related
prospectus supplement, or by check mailed to the address of the person
entitled to receive payment 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 the 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:
o the total amount of all cash on deposit in the related collection
account as of the corresponding determination date, exclusive of:
o 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,
o unless the related prospectus supplement provides otherwise,
all prepayments, together with related payments of the interest
on those prepayments and related prepayment premiums,
liquidation proceeds, insurance proceeds and other unscheduled
recoveries received subsequent to the related due period, and
o 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 the expenses of the related trust fund;
o 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;
o all advances made by a master servicer or any other entity as
specified in the related prospectus supplement with respect to the
distribution date;
o 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
o 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 the 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 each class or a component
of each class, 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, based on the accrued security interest for
that class and that distribution date, subject to the sufficiency of the
portion of the available distribution amount allocable to that class on that
distribution date. It should be noted that accrual securities are excluded
from the above distribution of interest, but they will be entitled to
distributions of accrued interest commencing only on the distribution date, or
under the circumstances, specified in the related prospectus supplement. In
addition, any class of Stripped Principal Securities are not entitled to
distributions of interest. Before the time interest is distributable on any
class of accrual securities, the amount of accrued security interest otherwise
distributable on that class will be added to the security balance of that
class on each distribution date. With respect to each class of securities and
each distribution date, other than classes of Stripped Interest Securities,
accrued security interest will be equal to interest accrued for a specified
period on the outstanding security balance of that class immediately prior to
the distribution date, at the applicable pass-through rate or interest rate,
reduced. 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 of those
Stripped Interest Securities immediately prior to each distribution date, at
the applicable pass-through rate or interest rate, reduced. 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 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 the accrual period on the mortgage loans comprising or underlying
the assets in the trust fund for that series. The particular manner in which
those 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 that class of a portion of any deferred interest on the
mortgage loans comprising or underlying the assets in the related trust fund
will result in a corresponding increase in the security balance of that 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 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 on that security
balance 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 of that security 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 to the distribution in accordance with the
provisions described in the related prospectus supplement until the security
balance of each 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 the extent
specified in the related prospectus supplement, the descriptions set forth
under "--Distributions of Interests on the Securities" and "--Distributions of
Principal of the Securities" above also relate to components of that class of
securities. In that case, reference in those sections to security balance and
pass-through rate or interest rate refer to the principal balance, if any, of
any component and the pass-through rate or interest rate, if any, on any
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 the 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 the 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 the 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 in the prospectus supplement
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 each
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 the
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 those 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 those 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 those advances will be reimbursable
not only from related proceeds but also from collections on other assets
otherwise distributable on one or more classes of those 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 to those advances, 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 proceeds on the mortgage loans, including amounts recovered or
received under any form of credit support, respecting which to those advances
were made, and, if so provided in the prospectus supplement, out of any
amounts otherwise distributable on one or more classes of subordinate
securities of those series; provided, however, that any related advance will
be reimbursable from any amounts in the collection account before any
distributions being made on the securities to the extent that the master
servicer, or related other entity, shall determine in good faith that the
nonrecoverable advance is not ultimately recoverable from related proceeds or,
if applicable, from collections on other assets otherwise distributable on
those 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 those funds in the collection account on any future
distribution date to the extent that funds in the collection account on the
distribution date are less than payments required to be made to
securityholders on the 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 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 in the prospectus supplement on its outstanding advances
and will be entitled to pay itself that 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 the prospectus
supplement.
The prospectus supplement for any series of securities evidencing an
interest in a trust fund that includes mortgage backed securities will
describe any corresponding advancing obligation of any person in connection
with the mortgage backed securities.
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 holder, to the depositor and to
those other parties as may be specified in the related agreement, a statement
setting forth, in each case to the extent applicable and available:
o the amount of the distribution to holders of securities of that
class applied to reduce the security balance of those securities;
o the amount of the distribution to holders of securities of that
class allocable to accrued security interest;
o the amount of the distribution allocable to prepayment premiums;
o 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 the other customary information as any master
servicer or the trustee deems necessary or desirable, or that a
securityholder reasonably requests, to enable securityholders to
prepare their tax returns;
o the aggregate amount of advances included in the distribution, and
the aggregate amount of unreimbursed advances at the close of
business on the distribution date;
o the aggregate principal balance of the assets at the close of
business on the distribution date;
o the number and aggregate principal balance of whole loans in respect
of which:
o one scheduled payment is delinquent,
o two scheduled payments are delinquent,
o three or more scheduled payments are delinquent and
o foreclosure proceedings have been commenced;
o with respect to any whole loan liquidated during the related due
period, the portion of the liquidation proceeds payable or
reimbursable to the master servicer, or any other entity, in respect
of each mortgage loan, and the amount of any loss to
securityholders;
o 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;
o 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:
o the book value,
o the principal balance of the related mortgage loan immediately
following the distribution date, which is calculated as if each
mortgage loan were still outstanding taking into account
limited modifications to the terms of that mortgage loan
specified in the agreement,
o the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect of that REO property and
o if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
o with respect to any REO property sold during the related due period:
o the aggregate amount of sale proceeds,
o the portion of the sales proceeds payable or reimbursable to
the master servicer in respect of that REO property or the
related mortgage loan and
o the amount of any loss to securityholders in respect of the
related mortgage loan;
o 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 that distribution
date, separately identifying any reduction in the 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 that balance;
o the aggregate amount of principal prepayments made during the
related due period;
o the amount deposited in the reserve fund, if any, on that
distribution date;
o the amount remaining in the reserve fund, if any, as of the close of
business on that distribution date;
o the aggregate unpaid accrued security interest, if any, on each
class of securities at the close of business on that distribution
date;
o in the case of securities with a variable pass-through rate or
interest rate, the pass-through rate or interest rate applicable to
that distribution date, and, if available, the immediately
succeeding distribution date, as calculated in accordance with the
method specified in the related prospectus supplement;
o 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 that distribution date, if available,
and the immediately succeeding distribution date as calculated in
accordance with the method specified in the related prospectus
supplement;
o as to any series which includes credit support, the amount of
coverage of each instrument of credit support included in the credit
support as of the close of business on that distribution date; and
o 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 the first four
subclauses above, the amounts shall be expressed as a dollar amount per
minimum denomination of securities or for any other specified related portion.
In addition, in the case of information furnished pursuant to the first,
second, twelfth, sixteenth and seventeenth clause above, those 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 any 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 mortgage backed securities.
The prospectus supplement for each series of offered securities will describe
any additional information to be included in reports to the holders of the
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 first four subclauses above, aggregated for the calendar year or the
related applicable portion of that calendar year during which that person was
a securityholder. The 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
that agreement following the earlier of:
o the final payment or other liquidation of the last asset subject to
that agreement or the disposition of all property acquired upon
foreclosure of any whole loan subject to that agreement and
o the purchase of all of the assets of the trust fund by the party
entitled to effect a termination, under the circumstances and in the
manner set forth in the related prospectus supplement.
In no event, however, will the trust created by the agreement continue beyond
the date specified in the related prospectus supplement. Written notice of
termination of the agreement will be given to each securityholder, and the
final distribution will be made only upon presentation and surrender of the
securities at the location to be specified in the notice of termination.
If so specified in the related prospectus supplement, a series of
securities may be subject to optional early termination through the repurchase
of the assets in the related trust fund by the party specified in the
prospectus supplement, under the circumstances and in the manner set forth in
the prospectus supplement. 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
in the prospectus supplement will solicit bids for the purchase of all assets
of the trust fund, or of a sufficient portion of those assets to retire that
class or classes or purchase that 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 in the prospectus supplement.
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 class will be represented by one or more single
securities registered in the name of a nominee for the depository, 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 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 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 other organizations. Indirect access to
the DTC system also is available to others like banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
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, these investors 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, on each date, DTC will forward those 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 the term is used in the agreement,
will be Cede &Co., 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 the 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 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 the 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.
Clearstream Banking is a duly licensed bank organized as a "societe
anonyme", limited company, under the laws of Luxembourg. Clearstream holds
securities for its participants, or participating organizations and
facilitates the clearance and settlement of securities transactions between
Clearstream participants through electronic book-entry changes in accounts of
Clearstream participants, eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream in any of 37
currencies, including United States dollars. Clearstream provides to As
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 licensed bank, Clearstream is regulated by
the Luxembourg Monetary Institute. Clearstream participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to Clearstream is also available to others,
like 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 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, under contract with Euroclear Clearance System, S.C., a Belgian
cooperative corporation. 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 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. Euroclear 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. 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 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. 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. Clearstream 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 Clearstream participant or Euroclear
participant only in accordance with its relevant rules and procedures and
subject to its depositary's ability to effect those actions on its behalf
through DTC.
Cede & Co., as nominee for DTC, will hold the Securities. Clearstream and
Euroclear will hold omnibus positions in the securities on behalf of the
Clearstream participants and the Euroclear participants, respectively, through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective depositaries, which in turn will hold the positions
in customers' securities accounts in the depositaries' names on the books of
DTC.
Transfers between DTC's participating organizations will occur in
accordance with DTC rules. Transfers between Clearstream 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 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, cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its
rules and procedures and within its established deadlines. 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. Credits or any transactions in securities
settled during the processing will be reported to the relevant Clearstream
participant or Euroclear participant on that 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.
Although DTC, Clearstream and Euroclear have agreed to the specified
procedures in order to facilitate transfers of securities among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform those procedures and those procedures may be discontinued
at any time.
In the event that any of DTC, Clearstream 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 of the
securities 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, as
definitive securities, rather than to DTC or its nominee only if:
o 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
o 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 those instructions the definitive securities to which they are entitled,
and thereafter the trustee will recognize the holders of those 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 among the depositor, the master servicer
and the trustee. The assets of the trust fund will be transferred to the trust
fund and thereafter serviced in accordance with the terms of the pooling and
servicing agreement. In the context of the conveyance and servicing of the
related assets, the pooling and servicing agreement may be referred to in this
prospectus as the "agreement." If the assets of the trust fund for a series
consists only of government securities or mortgage backed securities, those
assets will be conveyed to the trust fund and administered pursuant to a trust
agreement between the depositor and the trustee which may also be referred to
in this prospectus 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 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 in this prospectus as the agreement.
