<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-81429
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 27, 2000)
[LOGO]
$176,390,000 (APPROXIMATE)
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES,
SERIES 2000-CB1
MERRILL LYNCH MORTGAGE INVESTORS, INC.
Depositor
-------------
CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
SELLER
--------------
LITTON LOAN SERVICING LP
Servicer
<TABLE>
<CAPTION>
===================== ======================= ====================== =================== =================== ====================
Initial Certificate Price to Underwriting Proceeds to
Class Balance(1) Pass-Through Rate Public Discount (2) Depositor
- --------------------- ----------------------- ---------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C>
A-1 $70,811,000 7.99%(3) 99.986345% 0.30% 99.686345%
- --------------------- ----------------------- ---------------------- ------------------- ------------------- --------------------
A-2 $71,193,000 (4) 100.000000% 0.30% 99.700000%
- --------------------- ----------------------- ---------------------- ------------------- ------------------- --------------------
A-3 $34,386,000 8.03%(3) 99.979220% 0.30% 99.679220%
- --------------------- ----------------------- ---------------------- ------------------- ------------------- --------------------
Total $176,390,000 $176,373,185.35 $529,170 $175,844,015.35
===================== ======================= ====================== =================== =================== ====================
</TABLE>
- -----------------------
(1) Plus or minus 10%.
(2) Inclusive of expense reimbursement to the Seller described in "Method of
Distribution."
(3) Subject to a cap.
(4) The Class A-2 Certificates will bear interest at the variable rate
described in this prospectus supplement.
---------------------
Only the three classes of certificates identified above are being offered
by this prospectus supplement and the accompanying prospectus.
THE CERTIFICATES
o Represent ownership interests in a trust consisting primarily of a pool of
first lien and second lien residential mortgage loans. The mortgage loans
will be segregated into three groups, loan group 1, loan group 2 and loan
group 3. Loan group 1 consists of two sub-groups of fixed-rate FHA insured
and VA guaranteed mortgage loans and conventional fixed-rate mortgage loans
with conforming balances and no prepayment penalties. Loan group 2 consists
of two sub-groups of conventional fixed-rate mortgage loans with
non-conforming balances and adjustable-rate mortgage loans. Loan group 3
consists of conventional fixed-rate mortgage loans with conforming balances
and prepayment penalties.
o The Class A-2 Certificates will accrue interest at a rate equal to
one-month LIBOR plus a fixed margin, subject to a cap.
[MBIA logo]
CREDIT ENHANCEMENT
o MBIA Insurance Corporation will issue a certificate guaranty insurance
policy guaranteeing payments on the Class A-1, Class A-2 and Class A-3
Certificates.
o Overcollateralization - The aggregate principal balance of the mortgage
loans will exceed the aggregate principal balance of the certificates.
Certain excess interest received from the mortgage loans in the trust will
be applied as payments of principal on the Class A Certificates to maintain
a required level of overcollateralization.
o Crosscollateralization - Certain funds received on the mortgage loans in
one mortgage loan group may be available to pay the certificates related to
another loan group.
o Approximately 25.59% of the mortgage loans in loan group 1 and
approximately 2.93% of the mortgage loans in loan group 2 by aggregate
principal balance will be covered by either insurance from the Federal
Housing Administration or a guaranty by the United States Department of
Veterans Affairs.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Delivery of the Class A Certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Clearstream, Luxembourg and the
Euroclear System on or about March 2, 2000.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 3 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Merrill Lynch Mortgage Investors, Inc.,
Credit-Based Asset Servicing and Securitization LLC or any of their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
------------------------------------
MERRILL LYNCH & CO.
February 28, 2000
<PAGE>
TABLE OF CONTENTS
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PAGE
<S> <C>
Summary of Prospectus Supplement...............................................................................S-1
Risk Factors..................................................................................................S-11
The Certificate Insurer.......................................................................................S-17
The Mortgage Pool.............................................................................................S-19
The Seller....................................................................................................S-60
The Servicer..................................................................................................S-62
The Pooling and Servicing Agreement...........................................................................S-64
Description of the Certificates...............................................................................S-70
Yield, Prepayment and Maturity Considerations.................................................................S-85
Use of Proceeds...............................................................................................S-95
Certain Federal Income Tax Consequences.......................................................................S-95
State Taxes...................................................................................................S-98
ERISA Considerations..........................................................................................S-98
Legal Investment Considerations..............................................................................S-100
Experts......................................................................................................S-100
Method of Distribution.......................................................................................S-100
Legal Matters................................................................................................S-100
Ratings......................................................................................................S-101
Index of Principal Definitions...............................................................................S-102
Annex I......................................................................................................S-106
</TABLE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We tell you about the certificates in two separate documents that
progressively provide more detail; (a) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your series; and (b) this prospectus supplement, which
describes the specific terms of your series of securities.
If the terms of your series of certificates vary between this prospectus
supplement and the prospectus, you should rely on the information in this
prospectus supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions can be found.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-102 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 102 in the
accompanying prospectus.
---------------------
i
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire prospectus and prospectus
supplement carefully before you decide to purchase a certificate
<TABLE>
<S> <C>
Title of Series.....................................C-BASS Mortgage Loan Asset Backed Certificates, Series 2000-CB1.
The Certificates....................................The Class A-1, Class A-2, Class A-3, Class BB, Class X and Class
R Certificates are the entire ownership interest in a trust
which is composed of first and second lien mortgage loans. The
trust will issue the certificates pursuant to a pooling and
servicing agreement among Credit-Based Asset Servicing and
Securitization LLC, as seller, Merrill Lynch Mortgage Investors,
Inc., as depositor, Litton Loan Servicing LP, as servicer, and
The Chase Manhattan Bank, as trustee. The trust will issue the
Class A-1, Class A-2 and Class A-3 Certificates as book-entry
securities clearing through The Depository Trust Company (in the
United States) or Clearstream, Luxembourg or Euroclear (in
Europe). See "Description of the Certificates - Book-Entry
Certificates" in this prospectus supplement.
The Offered Certificates............................The underwriter is offering to sell the Class A-1, Class A-2 and
Class A-3 Certificates. The Class BB, Class X and Class R
Certificates are not being offered hereby.
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 Seller................................On the closing date, the mortgage loans will be sold to the
depositor by Credit-Based Asset Servicing and Securitization
LLC. The mortgage loans were originated or acquired generally
in accordance with the underwriting standards described in "The
Mortgage Pool - Underwriting Standards" herein.
Servicer............................................Litton Loan Servicing LP will service the mortgage loans. The
servicer must advance delinquent payments of principal and
interest on the mortgage loans, other than with respect to
simple interest mortgage loans, subject to certain limitations.
See "The Pooling and Servicing Agreement--Advances" in this
prospectus supplement and "Description of the
Securities--Advances in Respect of Delinquencies" in the
prospectus. The servicer is a wholly-owned subsidiary of the
seller of the mortgage loans.
Trustee.............................................The Chase Manhattan Bank, a New York banking corporation.
Certificate Insurer.................................MBIA Insurance Corporation.
Cut-off Date........................................February 1, 2000.
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S-1
<PAGE>
<TABLE>
<S> <C>
Closing Date........................................On or about March 2, 2000.
Assumed Final Maturity Dates........................The assumed final maturity date for each class of offered
certificates is set forth below:
Assumed Final
Class Maturity Date
----- -------------
Class A-1 February 25, 2031
Class A-2 February 25, 2031
Class A-3 February 25, 2031
Each such final maturity
date has been calculated as
described under "Yield,
Prepayment and Maturity
Considerations--Final
Scheduled Distribution
Dates" in this prospectus
supplement.
The Mortgage Pool...................................On the closing date, the trust will acquire a pool of
mortgage loans that will be divided into three loan groups,
loan group 1, loan group 2 and loan group 3. Loan group 1
will be divided into sub-groups 1A and 1B. Loan group 2
will be divided into sub-groups 2A and 2B.