A series of notes issued by a trust fund will be issued pursuant to the
indenture between the related trust fund and an indenture trustee named in the
related prospectus supplement.
If the assets of a trust fund consist only of mortgage backed securities
or government securities, those assets will be conveyed to the trust fund and
administered in accordance with the terms of the trust agreement, which in
that context may be referred to in this prospectus 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 master servicer will be limited to the whole
loans in the corresponding mortgage loan group. In lieu of appointing a master
servicer, a servicer may be appointed pursuant to the agreement for any trust
fund. The 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 servicer shall be commensurate
with those of the master servicer described in this prospectus. 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 that 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 provisions that may appear in each
agreement. The prospectus supplement for a series of securities will describe
any provision of the agreement relating to those series that materially
differs from the description of those series 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 those provisions in the related
prospectus supplement. As used in this prospectus 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 that series addressed
to Merrill Lynch Mortgage Investors, Inc., 4 World Financial Center, North
Tower Floor #10, New York NY 10080. Attention: Michael McGovern.
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 those 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 the
assignment, deliver the securities to the depositor in exchange for the assets
and the other assets comprising the trust fund for that series. Each asset
will be identified in a schedule appearing as an exhibit to the related
agreement. Unless otherwise provided in the related prospectus supplement, the
schedule will include detailed information:
o 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 that 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
o in respect of each mortgage backed securities included in the
related trust fund, including without limitation, the mortgage
backed securities issuer, mortgage backed securities servicer and
mortgage backed securities trustee, the pass-through or bond rate or
formula for determining the 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 custodian, 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 of that original mortgage,
with evidence of recording indicated on the certified copy and an assignment
of the mortgage to the trustee in recordable form. 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 of that mortgage note has been lost or destroyed. With
respect to the 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 mortgage loan that is
subsequently in default if the enforcement of those defaulted mortgages 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 in the agreement to promptly cause each 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, the 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 the whole loan documents within
a specified period of days after receipt of those documents, and the trustee,
or a custodian, will hold the documents in trust for the benefit of the
certificateholders. Unless otherwise specified in the related prospectus
supplement, if any document is found to be missing or defective in any
material respect, the trustee, or the 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 the 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 that
notice, to repurchase the related whole loan from the trustee at the purchase
price or substitute for the 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 the 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 that asset, the asset seller may
agree to cover any losses suffered by the trust fund as a result of a 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 mortgage backed securities 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 the government security or mortgage backed securities, as
applicable, together with bond power or other instruments, certifications or
documents required to transfer fully that government security or mortgage
backed securities, as applicable, to the trustee for the benefit of the
certificateholders. With respect to each Government security or mortgage
backed securities 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 that government security or mortgage backed securities to
be registered directly or on the books of the 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 mortgage backed securities 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
warranting party, which is the person making the representations and
warranties, will, with respect to each whole loan, assign representations and
warranties, as of a specified date covering, by way of example, the following
types of matters:
o the accuracy of the information set forth for each whole loan on the
schedule of assets appearing as an exhibit to the related agreement;
o the existence of title insurance insuring the lien priority of the
whole loan;
o the authority of the warranting party to sell the whole loan;
o the payment status of the whole loan;
o 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
o the existence of hazard and extended perils insurance coverage on
the mortgaged property.
Any warranting party shall be an asset seller or an affiliate of that
asset seller or any 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 before the applicable cut-off date. A substantial
period of time may have elapsed between the date and the date of initial
issuance of the related series of certificates evidencing an interest in the
whole loan. Unless otherwise specified in the related prospectus supplement,
in the event of a breach of any representation or warranty, the warranting
party will be obligated to reimburse the trust fund for losses caused by any
breach or either cure the breach or repurchase or replace the affected whole
loan. 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 a representation and warranty only if the relevant
event that causes the breach occurs before the date. The party would have no
obligations if the relevant event that causes the breach occurs after the
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 that whole loan or the interests
in the prospectus supplement of the securityholders. If the warranting party
cannot cure the breach within a specified period following the date on which
the party was notified of the breach, then the warranting party will be
obligated to repurchase the whole loan from the trustee within a specified
period from the date on which the warranting party was notified of the breach,
at the purchase price. 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 of that whole loan, plus unpaid accrued interest 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
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 the series of
certificates, to cause the removal of the 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 the 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 those
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 mortgage backed securities, make or assign representations or
warranties, as of a specified date, with respect to the government securities
or mortgage backed securities, covering the accuracy of the information set
forth on the schedule of assets appearing as an exhibit to the related
agreement and covering the authority of the warranting party to sell the
assets. The related prospectus supplement will describe the remedies for a
breach of that prospectus supplement.
A master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related agreement. A breach of any 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 the 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 the 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 collection accounts for the collection of payments on the related
assets, which must be either
o an account or accounts the deposits in which are insured by the
Federal Deposit Insurance Corporation, to the limits established by
the FDIC, and, if so specified in the related prospectus supplement,
the uninsured deposits in which are otherwise secured so that the
trustee has a claim with respect to the funds in the collection
account or a perfected first priority security interest against any
collateral securing the 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
o 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 the series.
The collateral eligible to secure amounts in the collection account is limited
to permitted investments, which is United States government securities and
other investment grade obligations specified in the agreement. A collection
account may be maintained as an interest bearing or a non-interest bearing
account and the funds held in the collection account may be invested pending
each succeeding distribution date in short-term permitted investments. Unless
otherwise provided in the related prospectus supplement, any interest or other
income earned on funds in the collection account will be paid to a master
servicer or its designee as additional servicing compensation. The collection
account may be maintained with an institution that is an affiliate of the
master servicer, if applicable, provided that the 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:
o all payments on account of principal, including principal
prepayments, on the assets;
o all payments on account of interest on the assets, including any
default interest collected, in each case net of any portion retained
by a master servicer or a sub-servicer as its servicing compensation
and net of any retained interest;
o 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 the 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, and all other amounts
received and retained in connection with the liquidation of
defaulted mortgage loans in the trust fund, by foreclosure or
otherwise, 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;
o 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";
o any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
o any amounts paid under any cash flow agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements";
o all proceeds of any asset or, with respect to a whole loan, property
acquired or purchased by the depositor, with respect to a whole
loan, 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";
o any amounts paid by a master servicer to cover 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";
o to the extent that any 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;
o 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";
o 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
o 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:
o to make distributions to the securityholders on each distribution
date;
o to reimburse a master servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect
of Delinquencies," the reimbursement to be made out of amounts
received which were identified and applied by the master servicer as
late collections of interest, which are the 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 the whole
loans;
o to reimburse a master servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to whole loans
and properties acquired in respect of those unpaid servicing
expenses, the 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 the fees were
earned or the expenses were incurred or out of amounts drawn under
any form of credit support with respect to the whole loans and
properties;
o to reimburse a master servicer for any advances described in the
second clause above and any servicing expenses described in third
clause above which, in the master servicer's good faith judgment,
will not be recoverable from the amounts described in the second and
third clauses, respectively, the 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;
o if and to the extent described in the related prospectus supplement,
to pay a master servicer interest accrued on the advances described
in the second clause above and the servicing expenses described in
the third clause above while they remain outstanding and
unreimbursed;
o to reimburse a master servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case
may be, for expenses, costs and liabilities incurred thereby, as and
to the extent described under "Certain Matters Regarding a Master
Servicer and the Depositor";
o 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;
o to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred thereby, as and to the extent described under
"Certain Matters Regarding the Trustee";
o 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;
o to pay the person entitled to that withdrawal any amounts deposited
in the collection account that were identified and applied by the
master servicer as recoveries of retained interest;
o 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, the payments to be made out of income
received on the property;
o if one or more elections have been made to treat the trust fund or
designated portions of that trust fund 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";
o 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 connection with the
liquidation of the whole loan or property;
o to pay for the cost of various opinions of counsel obtained pursuant
to the related agreement for the benefit of securityholders;
o to pay for the costs of recording the related agreement if the
recordation materially and beneficially affects the interests of
securityholders, provided that the 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;
o to pay the person entitled to those withdrawals 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;
o to make any other withdrawals permitted by the related agreement;
and
o to clear and terminate the collection account at the termination of
the trust fund.
Other Collection Accounts
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 collection account will be withdrawn from the collection
account 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 collection account. The prospectus supplement will set
forth any restrictions with respect to any collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any 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 the collection procedures as it
would follow with respect to mortgage loans that are comparable to the whole
loans and held for its own account, provided the procedures are consistent
with:
o 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 in this prospectus or under
"Description of Credit Support,"
o applicable law and
o the general servicing standard specified in the related prospectus
supplement or, if no standard is so specified, its normal servicing
practices.
In addition, 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 in this prospectus 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 limited 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 on the whole loan. 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, the 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, as sub-servicers, but the master
servicer will remain obligated under the related agreement. Each sub-servicing
agreement between a master servicer and a sub-servicer 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 that capacity, the trustee or any successor master servicer may assume the
master servicer's rights and obligations under the 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 the fees. However, a
sub-servicer may be entitled to a retained interest in whole loans. Each
sub-servicer will be reimbursed by the master servicer for expenditures which
it makes, generally to the same extent the master servicer would be reimbursed
under an agreement. See "Retained Interest; Servicing Compensation and Payment
of Expenses."
Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related prospectus supplement, the
master servicer is required to monitor any whole loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if
cure is likely, inspect the mortgaged property and take any 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 the
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 classes of
securities a right of first refusal to purchase from the trust fund at a
predetermined purchase price any whole loan as to which a specified number of
scheduled payments are delinquent. Any 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 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 to it, if and when the master servicer determines,
consistent with the servicing standard, that a resulting 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 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 the
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 the defaulted mortgage loan. 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
that action is consistent with the servicing standard and a default on the
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 the
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. The master servicer
will be required to solicit bids for any mortgaged property so acquired in a
manner as will be reasonably likely to realize a fair price for the 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 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 at the mortgage rate, as applicable, plus the
aggregate amount of expenses incurred by the master servicer in connection
with the proceedings and which are reimbursable under the agreement, the trust
fund will realize a loss in the amount of the 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,
before the distribution of the 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:
o that the restoration will increase the proceeds to securityholders
on liquidation of the whole loan after reimbursement of the master
servicer for its expenses and
o that the 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 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 the proceeds, before the distribution of those
proceeds to certificateholders, 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. 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 the coverage as is required under the related
mortgage or, if any mortgage permits the holder of that mortgage to dictate to
the mortgagor the insurance coverage to be maintained on the related mortgaged
property, then the coverage as is consistent with the servicing standard.
Unless otherwise specified in the related prospectus supplement, the coverage
will be in general in an amount equal to the lesser of the principal balance
owing on the 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 policy will be deposited in the collection account.
However, 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 are not to be deposited in the collection account,
subject to the terms and conditions of the related mortgage and mortgage note.
The agreement will provide that the master servicer may satisfy its obligation
to cause each mortgagor to maintain a hazard insurance policy by the master
servicer's maintaining a blanket policy insuring against hazard losses on the
whole loans. If the 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 in the collection account but for the 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 are dictated by respective state laws, and most
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 other kinds of uninsured risks.
The hazard insurance policies covering the mortgaged properties securing
the whole loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
the clause generally provides that the insurer's liability in the event of
partial loss does not exceed the lesser of:
o the replacement cost of the improvements less physical depreciation
and
o the proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of the
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
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 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
the cost will not be taken into account for purposes of calculating the
distribution to be made to certificateholders. Costs may be recovered by the
master servicer or sub-servicer, as the case may be, from the collection
account, with interest, 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 those 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 of those forms of insurance coverage
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 the 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 of that retained interest. If so, the retained interest will be
established on a loan-by-loan basis and will be specified on an exhibit to the
related agreement. A "retained interest" in an asset represents a specified
portion of the interest payable. 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, the 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 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. Other expenses,
including expenses relating to defaults and liquidations on the whole loans
and, to the extent so provided in the related prospectus supplement, interest
on those expenses at the rate specified in the prospectus supplement 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 interest
shortfalls resulting from the voluntary prepayment of any whole loans in the
related trust fund during the period before their respective due dates in the
prospectus supplement.
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 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 the 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 or any 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 the
agreements or the 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 any other audit or attestation program
requires it to report. In rendering its statement the 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 the other audit or
attestation program used by the sub-servicer, rendered within one year of the
statement, of firms of independent public accountants with respect to the
related sub-servicer.
Each 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
the annual accountants' statement and the statements of officers will be
obtainable by securityholders without charge upon written request to the
master servicer at the address set forth in the related prospectus supplement.
Certain Matters Regarding a Master Servicer and the Depositor
The master servicer, if any, or a servicer for substantially all the
whole loans under each agreement will be named in the related prospectus
supplement. The entity serving as master servicer, or as the servicer, may be
an affiliate of the depositor and may have other normal business relationships
with the depositor or the depositor's affiliates. Reference in this prospectus
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 a
conflict being of a type and nature carried on by the master servicer at the
date of the agreement. No 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 person will be protected against any
breach of a representation, warranty or covenant made in the 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 under the
agreement or by reason of reckless disregard of obligations and duties under
the agreement.
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 the indemnification will not extend to any loss, liability or
expense:
o specifically imposed by the 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
loss, liability or expense shall be otherwise reimbursable pursuant
to the agreement;
o incurred in connection with any breach of a representation, warranty
or covenant made in the agreement;
o incurred by reason of misfeasance, bad faith or gross negligence in
the performance of obligations or duties under the agreement, or by
reason of reckless disregard of obligations or duties;
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if the 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 master servicer or the depositor may, however, in its
discretion undertake any action which it may deem necessary or desirable with
respect to the agreement and the rights and duties of the parties and the
interests of the securityholders under the agreement. In any event, the legal
expenses and costs of the action and any liability resulting that action will
be expenses, costs and liabilities of the securityholders, and the master
servicer or the depositor, as the case may be, will be entitled to be
reimbursed 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:
o 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;
o 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 any other
period specified in the related prospectus supplement, after written
notice of the 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;
o 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 any longer period specified in the related
prospectus supplement, after written notice of the 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
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by or on behalf
of the master servicer indicating its insolvency or inability to pay
its obligations.
Material variations to the 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 officers of the
trustee become aware of the occurrence of an event, transmit by mail to the
depositor and all securityholders of the applicable series notice of
occurrence, unless the 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 any other percentage specified in the related
prospectus supplement, of the voting rights, the trustee shall, terminate all
of the rights and obligations of the master servicer under the agreement and
in and to the mortgage loans, other than as a securityholder or as the owner
of any retained interest, whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
agreement, except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent mortgage loans, or if the related
prospectus supplement so specifies, then the trustee will not be obligated to
make 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 any 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 the appointment of at least
$15,000,000, or any other amount specified in the related prospectus
supplement, to act as successor to the master servicer under the agreement.
Pending appointment, the trustee is obligated to act in that capacity. The
trustee and any 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 any 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 any event of default; provided, however, that an event of
default involving a failure to distribute a required payment to
securityholders described under "events of default" may be waived only by all
of the securityholders. Upon any waiver of an event of default, the 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 to any event of default unless the holder
previously has given to the trustee written notice of default and unless the
holders of securities evidencing not less than 25%, or any other percentage
specified in the related prospectus supplement of the voting rights have made
written request upon the trustee to institute the proceeding in its own name
as trustee and have offered to the trustee reasonable indemnity, and the
trustee for sixty days, or any other number of days specified in the related
prospectus supplement, has neglected or refused to institute any 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 under any agreement or to institute, conduct or defend any litigation
under any agreement or in relation to an agreement at the request, order or
direction of any of the holders of securities covered by the agreement, unless
the securityholders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred.
Amendment
Each agreement may be amended by the parties to the agreement, without
the consent of any of the holders of securities covered by the agreement:
o to cure any ambiguity or correct any mistake,
o to correct, modify or supplement any provision in the agreement
which may be inconsistent with any other provision in the agreement
or with the related prospectus supplement,
o to make any other provisions with respect to matters or questions
arising under the agreement which are not materially inconsistent
with the provisions of that agreement, or
o to comply with any requirements imposed by the Code; provided that,
in the case of the immediately preceding clause, the amendment will
not, as evidenced by an opinion of counsel to the effect or a letter
from the applicable rating agency that the 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 any 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 amendment may:
o 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
that security or
o reduce the consent percentages described in this paragraph without
the consent of the holders of all securities covered by the
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
the 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 the 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:
o enforcing its rights and remedies and protecting the interests, of
the securityholders during the continuance of an event of default,
o defending or prosecuting any legal action in respect of the related
agreement or series of securities,
o 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 for the benefit of securityholders, or
o 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 any other percentage as is specified in the related
agreement with respect to any particular matter, of the voting
rights for the series; provided, however, that the 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 under the agreement,
or by reason of its reckless disregard of the obligations or duties,
or as may arise from a breach of any representation, warranty or
covenant of the trustee made in the agreement.
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 of that resignation to the depositor,
the master servicer, if any, and all securityholders. Upon receiving the
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 the 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 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 any other percentage specified in the related prospectus supplement,
of the voting rights for the 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:
o a default for thirty (30) days, or any other number of days
specified in the prospectus supplement, or more in the payment of
any principal of or interest on any note of the series;
o 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 any other number of days specified in the prospectus
supplement, after notice of that failure to perform is given in
accordance with the procedures described in the related prospectus
supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to that indenture or in connection with that
indenture with respect to or affecting the series having been
incorrect in a material respect as of the time made, and the breach
is not cured within sixty (60) days, or any other number of days
specified in the prospectus supplement, after notice is given in
accordance with the procedures described in the related prospectus
supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
depositor or the trust fund; or
o 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
the series may declare the principal amount, or, if the notes of that series
are accrual securities, the 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 the series to be due and payable immediately.
The declaration may, under some circumstances, be rescinded and annulled by
the holders of a majority in aggregate outstanding amount of the notes of the
series.
If, following an event of default with respect to any series of notes,
the notes of that series have been declared to be due and payable, the
indenture trustee may, in its discretion, notwithstanding acceleration, elect
to maintain possession of the collateral securing the notes of that series and
to continue to apply distributions on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of that series
as they would have become due if there had not been the 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 the
series for thirty (30) days or more, unless:
o the holders of 100%, or any other percentage specified in the
related prospectus supplement, of the then aggregate outstanding
amount of the notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
the payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3%, or any other percentage specified
in the related prospectus supplement, of the then aggregate
outstanding amount of the notes of the 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 any 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 liquidation for unpaid fees and expenses. As a result, upon
the occurrence of 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 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 notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal
amount less the amount of the 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 the series, unless the
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 the request or direction. Subject to the provisions for
indemnification and limitations contained in the indenture, the holders of a
majority of the then aggregate outstanding amount of the notes of the 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
the series, and the holders of a majority of the then aggregate outstanding
amount of the notes of the series may, in some cases, waive any default,
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
the affected series.
Discharge of the Indenture
The indenture will be discharged with respect to a series of notes,
except with respect to continuing rights specified in the indenture, upon the
delivery to the indenture trustee for cancellation of all the notes of the
series or, with limitations, upon deposit with the indenture trustee of funds
sufficient for the payment in full of all of the notes of the series.
In addition to the discharge with 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 the series, except for obligations relating to temporary notes and
exchange of notes, to register the transfer of or exchange notes of the
series, to replace stolen, lost or mutilated notes of the 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 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 the series on the maturity date for the notes and any
installment of interest on the notes in accordance with the terms of the
indenture and the notes of the series. In the event of any defeasance and
discharge of notes of that series, holders of notes of that series would be
able to look only to the 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 indebtedness owing by the trust to the
applicable indenture trustee in its individual capacity, the property and
funds physically held by the indenture trustee and any action taken by it that
materially affects the 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 the series. The depositor may also remove any indenture
trustee if that indenture trustee ceases to be eligible to continue under the
related indenture or if the indenture trustee becomes insolvent. In these
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 that 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 of those series 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 a combination of those types of credit
support. 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 in the prospectus supplement.
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 on those securities. 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. In addition, if a form of credit support covers more than one
series of securities, creating a covered trust, holders of securities
evidencing interests in any covered trusts will be subject to the risk that
the credit support will be exhausted by the claims of other covered trusts
before the covered trust receiving any of its intended share of the 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:
o the nature and amount of coverage under the credit support,
o any conditions to payment under the credit support not otherwise
described in the prospectus supplement,
o the conditions, if any, under which the amount of coverage under the
credit support may be reduced and under which the credit support may
be terminated or replaced and
o the material provisions relating to the credit support.
Additionally, the related prospectus supplement will set forth
information with respect to the obligor under any instrument of
credit support, including
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business
and
o 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 the
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, 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 the 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 the 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 the securities or classes will be
covered by one or more letters of credit, issued by a bank or financial
institution specified in the prospectus supplement. Under a letter of credit,
the L/C Bank will be obligated to honor draws under the letter of credit in an
aggregate fixed dollar amount, net of unreimbursed payments thereunder,
generally equal to a percentage specified in the related prospectus supplement
of the aggregate principal balance of the assets on the related cut-off date
or of the initial aggregate security balance of one or more classes of
securities. If so specified in the related prospectus supplement, the letter
of credit may permit draws in the event of only some 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 under the letter
of credit 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 the securities or classes will be
covered by insurance policies and/or surety bonds provided by one or more
insurance companies or sureties. The 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 the securities or classes will be
covered by one or more reserve funds in which cash, a letter of credit,
permitted investments, a demand note or a combination of those reserve funds
will be deposited, in the amounts so specified in the prospectus supplement.
The reserve funds for a series may also be funded over time by depositing in
the reserve funds 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, 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 some types of losses and shortfalls. Following each
distribution date amounts in a reserve fund in excess of any amount required
to be maintained in the reserve fund 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 the investments will be credited to
the related reserve fund for the series, and any loss resulting from the
investments will be charged to the reserve fund. However, the 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 the
reserve fund, the balance required to be maintained in the reserve fund, the
manner in which the required balance will decrease over time, the manner of
funding the 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 Mortgage Backed Securities
If so provided in the prospectus supplement for a series of securities,
the mortgage backed securities in the related trust fund and/or the mortgage
loans underlying the mortgage backed securities may be covered by one or more
of the types of credit support described in this prospectus. The related
prospectus supplement will specify as to each form of credit support the
information indicated above, to the extent the information is material and
available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of state law legal aspects of loans secured by single-family or multi-family
residential properties. Because the 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 collectively referred to as "mortgages." Any of the 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 the 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, which is the borrower and
usually the owner of the subject property, and a mortgagee, which is the
lender. In contrast, a deed of trust is a three-party instrument, among a
trustor, which is the equivalent of a mortgagor, a trustee to whom the
mortgaged property is conveyed, and a beneficiary, which is 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 the 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, 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, an instrument may encumber other interests in real property, like a
tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by the lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating the interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
the 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 representations and warranties in
the agreement with respect to any mortgage loans that are secured by an
interest in a leasehold estate. The representations and warranties, if
applicable, will be set forth in the prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement relating to a series of offered
securities, the mortgage loans may also consist of cooperative apartment loans
secured by security interests in shares issued by a cooperative housing
corporation 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. 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 in the cooperative. 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:
o 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
o 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 the
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 the tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue
for judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "Foreclosure--Cooperatives" below.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in limited circumstances, including 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. 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. Equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on equitable 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 the
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers.
The mortgagor or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying
the entire actual amount in arrears, without acceleration, plus the expenses
incurred in enforcing the obligation. In other states, the mortgagor or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale.
Generally, the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods are governed by state
law and vary among the states. Foreclosure of a deed to secure debt is also
generally accomplished by a non-judicial sale similar to that required by a
deed of trust, except that the lender or its agent, rather than a trustee, is
typically empowered to perform the sale in accordance with the terms of the
deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of the 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 the 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 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 the 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 costs of
the action. Those having an equity of redemption must generally be made
parties and joined in the foreclosure proceeding in order for their equity of
redemption to be cut off and terminated.
The equity of redemption is a common-law, non-statutory, right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be authorized if the former mortgagor
pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser from a foreclosure sale or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to
maintain the property and pay the expenses of ownership until the redemption
period has expired. In some states, a post-sale statutory right of redemption
may exist following a judicial foreclosure, but not following a trustee's sale
under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related prospectus supplement, with respect to a
series of securities for which an election is made to qualify the trust fund
or part of that trust fund 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 the property or independent
counsel renders an opinion to the effect that holding the property for the
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 the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the cooperative to terminate the 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 the 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 the 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.
Recognition agreements also provide that in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperatives to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction
plan, some states require that a purchaser at a foreclosure sale take the
property subject to rent control and rent stabilization laws which apply to
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" in this prospectus.
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 any sums, those 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 other states, the lender has the option of bringing a personal
action against the mortgagor on the debt without first exhausting the
security; however, in some of these states, the lender, following judgment on
the 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 the election, is that lenders will usually proceed against
the security first rather than bringing a personal action against the
mortgagor. Finally, other statutory provisions limit any deficiency judgment
against the former mortgagor following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a lender
from obtaining a large deficiency judgment against the former mortgagor as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon
collateral or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative
plan to cure a monetary default in respect of a mortgage loan on a debtor's
residence by paying arrearages within a reasonable time period and reinstating
the original mortgage loan payment schedule even though the lender accelerated
the mortgage loan and final judgment of foreclosure had been entered in state
court, provided no sale of the residence had yet occurred, prior to the filing
of the debtor's petition. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by paying arrearages over
a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
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 some 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. A lien
will generally have priority over all subsequent liens on the property and, in
some 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 the costs could be substantial, it
is unclear whether they would be imposed on a lender, like 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 those
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 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 limited exceptions. Due-on-sale clauses contained in mortgage loans
originated by federal savings and loan associations of federal savings banks
are fully enforceable pursuant to regulations of the United States Federal
Home Loan Bank Board, as succeeded by the Office of Thrift Supervision, which
preempt state law restrictions on the enforcement of the 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, 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, provides that state usury limitations
shall not apply to some types of residential first mortgage loans originated
by 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 before origination of the
mortgage loans, any limitation under the state's usury law would not apply to
the 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 the state action will be eligible
for inclusion in a trust fund unless:
o the mortgage loan provides for the interest rate, discount points
and charges as are permitted in the state or
o the mortgage loan provides that the terms of that mortgage loan
shall be construed in accordance with the laws of another state
under which the interest rate, discount points and charges would not
be usurious and the mortgagor's counsel has rendered an opinion that
the 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.
The 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 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 the provisions. Certain states have
taken the action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a mortgagor who enters military service after the origination of
the 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 the 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 some 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
the 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 limited
circumstances, during an additional three month period thereafter. Thus, in
the event that 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 statute can be seized by the government if the property
was used in, or purchased with the proceeds of, those crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984, 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:
o its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or
o 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, laws, regulations, including the
REMIC regulations promulgated by the Treasury Department, 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,
including, but not limited to, 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 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, some trusts in existence on
August 20, 1996 and treated as United States persons prior to the 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 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.
Single Class of Grantor Trust Certificates
Characterization. The trust fund may be created with one class of grantor
trust certificates. In this case, each grantor trust certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the trust fund represented by the grantor trust
certificates and will be considered the equitable owner of a pro rata
undivided interest in each of the mortgage assets in the pool. Any amounts
received by a grantor trust certificateholder in lieu of amounts due with
respect to any mortgage asset because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character
as the payments they replace.
Each grantor trust certificateholder will be required to report on its
federal income tax return in accordance with the 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, or "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 the 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 the 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:
o 3% of the excess of adjusted gross income over the applicable amount
and
o 80% of the amount of itemized deductions otherwise allowable for the
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
the 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:
o 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 the Code section;
o 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 the Code section; and
o 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, those assets
would be subject to the stripped bond provisions of the Code. Under these
rules, these government securities are treated as having OID based on the
purchase price and the stated redemption price at maturity of each security.
Accordingly, 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 that year.
Buydown Loans. The assets constituting 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 the 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
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 the holder's undivided interest in each mortgage asset based
on each mortgage asset's relative fair market value, so that the 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 the premium under a constant interest
method, provided that the underlying mortgage loans with respect to the
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 the 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 the grantor trust certificate. The
basis for the 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 the
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 the 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 the mortgage
loan, or underlying mortgage loan. If a reasonable Prepayment Assumption is
used to amortize the premium, it appears that 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 amortizable bond premium regulations
dealing with amortizable bond premiums. These regulations specifically do not
apply to prepayable debt instruments subject to Code Section 1272(a)(6) like
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 in this prospectus, the special rules
of the Code relating to OID, currently Code Sections 1271 through 1273 and
1275, and Treasury regulations issued on January 27, 1994, as amended on June
11, 1996, 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. OID could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. OID generally must
be reported as ordinary gross income as it accrues under a constant interest
method. See "--Multiple Classes of Grantor Trust Certificates--Accrual of
Original Issue Discount" below.