Loan Group 1 will consist of two sub-groups with the following aggregate
characteristics (percentages are based on the aggregate principal balance as
of February 1, 2000)
Aggregate Current Principal Balance $75,131,549.58
Average Outstanding Principal Balance $65,617.07
Range of Outstanding Principal
Balances $1,367.74 to
$262,148.35
Average Original Principal Balance $68,713.65
Range of Original Principal Balances $5,972.00 to
$263,475.00
Loans with Prepayment Penalties 0.00%
Second Liens 1.76%
FHA Mortgage Loans 17.50%
VA Mortgage Loans 8.09%
Sub-Prime Loans 54.86%
Performing Loans 63.63%
Sub-Performing Loans: 18.87%
Sub-Performing Loans that are Forbearance
Plan Loans 1.87%
Sub-Performing Loans that are Bankruptcy
Plan Loans 1.29%
Re-Performing Loans: 17.49%
Re-Performing Loans that are Forbearance 1.17%
Plan Loans
Re-Performing Loans that are Bankruptcy 11.95%
Plan Loans
Weighted Average Loan Rate 10.033%
Range of Loan Rates 6.000% to 17.440%
Weighted Average CLTV 84.88%
Weighted Average Original Term to
Maturity 312 months
Weighted Average Remaining Term to
Stated Maturity 283 months
Balloon Loans 3.90%
</TABLE>
S-2
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<S> <C>
Sub-group 1A will consist of FHA insured and VA guaranteed fixed rate mortgage
loans with the following characteristics (percentages are based on the
aggregate principal balance as of February 1, 2000)
Aggregate Current Principal Balance $19,151,291.69
Average Outstanding Principal Balance $82,194.38
Range of Outstanding Principal Balances
$1,367.74 to $256,753.62
Average Original Principal Balance $85,877.15
Range of Original Principal Balances
$15,700.00 to $263,475.00
Loans with Prepayment Penalties 0.00%
Second Liens 0.00%
FHA Mortgage Loans 68.26%
VA Mortgage Loans 31.74%
Sub-Prime Loans 0.00%
Performing Loans 33.57%
Sub-Performing Loans: 21.07%
Sub-Performing Loans that are Forbearance
Plan Loans 7.18%
Sub-Performing Loans that are Bankruptcy
Plan Loans 2.41%
Re-Performing Loans: 45.36%
Re-Performing Loans that are Forbearance
Plan Loans 4.59%
Re-Performing Loans that are Bankruptcy
Plan Loans 37.18%
Weighted Average Loan Rate 8.294%
Range of Loan Rates 6.500% to 15.500%
Weighted Average CLTV 98.00%
Weighted Average Original Term to Maturity 358 months
Weighted Average Remaining Term to
Stated Maturity 314 months
Balloon Loans 0.00%
Sub-group 1B will consist of conventional fixed rate mortgage loans having
conforming balances and no prepayment penalties with the following
characteristics (percentages are based on the aggregate principal balance as
of February 1, 2000)
Aggregate Current Principal Balance $55,980,257.89
Average Outstanding Principal Balance $61,381.86
Range of Outstanding Principal Balances $1,983.60 to
$262,148.35
Average Original Principal Balance $64,328.68
Range of Original Principal Balances $5,972.00 to
$262,250.00
Loans with Prepayment Penalties 0.00%
Second Liens 2.37%
Sub-Prime Loans 73.63%
Performing Loans 73.92%
Sub-Performing Loans: 18.13%
Sub-Performing Loans that are Forbearance Plan Loans 0.06%
Sub-Performing Loans that are Bankruptcy Plan Loans 0.90%
Re-Performing Loans: 7.96%
Re-Performing Loans that are Forbearance
Plan Loans 0.00%
Re-Performing Loans that are Bankruptcy
Plan Loans 3.32%
Weighted Average Loan Rate 10.627%
Range of Loan Rates 6.00% to 17.44%
Weighted Average CLTV 80.39%
Weighted Average Original Term to Maturity 297 months
Weighted Average Remaining Term to Stated Maturity
272 months
Balloon Loans 5.23%
</TABLE>
S-3
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<TABLE>
<S> <C>
Loan Group 2 will consist of two sub-groups with the following aggregate
characteristics (percentages are based on the aggregate principal balance as
of February 1, 2000)
Aggregate Current Principal Balance $75,416,506.15
Average Outstanding Principal Balance $112,394.20
Range of Outstanding Principal Balances $5,803.18 to
$592,537.05
Average Original Principal Balance $113,779.72
Range of Original Principal Balances $19,125.00 to
$601,858.75
Second Liens 0.00%
Loans with Prepayment Penalties 41.66%
Adjustable Rate Loans 88.35%
Fixed Rate Loans 11.65%
FHA Mortgage Loans 2.64%
VA Mortgage Loans 0.29%
Sub-Prime Loans 79.93%
Performing Loans 86.34%
Sub-Performing Loans: 6.78%
Sub-Performing Loans that are Forbearance
Plan Loans 0.66%
Sub-Performing Loans that are Bankruptcy
Plan Loans 0.27%
Re-Performing Loans: 6.88%
Re-Performing Loans that are Forbearance
Plan Loans 1.02%
Re-Performing Loans that are Bankruptcy
Plan Loans 3.04%
Weighted Average Loan Rate 10.174%
Range of Loan Rates 5.440% to 16.020%