Market Discount. A grantor trust certificateholder that acquires an
undivided interest in mortgage assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest
in a mortgage asset is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess of
the portion of the principal amount of the mortgage asset allocable to the
holder's undivided interest over the holder's tax basis in the 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
the 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:
o the total remaining market discount and
o 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:
o the total remaining market discount and
o 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, like grantor trust certificates, that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing the 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 the grantor trust certificate purchased with market
discount. For these purposes, the de minimis rule referred above applies. Any
deferred interest expense would not exceed the market discount that accrues
during the taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by the 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 an election were to be made with respect to a grantor trust
certificate with market discount, the certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that the
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 the certificateholder owns or acquires. See "--Regular
Certificates--Premium" in this prospectus. The election to accrue interest,
discount and premium on a constant yield method with respect to a certificate
is irrevocable.
Multiple Classes of Grantor Trust Certificates
o 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 the stripped interest
is created. If a trust fund is created with two classes of grantor trust
certificates, the stripped bond certificates may represent the right to
principal and interest, or principal only, on all or a portion of the mortgage
assets, while the stripped coupon certificates second may represent the right
to some or all of the interest on that portion.
Excess servicing fees, which are servicing fees in excess of reasonable
servicing fees, 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" in this prospectus.
Although not entirely clear, a stripped bond certificate generally should
be treated as an in interest in mortgage assets issued on the day the
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 the 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" in this prospectus. 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:
o 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
o 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 the mortgage asset would be included in the mortgage asset's
stated redemption price at maturity for purposes of calculating income on the
certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
mortgage assets will give rise to a loss to the holder of a stripped bond
certificate purchased at a premium or a stripped coupon certificate. If the
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 the 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 the 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 the certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the certificate that is allocable to
the 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 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 the 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 the mortgage assets qualify for the treatment. Prospective
purchasers to which the 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).
o 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, the 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 some 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 the 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 likely will be computed as
described 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 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, like grantor trust
certificates, issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issued date of the mortgage assets should be used, or, in the case
of stripped bond certificates or stripped coupon certificates, the date the
certificates are acquired. The holder of a certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address 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 the 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 loan origination fees. The stated redemption
price at maturity of a mortgage asset is the sum of all payments to be made on
the mortgage asset other than payments that are treated as qualified stated
interest payments. The accrual of this OID, as described 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 Prepayment Assumption rate
for the mortgage loans underlying the grantor trust certificates, 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 provides, however, that the regulations will require that the Prepayment
Assumption be the Prepayment Assumption that is used in determining the
offering price of the 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 the debt instruments,
like 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 the grantor trust certificate for
each day on which it owns the 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 the 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 the date. This will be done, in
the case of each full month accrual period, by:
o adding
o 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
o any payments included in the state redemption price at maturity
received during the accrual period, and
o subtracting from that total the "adjusted issue price" of the
respective component at the beginning of the 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 the
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the period. With respect to
an initial accrual period shorter than a full monthly accrual period, the
daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if the mortgage assets acquired by a
certificateholder are purchased at a price equal to the then unpaid principal
amount of the mortgage asset, no OID attributable to the difference between
the issue price and the original principal amount of the mortgage asset , like
points, will be includible by the holder. Other OID on the mortgage assets,
including that arising from a "teaser" rate, would still need to be accrued.
o Grantor Trust Certificates Representing Interests in ARM Loans
The OID regulations do not address the treatment of instruments, like 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 the instruments. In the absence of any
authority, the master servicer will report OID on grantor trust certificates
attributable to ARM loans, under 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 the income. Further, the addition of
deferred interest, which is interest deferred by reason of negative
amortization, to the principal balance of an ARM loan may require the
inclusion of the amount in the income of the grantor trust certificateholder
when the 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 the 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 the certificates.
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. The 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. 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
the section applies will be treated as ordinary income or loss.
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:
o an owner that is not a U.S. Person or
o 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 the 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 a grantor trust
certificate also will be subject to federal income tax at the same rate.
Generally, the payments would not be subject to withholding to the extent that
a grantor trust certificate evidences ownership in mortgage assets issued
after July 18, 1984, by natural persons if the grantor trust certificateholder
complies with identification requirements, including delivery of a statement,
signed by the grantor trust certificateholder under penalties of perjury,
certifying that the grantor trust certificateholder is not a U.S. Person and
providing the name and address of the 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.
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 the year, the information as may be
deemed necessary or desirable to assist certificateholders in preparing their
federal income tax returns, or to enable holders to make the information
available to beneficial owners or financial intermediaries that hold the
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 the
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 the recipient's federal
income tax liability.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
modify 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 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
specified conditions. Although a REMIC is not generally subject to federal
income tax, notwithstanding "--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 under "Taxation of Owners of
REMIC Residual Certificates," the Code provides that a trust fund will not be
treated as a REMIC for the year and thereafter. In that event, the entity may
be taxable as a separate corporation, and the related 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 regulations have been issued. Any relief, moreover, may be
accompanied by sanctions, like the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for the
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, the trust fund will qualify as a
REMIC, and the related REMIC regular certificates will be considered to be
Regular Interests, or a sole class of Residual Interests, called the 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,
o the 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);
o the certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A); and
o interest on the certificates held by a real estate investment trust
will be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code Section 856(c)(3)(B).
If less than 95% of the REMIC's assets are assets qualifying under any of the
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 Code. 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 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 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 some 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 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:
o "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code;
o "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and
o whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code.
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, the 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 the 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. Holders of REMIC regular certificates should be aware,
however, that the OID Regulations do not adequately address issues relevant to
prepayable securities, like the REMIC regular certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC regular certificates and prescribe a
method for adjusting the amount and rate of accrual of the 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 the 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, or the
closing date, the issue price for the class will be treated as the fair market
value of the 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 the distributions constitute "qualified stated interest." Qualified stated
interest generally means interest payable at a single fixed rate or qualified
variable rate, provided that the 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 the REMIC regular
certificates includes all distributions of interest as well as principal.
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 OID, 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 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 the 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,
including 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 the 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 the income will
be capital gain if the REMIC regular certificate is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as well
as market discount under a constant interest method.
The prospectus supplement with respect to a trust fund may provide for
super-premium certificates, which are REMIC regular certificates to be issued
at prices significantly exceeding their principal amounts or based on notional
principal balances. The income tax treatment of the REMIC regular certificates
is not entirely clear. For information reporting purposes, the trust fund
intends to take the position that the stated redemption price at maturity of
the REMIC regular certificates is the sum of all payments to be made on the
REMIC regular certificates determined under the Prepayment Assumption, with
the result that the REMIC regular certificates would be issued with OID. The
calculation of income in this manner could result in negative OID, 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 proposed contingent payment
rules contained in regulations issued on December 15, 1994, with respect to
OID, should apply to the certificates. Although the 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 the REMIC regular certificates should be
limited to their principal amount, subject to the discussion below under
"--Accrued Interest Certificates," so that the REMIC regular certificates
would be considered for federal income tax purposes to be issued at a premium.
If 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 the 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, the 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 the 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 the 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 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:
o adding
o 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
o any payments included in the stated redemption price at
maturity received during the accrual period, and
o subtracting from that total the adjusted issue price of the REMIC
regular certificates at the beginning of the accrual period.
The adjusted issue price of a REMIC regular certificate at the beginning
of the first accrual period is its issue price; the adjusted issue price of a
REMIC regular certificate at the beginning of a subsequent accrual period is
the adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease, but never below zero, in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC regular certificate issued with OID who
purchases the REMIC regular certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC regular certificate.
In computing the daily portions of OID for 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 the day, which is
to be 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 the holder for that REMIC regular certificate exceeds the following
amount:
o 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
o 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,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o 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 the 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 any 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. The treatment may effect the timing of
income accruals on the REMIC regular certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, and premium in income as interest,
based on a constant yield method. If 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 the 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 the certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" in this prospectus. 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
o the REMIC regular certificate's stated principal amount
or, in the case of a REMIC regular certificate with OID, the adjusted
issue price, which is determined for this purpose as if the purchaser
had purchased the REMIC regular certificate from an original holder,
over
o the price for the 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 the certificate's stated redemption price at maturity. In
particular, under Section 1276 of the Code a holder generally will be required
to allocate each 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. If made, the election
will apply to all market discount bonds acquired by the certificateholder on
or after the first day of the first taxable year to which the 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 the REMIC regular certificate's stated redemption price
at maturity multiplied by the 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 the 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
the 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 the 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:
o the total remaining market discount and
o 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:
o the total remaining market discount and
o 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, like the REMIC regular certificates, that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing the 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 the certificate purchased with market discount. For these
purposes, the de minimis rule referred to above applies. Any deferred interest
expense would not exceed the market discount that accrues during the taxable
year and is, in general, allowed as a deduction not later than the year in
which the market discount is includible in income. If the holder elects to
include market discount in income currently as it accrues on all market
discount instruments acquired by the 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 the 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 the
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 the 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 the REMIC regular
certificates and will be applied as an offset against the interest payment. On
December 30, 1997, the IRS issued final 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 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 those
certificates prior to the time distributions of cash with respect to the
deferred interest are made. It is unclear, under the OID Regulations, whether
any of the interest on the certificates will constitute qualified stated
interest or whether all or a portion of the interest payable on the
certificates must be included in the stated redemption price at maturity of
the certificates and accounted for as OID, which could accelerate the
inclusion. Interest on REMIC regular certificates must in any event be
accounted for under an accrual method by the holders of those 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 the REMIC
regular certificates.
Effects of Defaults and Delinquencies. 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 the certificates under an accrual
method without giving effect to delays and reductions in distributions on the
subordinated certificates attributable to defaults and delinquencies on the
mortgage assets, except to the extent that it can be established that the
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 the 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 the 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. The 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 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.
The 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 the gain does not exceed the excess, if any, of:
o the amount that would have been includible in the holder's income
with respect to the REMIC regular certificate had income accrued at
a rate equal to 110% of the AFR as defined in Code Section 1274(d)
determined as of the date of purchase of the REMIC regular
certificate, over
o the amount actually includible in the 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 the
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,
or 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 distribution date. The period between the closing date for
payment lag certificates and their first distribution date may or may not
exceed the interval. Purchasers of payment lag certificates for which the
period between the closing date and the first distribution date does not
exceed the interval could pay upon purchase of the REMIC regular certificates
accrued interest in excess of the accrued interest that would be paid if the
interest paid on the distribution date were interest accrued from distribution
date to distribution date. If a portion of the initial purchase price of a
REMIC regular certificate is allocable to pre-issuance interest, which is
interest that has accrued prior to the issue date, 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 the payments represent interest for the number of days that the
certificateholder has held the 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 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 certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of certificates may be allowed a bad debt deduction at the time that
the principal balance of any the 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 the 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. 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:
o the 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;
o the REMIC regular certificateholder is not a controlled foreign
corporation, within the meaning of Code Section 957, related to the
Issuer; and
o the REMIC regular certificateholder complies with identification
requirements, including delivery of a statement, signed by the REMIC
regular certificateholder under penalties of perjury, certifying
that the REMIC regular certificateholder is a foreign person and
providing the name and address of the REMIC regular
certificateholder.
If a REMIC regular certificateholder is not exempt from withholding,
distributions of interest to the holder, including distributions in respect of
accrued OID, may be subject to a 30% withholding tax, subject to reduction
under any applicable tax treaty.
Further, a REMIC regular certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC regular certificateholders who are not U.S. Persons and persons
related to the holders should not acquire any REMIC residual certificates, and
holders of REMIC residual certificates 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 the year, 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 the information available to beneficial
owners or financial intermediaries that hold the 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 the 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 the recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations which modify 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 transition rules. Prospective investors are urged to consult
their own tax advisors regarding the new regulations.
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 as well as 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 the 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. 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 the 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, which is, a fast-pay, slow-pay structure, may generate
phantom income, which is a mismatching of income and cash distributions. This
mismatching may be caused by the use of required tax accounting methods by the
REMIC, variations in the prepayment rate of the underlying mortgage assets and
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 the 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 the REMIC residual certificateholder
owns the REMIC residual certificate. Those daily amounts generally would equal
the amounts that would have been reported for the same days by an original
REMIC residual certificateholder, as described above. The legislative history
indicates that adjustments may be appropriate to reduce, or increase, the
income of a subsequent holder of a REMIC residual certificate that purchased
the REMIC residual certificate at a price greater than, or less than, the
adjusted basis the 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 the
adjustments will in fact be permitted or required and, if so, how they would
be made. The REMIC regulations do not provide for any adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage assets and the REMIC's other assets and 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:
o the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
o all bad loans will be deductible as business bad debts, and
o 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.
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 is less than or greater than its principal
balance, respectively. Any 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 the 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 the 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, 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 a mortgage loan would be allocated among the principal
payments on the mortgage loan 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 in the prospectus supplement
will not apply.
A REMIC residual certificateholder will not be permitted to amortize the
cost of the REMIC residual certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC residual
certificates will be added to the issue price of the REMIC regular
certificates in determining the REMIC's initial basis in its assets. See
"--Sale or Exchange of REMIC Residual Certificates" below. For a discussion of
possible adjustments to income of a subsequent holder of a REMIC residual
certificate to reflect any difference between the actual cost of the REMIC
residual certificate to the holder and the adjusted basis the 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. 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 the net
loss exceeds the holder's adjusted basis in the REMIC residual certificate.
Any net loss that is not currently deductible by reason of this limitation may
only be used by the 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:
o 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
o is similar to 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, like a
partnership, an S corporation or a grantor trust, the expenses will be
deductible under Code Section 67 only to the extent that the expenses, plus
other "miscellaneous itemized deductions" of the individual, exceed 2% of the
individual's adjusted gross income. In addition, Code Section 68 provides that
the applicable amount, which is the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount, will be reduced by the lesser of:
o 3% of the excess of the individual's adjusted gross income over the
applicable amount or
o 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 the holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS the 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
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, which is 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:
o may not, notwithstanding any other provisions in this prospectus, be
offset by any unrelated losses, deductions or loss carryovers of a
REMIC residual certificateholder;
o will be treated as "unrelated business taxable income" within the
meaning of Code Section 512 if the REMIC residual certificateholder
is a pension fund or any other organization that is subject to tax
only on its unrelated business taxable income, refer to
"--Tax-Exempt Investors" below; and
o 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
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:
o the income of the REMIC residual certificateholder for that calendar
quarter from its REMIC residual certificate over:
o the sum of the "daily accruals," as defined below, for all days
during the calendar quarter on which the REMIC residual
certificateholder holds the 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 the 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 the 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
the trust in proportion to the dividends received by the shareholders from the
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 the
shareholder. Regulated investment companies, common trust funds and
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 the REMIC residual certificate. To the
extent a distribution exceeds the 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 the REMIC residual certificate to the REMIC residual
certificateholder, increased by the taxable income of the REMIC that was
included in the income of the REMIC residual certificateholder with respect to
the REMIC residual certificate, and decreased, but not below zero, by the net
losses that have been allowed as deductions to the REMIC residual
certificateholder with respect to the REMIC residual certificate and by the
distributions received by the REMIC residual certificateholder. In general,
any 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 the 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 the 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 the sale, that 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 the REMIC residual certificateholder's
adjusted basis in the newly acquired asset.
Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions." In general, subject to 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 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, contributions to a trust fund as to which an election has
been made to treat the trust fund as a REMIC made after the day on which the
trust fund issues all of its interests could result in the imposition of a
contributions tax on the trust fund equal to 100% of the value of the
contributed property. No trust fund for any series of certificates will accept
contributions that would subject it to the tax.
In addition, a trust fund as to which an election has been made to treat
the 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:
o 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 the series, the tax will be borne by the master
servicer, trustee or asset seller, as the case may be, out of its
own funds or
o the asset seller's obligation to repurchase a mortgage loan, the tax
will be borne by the asset seller.
In the event that the master servicer, trustee or asset seller, as the case
may be, fails to pay or is not required to pay any tax as provided above, the
tax will be payable out of the trust fund for the series and will result in a
reduction in amounts available to be distributed to the certificateholders of
the series.
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 the adoption is deemed to occur, and
sells all of its assets, other than cash, within a 90-day period beginning on
the 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
the 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 the excess. It is unclear whether a
loss, if allowed, will be a capital loss or an ordinary loss.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC residual
certificateholders will be treated as the partners. Certain information will
be furnished quarterly to each REMIC residual certificateholder who held a
REMIC residual certificate on any day in the previous calendar quarter.
Each REMIC residual certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
REMIC residual certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC residual
certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of the person and other information.
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 the 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.
Residual Certificate Payments--Non-U.S. Persons
Amounts paid to REMIC residual certificateholders who are not U.S.
Persons, which is discussed in "--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, the
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, including
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 any 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 the 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 the 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 the 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:
o an amount, as determined under the REMIC regulations, equal to the
present value of the total anticipated "excess inclusions" with
respect to the interest for periods after the transfer and
o 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 the person an affidavit that the transferee is not a disqualified
organization and, at the time of the transfer, the person does not have actual
knowledge that the affidavit is false. A disqualified organization means:
o the United States, any State, possession or political subdivision of
that disqualified organization, any foreign government, any
international organization or any agency or instrumentality of any
of the disqualified organizations, provided that the term does not
include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not
selected by any governmental agency,
o any organization, other than farmers' cooperatives, generally exempt
from federal income taxes unless the organization is subject to the
tax on "unrelated business taxable income" and
o 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 the entity. The amount of the tax is equal to the product of:
o the amount of excess inclusions for the taxable year allocable to
the interest held by the disqualified organization and
o 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 the
entity, will be relieved of liability for the tax if the record holder
furnishes to the entity an affidavit that the record holder is not a
disqualified organization and, for the period, the pass-through entity does
not have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means:
o a regulated investment company, real estate investment trust or
common trust fund,
o a partnership, trust or estate and
o 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 the 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 this 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 consent
to a proposed transfer only if it receives the following:
o 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
o 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,
o 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
o 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
knowledge if:
o the transferor conducted a reasonable investigation of the
transferee and
o 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 the 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 the transferee's
income in respect of the REMIC residual certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC residual
certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that the 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 the person provides the trustee with a duly completed IRS Form
4224 and the trustee consents to the 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:
o the nature of the income of the trust fund will exempt it from the
rule that publicly traded partnerships are taxable as corporations
or
o 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 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 tax that is unpaid by the trust fund.
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, including
any excess of the principal amount of the notes over their issue price, does
not exceed a de minimis amount, like 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 the 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 will be taxable to a noteholder as ordinary
interest income when received or accrued in accordance with the 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 the OID in income, on a pro rata
basis, as principal payments are made on the note. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable
as contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one
year from the issue date of the note, or short-term note, may be subject to
special rules. An accrual basis holder of a short-term note, and 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 the 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 the noteholder with respect to the note. Any 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.
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 foreign person, which is a nonresident alien, foreign corporation or
other non-United States 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:
o 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
o 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 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 the 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:
o the gain is not effectively connected with the conduct of a trade or
business in the United States by the foreign person and
o in the case of an individual foreign person, the foreign person is
not present in the United States for 183 days or more in the taxable
year.
Backup Withholding. Each holder of a note, other than an exempt holder,
like 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 qualifying income
tests. Nonetheless, treatment of the notes as equity interests in a publicly
traded partnership could have adverse tax consequences to holders. For
example, income to 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 limitations on their
ability to deduct their share of the trust fund's expenses.