Weighted Average CLTV 77.74%
Weighted Average Original Term to Maturity 352 months
Weighted Average Remaining Term to
Stated Maturity 339 months
Sub-group 2A will consist of conventional fixed rate mortgage loans having
non-conforming balances with the following characteristics (percentages are
based on the aggregate principal balance as of February 1, 2000)
Aggregate Current Principal Balance $8,788,742.69
Average Outstanding Principal Balance $325,508.99
Range of Outstanding Principal Balances $160,341.18 to
$592,537.05
Average Original Principal Balance $342,743.12
Range of Original Principal Balances $253,130.30 to
$601,858.75
Loans with Prepayment Penalties 19.70%
Second Liens 0.00%
Sub-Prime Loans 38.01%
Performing Loans 93.92%
Sub-Performing Loans: 6.08%
Sub-Performing Loans that are Forbearance
Plan Loans 0.00%
Sub-Performing Loans that are Bankruptcy
Plan Loans 0.00%
Re-Performing Loans: 0.00%
Re-Performing Loans that are Forbearance
Plan Loans 0.00%
Re-Performing Loans that are Bankruptcy
Plan Loans 0.00%
Weighted Average Loan Rate 9.669%
Range of Loan Rates 6.880% to 11.990%
Weighted Average CLTV 78.38%
Weighted Average Original Term to Maturity 331 months
Weighted Average Remaining Term to Stated
Maturity 291 months
Balloon Loans 10.49%
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Sub-group 2B will consist of adjustable-rate mortgage loans with
the following characteristics (percentages are based on the
aggregate principal balance as of February 1, 2000)
Aggregate Current Principal Balance $66,627,763.46
Average Outstanding Principal $103,459.26
Balance
Range of Outstanding Principal $5,803.18 to
Balances $399,721.12
Average Original Principal Balance $104,180.33
Range of Original Principal Balances $19,125.00 to
$400,000.00
Second Liens 0.00%
Loans with Prepayment Penalties 44.56%
Index:
Six-Month LIBOR 92.31%
1 YR CMT 7.49%
Other 0.19%
Mortgage Interest Rates by Index:
Six-Month LIBOR 10.34%
1 YR CMT 8.97%
Other 9.93%
Gross Margin Weighted Average by
Index:
Six-Month LIBOR 6.28%
1 YR CMT 3.94%
Other 3.08%
FHA Mortgage Loans 2.99%
VA Mortgage Loans 0.33%
Sub-Prime Loans 85.46%
Performing Loans 85.34%
Sub-Performing Loans: 6.87%
Sub-Performing Loans that are Forbearance
Plan Loans 0.74%
Sub-Performing Loans that are Bankruptcy
Plan Loans 0.31%
Re-Performing Loans: 7.79%
Re-Performing Loans that are Forbearance
Plan Loans 1.15%
Re-Performing Loans that are Bankruptcy Plan
Loans 3.44%
Weighted Average Loan Rate 10.240%
Range of Loan Rates 5.440% to 16.020%
Weighted Average CLTV 77.65%
Weighted Average Original Term to Maturity 355 months
Weighted Average Remaining Term to Stated Maturity
345 months
Weighted Average Maximum Loan Rate 16.29%
Range of Maximum Loan Rates 10.00% to 22.04%
Weighted Average Minimum Loan Rate 9.32%
Range of Minimum Loan Rates 0.00% to 16.02%
Weighted Average Initial Rate Adjustment Cap 2.63%
Range of Initial Rate Adjustment 0.00% to 6.00%
Caps Weighted Average Periodic Rate Adjustment Cap 1.16%
Range of Periodic Rate Adjustment 0.00% to 3.00%
Caps Weighted Average Months to Next Roll 18 months
Range of Months to Next Roll 1 to 116 months
Weighted Average Interest Roll Frequency 6 months
</TABLE>
S-5
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<TABLE>
<S> <C>
Loan Group 3 will consist of conventional fixed-rate
mortgage loans with conforming balances and prepayment
penalties with the following aggregate characteristics
(percentages are based on the aggregate principal balance as
of February 1, 2000)
Aggregate Current Principal Balance $36,484,054.64
Average Outstanding Principal Balance $64,918.25
Range of Outstanding Principal
Balances $3,230.25 to
$232,074.44
Average Original Principal Balance $66,018.35
Range of Original Principal Balances $10,000.00 to
$232,500.00
Loans with Prepayment Penalties 100.00%
Second Liens 1.93%
FHA Mortgage Loans 0.00%
VA Mortgage Loans 0.00%
Sub-Prime Loans 92.73%
Performing Loans 58.85%
Sub-Performing Loans: 33.89%
Sub-Performing Loans that are Forbearance
Plan Loans 0.00%
Sub-Performing Loans that are Bankruptcy 0.94%
Plan Loans
Re-Performing Loans: 7.25%
Re-Performing Loans that are Forbearance
Plan Loans 0.00%
Re-Performing Loans that are Bankruptcy 0.29%
Plan Loans
Weighted Average Loan Rate 10.707%
Range of Loan Rates 7.200% to 19.500%
Weighted Average CLTV 80.15%
Weighted Average Original Term to
Maturity 291 months
Weighted Average Remaining Term to
Stated Maturity 277 months
Balloon Loans 14.22%
See "The Mortgage Pool" in this prospectus supplement for
more information about the mortgage loans.