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 in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have features characteristic of debt, the
certificates might be considered debt of the trust fund. Any 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 the 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 the 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,
which, in this context, is 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:
o the interest that accrues on the certificates in accordance with
their terms for the month, including interest accruing at the
pass-through rate for the month and interest on amounts previously
due on the certificates but not yet distributed;
o 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;
o prepayment premium payable to the certificateholders for the month;
and
o any other amounts of income payable to the certificateholders for
the month.
The 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 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 the
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 the 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 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. The deductions might be disallowed to the individual in
whole or in part and might result in the holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to the 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 the 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 discount in income currently
as it accrues over the life of the mortgage loans or to offset any premium
against interest income on the mortgage loans. As indicated above, a portion
of the 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 a termination occurs, the old
partnership, which is the trust fund, would be deemed to contribute its assets
to a new partnership in exchange for interests in the new partnership. The
interests would be deemed distributed to the partners of the old partnership
in liquidation of that partnership, 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 the 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 the certificates, and, upon sale or other
disposition of some of the certificates, allocate a portion of 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 the 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, the 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 the 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 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, or loss, the purchasing certificateholder will have
a higher, or 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 the 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. The 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 on 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 the nominees will be required to forward the 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 the
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 information on the nominee, the beneficial
owners and the certificates so held. The information includes:
o the name, address and taxpayer identification number of the nominee
and
o as to each beneficial owner
o the name, address and identification number of the person,
o whether the 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 entity,
and
o information on certificates that were held, bought or sold on
behalf of the 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 information statement to the trust fund. The information referred
to above for any calendar year must be furnished to the trust fund on or
before the following January 31. Nominees, brokers and financial institutions
that fail to provide the trust fund with the information described above may
be subject to penalties.
The company will be designated as the tax matters partner in the related
trust agreement and 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 limited 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 in this prospectus.
Although it is not expected that the trust fund would be engaged in a trade or
business in the United States for those 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 the 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 that 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
any 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
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 which make 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 transition rules. Prospective investors
are urged to consult their own tax advisors regarding the new regulations.
Tax Treatment of Certificates as Debt for Tax Purposes
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, will deliver its
opinion that the certificates will be treated as debt instruments for federal
income tax purposes as of the 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 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 of that property. 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.
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 the 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.
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 in the
prospectus supplement, to the certificate owners and that the proper
classification of the legal relationship between the depositor and the
certificate owners resulting form this transaction is that of a partnership,
including a publicly traded partnership treated as a corporation, or an
association taxable as a corporation. Since tax counsel will advise that the
certificates will be treated as indebtedness in the hands of the
certificateholders for U.S. federal income tax purposes and that the entity
constituted by the trust will not be a publicly traded partnership treated as
a corporation or an association taxable as a corporation, the depositor will
not attempt to comply with U.S. federal income tax reporting requirements
applicable to partnerships or corporations as the 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 the 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.
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:
o substantially all of its assets consist of debt instruments, more
than 50% of which are real estate mortgages,
o the entity is the obligor under debt obligations with two or more
maturities, and
o under the terms of the entity's debt obligations, or an underlying
arrangement, payments on the 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, then the arrangement would be subject to U.S. federal corporate income
tax on its taxable income generated by ownership of the mortgage loans. The
tax might reduce amounts available for distributions to certificate owners.
The amount of the tax would depend upon whether distributions to certificate
owners would be deductible as interest expense in computing the taxable income
of an arrangement as a taxable mortgage pool.
Foreign Investors
In general, subject to 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 the interest is not effectively connected with a trade or business of the
recipient in the United States and the certificate owner provides the required
foreign person information certification.
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 the 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, the 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 the foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless the rate were reduced by an applicable
tax treaty.
Backup Withholding
Certain certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the certificates if the
certificate owners, upon issuance of the certificates, fail to supply the
trustee or the certificate owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments,' as defined
in the Code, properly, or, under some 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, tax-exempt organizations or
nonresident aliens provide certification as to their status as nonresidents.
As long as the only "certificateholder" of record is Cede & Co., 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 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.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations which
modify 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 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 in this prospectus 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 the
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 the series will
be designated as regular securities, and which, if any, will be designated as
ownership securities.
Qualification as a FASIT. The trust fund underlying a series, or one or
more designated pools of assets held in the trust fund, will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "Regular Interests" and the "Ownership
Interests," respectively, if:
o a FASIT election is in effect,
o tests concerning:
o the composition of the FASIT's assets and
o the nature of the securityholders' interest in the FASIT are
met on a continuing basis, and
o 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 satisfy the FASIT qualification test, which means that the assets must
consist of "permitted assets" as of the close of the third month beginning
after the closing date and at all times thereafter. Permitted assets include:
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC
Regular Interests if issued by a REMIC, like instruments that
provide for interest at a fixed rate, a qualifying variable rate, or
a qualifying interest-only type rate,
o foreclosure property,
o hedging instruments , like 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,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT Regular Interests, and
o 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 the holder.
Interests in a FASIT. In addition to the asset qualification
requirements, the interests in a FASIT also must meet requirements. All of the
interests in a FASIT must belong to either of the following:
o one or more classes of Regular Interests or
o 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:
o it is designated as a Regular Interest,
o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, the interest is payable at either
o a fixed rate with respect to the principal amount of the
Regular Interest or
o a permissible variable rate with respect to the principal
amount.
Permissible variable rates for FASIT Regular Interests are the same as those
for REMIC Regular Interest, like 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 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 the last
clause, 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, other FASITs and
dealers in securities who acquire the interests as inventory, rather than for
investment. In addition, holders of High-Yield Interests are subject to
limitations on offset of income derived from the 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 in the FASIT 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, the
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, 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 the 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 the 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 the 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 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 the 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 the Securities will be considered qualifying REIT interest to the same
extent that REMIC securities would be so considered. FASIT Regular Securities
held by a thrift institution taxed as a "domestic building and loan
association" will represent qualifying assets for purposes of the
qualification requirements set forth in Code Section 7701(a)(19) to the same
extent that REMIC securities would be so considered. See "Material Federal
Income Tax Consequences--REMICs." In addition, FASIT Regular Securities held
by a financial institution to which Section 585 of the Code applies will be
treated as evidences of indebtedness for purposes of Section 582(c)(1) of the
Code. FASIT securities will not qualify as "government securities" for either
REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of those interests, and the
ability of those 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 the interests as
inventory. If a securities dealer, other than an due period, 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. 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 the 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 the
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 the holder, then section 475 will continue to apply to the
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:
o the receipt of income derived from assets that are not permitted
assets,
o dispositions of permitted assets,
o the receipt of any income derived from any loan originated by a
FASIT, and
o in some cases, the receipt of income representing a servicing fee or
other compensation.
Any series for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
Due to the complexity of the Federal income tax rules applicable to
securityholders and the considerable uncertainty that exists with respect to
many aspects of those rules, potential investors should consult their own tax
advisors regarding the tax treatment of the acquisition, ownership, and
disposition of the securities.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the offered securities. State and local income tax law may
differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax advisors
with respect to the various state and local tax consequences of an investment
in the offered securities.
ERISA CONSIDERATIONS
General
The Employee Retirement Income security Act of 1974, as amended, imposes
restrictions on employee benefit Plans subject to ERISA and on persons who are
parties in interest or disqualified persons with respect to the Plans. Certain
employee benefit Plans, like governmental plans and church plans, if no
election has been made under Section 410(d) of the Code, are not subject to
the restrictions of ERISA, and assets of the Plans may be invested in the
securities without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any the 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 transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes 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 has issued a final regulation,
codified in 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 other entities in which a Plan makes an "equity
investment" will be deemed for purposes of ERISA to be assets of the Plan
unless 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; the Plan assets
would include an undivided interest in the mortgage loans and any other assets
held by the trust fund. In that 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
the assets unless the transactions are subject to a statutory or
administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
the 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, like 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 the class, on an ongoing basis.
One exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided
ownership interest in property and a beneficial ownership interest in a trust
are deemed to be "equity interest" under the final regulation. If notes of a
particular series were deemed to be indebtedness under applicable local law
without any substantial equity features, an investing Plan's assets would
include the notes, but not, by reason of the purchase, the underlying assets
of the trust fund.
Availability of Underwriter's Exemption for Certificates
DOL has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) which exempts from the application of the prohibited
transaction rules transactions relating to:
o the acquisition, sale and holding by Plans of certificates
representing an undivided interest in 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
o the servicing, operation and management of the asset-backed
pass-through trusts, provided that the general conditions and 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 the 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:
o The acquisition of the certificates by a Plan is on terms, including
the price for the 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;
o 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;
o The certificates acquired by the Plan have received a rating at the
time of the acquisition that is in one of the three highest generic
rating categories from any of Fitch, Inc., Moody's Investors
Service, Inc. and Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc.
o The trustee is not an affiliate of the Restricted Group, which
includes 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;
o 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 the 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 the 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; and
o 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:
o that the certificates constitute "certificates" for purposes of the
Exemption and
o 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 the 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, the Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
for transactions involving mortgage pool investment trusts. The prospectus
supplement with respect to a series of securities may contain additional
information regarding the application of the Exemption, PTCE 83-1, or any
other exemption, with respect to the securities offered thereby. PTCE 83-1 is
not applicable to manufactured housing contract pool investment trusts or
multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank, decided December 13, 1993. In John
Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be "plan assets" for ERISA purposes under
some circumstances. Prospective purchasers should determine whether the
decision affects their ability to make purchases of the securities. In
particular, an insurance company should consider the exemptive relief granted
by DOL 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" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. These "SMMEA securities"
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities, including,
but not limited to, state chartered savings banks, commercial banks, savings
and loan associations and insurance companies, as well as trustees and state
government employee retirement systems, created pursuant to or existing under
the laws of the United States or of any state, including the District of
Columbia and Puerto Rico, whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued
by or guaranteed as to principal and interest by the United States or any
agency or instrumentality of the United States constitute legal investments
for those 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 the enactments, limiting to varying extents the
ability of entities, and insurance companies in particular, 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
the legislation will be authorized to invest in SMMEA certificates only to the
extent provided in the legislation. SMMEA provides, however, that in no event
will the enactment of any 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 the securities, so long as the
contractual commitment was made or the securities acquired prior to the
enactment of the 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 the securities, and
national banks may purchase the 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 the regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review the National Credit Union Administration
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," codified in 12 C.F.R. Part
703, which sets forth 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 regulatory authorities may be subject to
restrictions on investment in 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 FDIC, the
Office of Thrift Supervision, 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 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 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 "high-risk" mortgage derivative
securities and limitations on the use of the securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, "high-risk" mortgage derivative securities include securities having
specified characteristics, which may include classes of securities. In
accordance with Section 402 of the Financial Institutions Reform, Recovery and
Enhancement Act of 1989, the 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 which sets forth model investment
guidelines for the insurance industry. Institutions subject to insurance
regulatory authorities may be subject to restrictions on investment similar to
those set forth in the model law and other restrictions.