Distributions--General.............................The distribution date will be the 25th day of each month or, if
such day is not a business day, the next business day, beginning
on March 27, 2000. Distributions will generally include payments
made on the mortgage loans during the related collection period.
The collection period for any distribution date is the period
from the second day of the calendar month preceding the month in
which such distribution date occurs through the first day of the
calendar month in which such distribution date occurs. The
collection period for the first distribution date will be from
February 2, 2000 through March 1, 2000.
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S-6
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<S> <C>
Record Date........................................The record date for each distribution date will be as follows:
for the Class A-1 and Class A-3 Certificates, the last business
day of the month preceding the month in which the related
distribution date occurs and for the Class A-2 Certificates
(unless definitive certificates are issued), the business day
before such distribution date (except that the record date for
the Class A Certificates for the first distribution date is the
closing date).
Interest Distributions.............................On each distribution date, you will be entitled to receive
interest accrued on your certificate at the applicable
pass-through rate during the related accrual period and any
interest which you earned previously but which you did not
receive. The accrual period for the Class A-1 and Class A-3
Certificates is the month immediately preceding the month in
which such distribution date occurs. Except for the first
accrual period, the accrual period for the Class A-2 Certificates
is the period from the distribution date in the prior month to
the day prior to the current distribution date. The first
accrual period for the Class A-2 Certificates will begin on the
closing date and end on March 26, 2000. Interest will be
calculated for the Class A-1 and Class A-3 Certificates on the
basis of a 360-day year consisting of twelve 30-day months.
Interest will be calculated for the Class A-2 Certificates on the
basis of the actual number of days in the accrual period, based
on a 360-day year.
There are certain circumstances which could reduce the
amount of interest paid to you. See "Description of the
Certificates - Definitions - Interest Distributable Amount"
in this prospectus supplement.
Pass-Through
Rates..............................................The pass-through rate with respect to the Class A-1
Certificates will be equal to the lesser of (i) 7.99% per
annum and (ii) the Class A-1 Net WAC Cap as described herein.
The pass-through rate with respect to the Class A-2
Certificates will be equal to the lesser of (i) the Class A-2
Formula Rate and (ii) the Class A-2 Available Funds Cap, each
as described herein. The pass-through rate with respect to
the Class A-3 Certificates will be equal to the lesser of (i)
8.03% per annum and (ii) the Class A-3 Net WAC Cap as
described herein.
In addition, if the seller fails to exercise its option to
purchase the mortgage loans as described below under the
heading "The Pooling and Servicing Agreement -- Termination",
the pass-through rate on the Class A-1 and Class A-3
Certificates will increase by 0.50% and the margin used in
calculating the pass-through rate on the Class A-2
Certificates will double.
Principal Distributions............................On each distribution date, you will receive a distribution of
principal if there is cash available on that date for your class
of certificates. You should review the priority of payments
described under "Description of the Certificates - Allocation of
Available Funds" in this prospectus supplement.
Credit Enhancement.................................Credit enhancements reduce the harm caused to holders of
certificates by shortfalls in payments received on the mortgage
loans. They can reduce the effect of shortfalls on all classes,
or they can allocate shortfalls so they affect some classes
before others. This transaction employs the following four forms
of credit
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S-7
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enhancement. See "Description of the Certificates" in this
prospectus supplement.
THE POLICY. The certificate guaranty policy will guaranty the
ultimate payment of principal and timely payment of interest
on the Class A Certificates. If the certificate insurer were
unable to pay under the policy, the Class A Certificates
could be subject to losses.
OVERCOLLATERALIZATION. The total principal balance of the
mortgage loans in each loan group will exceed the total
principal balance of each related class of certificates as of
the closing date. For loan group 1, the total principal
balance of the mortgage loans exceeds the total principal
amount of the Class A-1 Certificates by an amount equal to
approximately 5.75% of the total principal balance of the
mortgage loans in loan group 1. For loan group 2, the total
principal balance of the mortgage loans exceeds the total
principal amount of the Class A-2 Certificates by an amount
equal to approximately 5.60% of the total principal balance
of the mortgage loans in loan group 2. For loan group 3, the
total principal balance of the mortgage loans exceeds the
total principal amount of the Class A-3 Certificates by an
amount equal to approximately 5.75% of the total principal
balance of the mortgage loans in loan group 3. The excess
portion of the total principal balance of the mortgage loans
will absorb losses on the mortgage loans before such losses
affect the certificates. If the level of
overcollateralization falls below what is required, the
excess interest described in the next section will be paid to
the certificates as principal. This will have the effect of
reducing the principal balance of the certificates faster
than the principal balance of the mortgage loans so that the
required level of overcollateralization is reached.
CROSSCOLLATERALIZATION. Certain funds received on the
mortgage loans in one mortgage loan group after payment of
required interest and principal on the related Certificates
may be used to make certain distributions to the Class A
Certificates relating to another loan group.
MONTHLY EXCESS CASHFLOW. Because more interest is expected to
be paid by the mortgagors than is necessary to pay the
interest earned on the certificates, we expect there to be
excess interest each month. The excess interest will be used
to create overcollateralization, to pay interest that was
previously earned but not paid to the certificates, to
reimburse the certificates for losses that they experienced
previously and then, if necessary, for
cross-collateralization to the other loan groups.
Optional Termination...............................The seller has the option to purchase all the mortgage loans and
any properties that the trustee acquired in satisfaction of any
of the mortgage loans. This option can be exercised when the
total principal balance of the mortgage loans is 10% or less of
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
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S-8
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<S> <C>
will be entitled to the following amounts to the extent
available therefor:
o the outstanding principal balance of your certificate;
o one month's interest on such balance at the applicable
pass-through rate;
o any interest previously earned but not paid; and
o in the case of the Class A-2 Certificates only, any
"LIBOR Carryover Amount", as described in this prospectus
supplement, from all previous distribution dates.
See "The Pooling and Servicing Agreement - Termination" in
this prospectus supplement.
Certain Federal Income Tax
Consequences................................... The trustee will elect to treat the assets of the trust,
exclusive of a reserve fund intended to protect against basis
risk for the Class A Certificates, as comprising two separate
real estate mortgage investment conduits, or REMICs, for federal
income tax purposes.
For further information regarding the federal income tax
consequences of investing in the offered certificates, see
"Certain Federal Income Tax Consequences" in this prospectus
supplement and "Material Federal Income Tax Consequences" in
the prospectus.
Ratings.......................................... The trust will not issue the certificates unless they receive the
respective ratings set forth below from Moody's Investors
Services, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hills Companies, Inc. ("S&P") and Duff &
Phelps Credit Rating Co. ("DCR")
Class Moody's S&P DCR
----- ------- --- ---
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
A-3 Aaa AAA AAA
The rating on the certificates indicates the likelihood that
you will receive all funds to which you are entitled by the
terms of your certificate. The ratings assigned to the Class
A Certificates will depend primarily upon the
creditworthiness of the certificate insurer. Any reduction in
a rating assigned to the financial strength of the
certificate insurer below the ratings initially assigned to
the Class A Certificates may result in a reduction of one or
more of the ratings assigned to the Class A Certificates. A
rating is not a recommendation to buy, sell or hold
securities and the rating agency can revise or withdraw it at
any time. A rating does not address the likelihood of the
payment of any LIBOR Carryover Amount, the frequency of
prepayments on the mortgage loans or the effect of such
prepayments on your yield. See "Yield, Prepayment and
Maturity Considerations" and "Ratings" in this prospectus
supplement and "Yield Considerations" in the prospectus.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Legal Investment................................. You should consult with counsel to see if you are permitted to
buy the offered certificates, since legal investment rules will
vary depending on the type of entity purchasing the offered
certificates, whether that entity is subject to regulatory
authority, and if so, by whom. The Class A-2 Certificates will
be "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended. The Class
A-1 and Class A-3 Certificates will not be "mortgage related
securities" because loan group 1 and loan group 3 contain second
lien mortgage loans and owner-financed mortgage loans that were
originated by individuals and not by financial institutions or
mortgagees approved by the Secretary of Housing and Urban
Development. See "Legal Investment Considerations" in this
prospectus supplement and in the prospectus.