If specified in the related prospectus supplement, other classes of
offered securities offered pursuant to this prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this offered security under various legal investment restrictions, and thus
the ability of investors subject to these restrictions to purchase the 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 preceding paragraph 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 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, acting as underwriter with other underwriters, if any,
named in the prospectus supplement. Merrill Lynch is an affiliate of the
depositor. In that 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 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 in the prospectus supplement 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 the persons act as agents in the
sale of offered securities, they will receive a selling commission with
respect to the offered securities, depending on market conditions, expressed
as a percentage of the aggregate principal balance or notional amount of the
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 the 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 the offering and any
agreements to be entered into between the depositor and purchasers of offered
securities of the series.
This prospectus may be used, to the extent required, by Merrill Lynch or
any other underwriter in connection with offers and sales related to market
making transactions.
The depositor will indemnify Merrill Lynch and any underwriters against
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 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 the assets or interests in the prospectus
supplement, 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 the
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
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 in this prospectus by reference, in each case to the extent the
documents or reports relate to the classes of offered securities, other than
the exhibits to the documents, unless those exhibits are specifically
incorporated by reference in the documents. Requests to the depositor should
be directed in writing to: Merrill Lynch Mortgage Investors, Inc., 4 World
Financial Center Floor #10, New York NY 10080, 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 in
this prospectus by reference at the Public Reference Room of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Investors may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website
at http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of any class of offered securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a rating agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with the
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 the 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.
Glossary
Whenever used in this prospectus, the following terms have the following
meanings:
"Code" means the Internal Revenue Code of 1986, as amended.
"Constant Prepayment Rate" means a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
loans for the life of the loans.
"Eligible Corporation" means a domestic C corporation that is fully
subject to corporate income tax.
"FASIT" means a "financial asset securitization investment trust" under
the Code.
"FASIT Ownership Securities" means interests in a FASIT that are
designated as "ownership interests" in the FASIT under the Code.
"FASIT Regular Securities" means interests in a FASIT that are designated
as "regular interests" in the FASIT under the Code.
"High-Yield Interest" means with respect to each of the following FASIT
eligibility requirements:
o that the FASIT interest entitles its holder to a specified principal
amount;
o that the issue price of the interest does not exceed 125% of its
stated principal amount;
o that the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
o that if it pays interest, that interest is payable at either a fixed
rate with respect to the principal amount of the regular interest or
a permissible variable rate with respect to that principal amount.
Permissible variable rates for FASIT regular interests are the same
as those for REMIC
an interest in a FASIT that fails to meet one or more of those
requirements but otherwise meets all requirements to be treated as a
FASIT, and any additional requirements imposed by the IRS; provided, that
if the it fails to meet the requirement described in the fourth item
above, the interest payable consists of a specified portion of the
interest payments on permitted assets and that portion does not vary over
the life of the security.
"OID" means with respect to any security, "original issue discount" under
the Code with respect to the issuance of that security.
"Parties in Interest" means, collectively, "disqualified persons" within
the meaning of the Code and "parties in interest" under ERISA who have
specified relationships with a Plan without an applicable exemption under
ERISA or the Code.
"Pass-Through Security" means securities of a series that are treated for
federal income tax purposes as representing ownership interests in the related
trust fund.
"Prepayment Assumption" means, for federal income tax purposes and any
security, the rate of prepayments assumed in pricing the security.
"Regular Interests" or "Regular Interest Securities" means securities
that are designated as "regular interests" in a REMIC in accordance with the
Code.
"Residual Interests" or Residual Interest Securities" means securities
that are designated as "residual interests" in a REMIC in accordance with the
Code.
"REMIC" means a "real estate mortgage investment conduit" under the Code.
"Restricted Group" means, for any series, the seller, the depositor,
[Merrill Lynch Mortgage Investors, Inc.] and the other underwrites set forth
in the related prospectus supplement, the trustee, the master servicer, any
sub-servicer, any pool insurer, any obligor with respect to the trust fund
asset 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 any of those parties.
"Standard Prepayment Assumption" means an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans.
"Stripped Interest Securities" means securities which are entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions.
"Stripped Principal Securities" means securities which are entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses in connection
with the offering of the Securities being registered under this Registration
Statement, other than underwriting discounts and commissions:
SEC Registration Fee $ 528,000**
Printing and Engraving $ 400,000
Legal Fees and Expenses $ 900,000
Trustee Fees and Expenses $ 900,000
Blue Sky Fees and Expenses $ 80,000
Rating Agency Fees $ 920,000
Miscellaneous $ 800,000
Total $4,528,000
________
* All amounts, except the SEC Registration Fee, are estimates of
aggregate expenses incurred or to be incurred in connection with the issuance
and distribution of Securities in an aggregate principal amount assumed for
these purposes to be equal to $6,187,896,465 of Securities registered hereby.
** This amount relates to the additional $2,000,000,000 registered
hereby. The remaining $4,000,000,000 of Asset Backed Securities relates to
registration statement No. 333-81429 and $187,896,465 of Asset Backed
Securities relates to registration statement No. 333-39127, and the
registration fee with respect thereto has been previously paid.
Item 15. Indemnification of Directors and Officers.
The Registrant's By-Laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement (filed as exhibit 1.1 to Registration
Statement on Form S-3 (File No. 333-24327) and incorporated herein by
reference).
3.1 Certificate of Incorporation of Merrill Lynch Mortgage Investors, Inc.,
as amended (filed as exhibit 1.1 to Registration Statement on Form S-3
(File No. 333-24327) and incorporated herein by reference).
3.2 By-laws of Merrill Lynch Mortgage Investors, Inc. as currently in effect
(filed as exhibit 3.2 to Registration Statement on Form S-3 (File No.
333-07569) and incorporated herein by reference).
4.1 Form of Pooling and Servicing Agreement (including form of Certificate as
an exhibit thereto) (filed as exhibit 4.1 to Registration Statement on
Form S-3 (File No. 333-07569) and incorporated herein by reference).
4.2 Form of Pooling and Servicing Agreement (Contracts) (including form of
Certificate as an exhibit thereto) (filed as exhibit 4.2 to Registration
Statement on Form S-3 (File No. 333-07569) and incorporated herein by
reference).
4.3 Form of Trust Agreement (including form of Certificate as an exhibit
thereto) (filed as exhibit 4.3 to Registration Statement on Form S-3
(File No. 333-07569) and incorporated herein by reference).
4.4 Form of Indenture (including form of Note as an exhibit thereto) (filed
as exhibit 4.4 to Registration Statement on Form S-3 (File No. 333-07569)
and incorporated herein by reference).
4.5 Form of Pooling and Servicing Agreement (revolving home equity loans)
(including form of Certificate as an exhibit thereto) (filed as exhibit
4.5 to Registration Statement on Form S-3 (File No. 333-24327) and
incorporated by reference).
5.1 Opinion of Brown & Wood LLP as to legality of certain Certificates and
Notes (including consent of such firm).*
5.2 Opinion of Richards, Layton & Finger, P.A., Wilmington, Delaware, as to
legality of certain Certificates (including consent of such firm).*
8.1 Opinion of Brown & Wood LLP as to certain tax matters (including consent
of such firm).*
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1 hereof).*
23.2 Consent of Richards, Layton & Finger, P.A., Wilmington, Delaware
(included in exhibit 5.2).*
24.1 Power of Attorney (included on signature page).
25.1 Statement of Eligibility and Qualification of Trustee.**
99.1 Form of Sale and Servicing Agreement(filed as exhibit 99.1 to
Registration Statement on Form S-3 (File No. 333-07569) and incorporated
herein by reference).
99.2 Form of Mortgage Loan Purchase Agreement (filed as an exhibit 99.2 to the
Registration Statement on Form S-3 (File No. 333-07569)(and incorporated
herein by reference).
99.3 Form of Mortgage Loan Purchase Agreement (revolving home equity loans)
(filed as an exhibit 99.3 to the Registration Statement on Form S-3 (File
No. 333-24327) (and incorporated herein by reference).
_____________
* Previously filed.
** To be filed on Form 8-K, as applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
29th day of November, 2000.
Merrill Lynch Mortgage Investors, Inc.
By: /s/ Michael M. McGovern
--------------------------------------
Name: Michael M. McGovern
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated and on this 29th day of November, 2000.
Signature Title
*
---------------------------- President and Director (Chief Executive
(Barry S. Blattman) Officer)
*
---------------------------- Treasurer (Principal Financial Officer and
(Thomas W. Layton) Principal Accounting Officer)
*
---------------------------- Director
(Donald J. Puglisi)
/s/ Michael M. McGovern Director
----------------------------
(Michael M. McGovern)
*By: /s/ Michael M. McGovern
-----------------------
Attorney-in-fact
<PAGE>