ERISA Considerations............................. If you are a fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended, you should consult
with counsel as to whether you can buy or hold an offered
certificate. See "ERISA Considerations" in this prospectus
supplement and in the prospectus.
</TABLE>
S-10
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
RATING OF THE CLASS A CERTIFICATES BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF
THE CERTIFICATE INSURER
The ratings on the Class A Certificates depend primarily on the financial
strength of the Certificate Insurer. Therefore, a reduction of the rating
assigned to the financial strength of the Certificate Insurer may have a
corresponding reduction on the ratings assigned to the Class A Certificates. In
general, the ratings address credit risk and do not address the likelihood of
prepayments.
THERE ARE RISKS INHERENT IN THE NATURE OF THE MORTGAGE LOANS
Approximately 54.86% of the mortgage loans in Loan Group 1, approximately
79.93% of the mortgage loans in Loan Group 2 and approximately 92.73% of the
mortgage loans in Loan Group 3 (by aggregate principal balance of the mortgage
loans in that Loan Group as of the Cut-off Date) are of sub-prime credit
quality. In addition, other mortgage loans have been severely delinquent or are
in bankruptcy or a forbearance period. Delinquencies and liquidation proceedings
are more likely with these mortgage loans than with mortgage loans that do not
have such histories. In the event these mortgage loans do become delinquent or
subject to liquidation, you may face delays in receiving payment and losses if
the Certificate Insurer is unable to pay on the certificate guaranty insurance
policy and the other credit enhancements are insufficient to cover the delays
and losses.
The trust also contains some mortgage loans with respect to which the total
amount of scheduled monthly payments due thereon on or before the Cut-off Date
were not received. These past due payments are called "arrearages" and are not a
part of the trust. In the case of any mortgage loan that has an outstanding
arrearage, all payments of principal received with respect to such mortgage loan
will be applied by the Servicer to reduce such arrearage to zero before being
applied to reduce the outstanding principal balance of such mortgage loan. The
Servicer will be required to make advances of delinquent payments of principal
and interest on delinquent mortgage loans except for simple interest mortgage
loans, each to the extent such advances are deemed recoverable, until such
mortgage loans become current. In the event that a mortgage loan is liquidated
before the related arrearage is reduced to zero, the arrearage, together with
reimbursements for advances of principal and interest and servicing advances
with respect to such mortgage loan, will reduce the liquidation proceeds
available for distribution to certificateholders.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Mortgagors may prepay their mortgage loans in whole or in part at any time.
We cannot predict the rate at which mortgagors will repay their mortgage loans.
A prepayment of a mortgage loan generally will result in a prepayment on the
certificates.
o If you purchase your certificates at a discount and principal is
repaid slower than you anticipate, then your yield may be lower than
you anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the fixed-rate
mortgage loans, those mortgage loans are more likely to prepay than if
prevailing rates remain above the interest rates on such mortgage
loans. In addition, if interest rates decline, adjustable-rate
mortgage loan prepayments may increase due to the availability of
fixed-rate mortgage loans at lower interest rates. Conversely, if
prevailing interest rates rise significantly, the prepayments on
fixed-rate and adjustable-rate mortgage loans are likely to decrease.
o Approximately 36.28% of the mortgage loans (by aggregate principal
balance as of the Cut-off Date) in the mortgage pool require the
mortgagor to pay a penalty if the
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<PAGE>
mortgagor prepays the mortgage loan during periods generally up to
five years after the mortgage loan was originated. A prepayment
penalty may discourage a mortgagor from prepaying the mortgage loan
during the applicable period. The holder of the Class X Certificates
will be entitled to all prepayment penalties received on the Mortgage
Loans, and such amounts will not be available for distribution on the
Class A Certificates. Under certain circumstances, as described in the
pooling and servicing agreement, the Servicer may waive the payment of
any otherwise applicable prepayment penalty. You should conduct your
own analysis of the effect, if any, that the prepayment penalties, and
decisions by the Servicer with respect to the waiver of such
penalties, may have on the prepayment performance of the mortgage
loans.
o The Seller may be required to purchase mortgage loans from the trust
in the event certain breaches of representations and warranties have
not been cured. In addition, the Seller has the option to purchase
mortgage loans that become sixty days or more delinquent. These
purchases will have the same effect on the holders of the Class A
Certificates as a prepayment of the mortgage loans.
o If the rate of default and the amount of losses on the mortgage loans
is higher than you expect, then your yield may be lower than you
expect.
See "Yield, Prepayment and Maturity Considerations" for a description of
factors that may influence the rate and timing of prepayments on the mortgage
loans.
BALLOON LOAN RISK
Balloon loans pose a risk because a mortgagor must make a large lump sum
payment of principal at the end of the loan term. If the mortgagor is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
Certificate Insurer fails to perform its obligations under the certificate
guaranty insurance policy. Approximately 3.90% of the mortgage loans in Loan
Group 1, approximately 1.22% of the mortgage loans in Loan Group 2 and
approximately 14.22% of the mortgage loans in Loan Group 3 are balloon loans (by
aggregate principal balance of the related Loan Group as of the Cut-off Date).
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE CLASS A CERTIFICATES
The credit enhancement features described in the summary are intended to
enhance the likelihood that holders of the Class A Certificates will receive
regular payments of interest and principal.
If delinquencies or defaults occur on the mortgage loans, neither the
Servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted actuarial mortgage loans if
such advances are not likely to be recovered. Neither the servicer nor any other
entity will advance scheduled monthly payments of principal and interest on
simple interest mortgage loans. We cannot assure you that the applicable credit
enhancement will adequately cover any shortfalls in cash available to pay your
certificates as a result of such delinquencies or defaults.
If losses occur as a result of defaults and delinquent payments on the
mortgage loans, and the Certificate Insurer were unable to pay under the
certificate guaranty insurance policy, you may suffer losses.
INTEREST PAYMENTS MAY BE INSUFFICIENT TO MAINTAIN OVERCOLLATERALIZATION
Because the weighted average of the interest rates on the mortgage loans in
each loan group is expected to be higher than the interest rates on the related
Class A Certificates, the mortgage loans are expected to generate more interest
than is needed to pay interest owed on the related class of Class A Certificates
as well as certain fees and expenses of the trust. After certain expenses of the
trust are paid, the available excess interest will be used to maintain the level
of overcollateralization established on the closing date. We cannot assure you,
however, that enough excess interest will be generated to maintain the
overcollateralization level required by the pooling and servicing agreement. The
factors described below will affect the amount of excess interest that the
mortgage loans will generate:
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<PAGE>
o Every time a mortgage loan is prepaid in full, excess interest may be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest will be reduced because such mortgage loans will no longer be
outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans turn out to be higher than expected, excess interest will be
reduced by the amount necessary to compensate for any shortfalls in
cash available on such date to pay certificateholders.
o Certain of the mortgage loans in Loan Group 2 have rates that are
fixed or that are adjustable based on an index that is different from
the index used to determine rates on the Class A-2 Certificates. As a
result, the interest rate on the Class A-2 Certificates may increase
relative to interest rates on the mortgage loans in Loan Group 2,
requiring that more of the interest generated by the mortgage loans in
Loan Group 2 be applied to cover interest on the Class A-2
Certificates.
EFFECT OF MORTGAGE LOAN RATES MAY ADVERSELY IMPACT YIELD ON THE CLASS A-2
CERTIFICATES
The Class A-2 Certificates accrue interest at a pass-through rate based on
the one-month LIBOR index plus a specified margin, but subject to a cap. The cap
on interest paid on the Class A-2 Certificates is based on the weighted average
of the interest rates on the mortgage loans in Loan Group 2 net of certain trust
expenses. The mortgage loans in Loan Group 2 have interest rates that are fixed
or that are based on various indices. Substantially all of the adjustable-rate
mortgage loans have periodic and maximum limitations on adjustments to the
mortgage loan rate. As a result, the Class A-2 Certificates may accrue less
interest than they would accrue if their rates were based solely on the
one-month LIBOR index plus the specified margin.
A variety of factors could limit the pass-through rate on the Class A-2
Certificates which would adversely affect the yield on the Class A-2
Certificates. Some of these factors are described below:
o The pass-through rate on the Class A-2 Certificates adjusts monthly
while the loan rates on the adjustable-rate mortgage loans adjust less
frequently. Consequently, the cap on the certificates may limit
increases in the pass-through rate for extended periods in a rising
interest rate environment.
o The loan rates on the adjustable-rate mortgage loans may respond to
different economic and market factors than one-month LIBOR. It is
possible that interest rates on certain of the adjustable-rate
mortgage loans may decline while the pass-through rate on the Class
A-2 Certificates is stable or rising. It is also possible that
interest rates on the adjustable-rate mortgage loans in Loan Group 2
and the pass-through rate on the Class A-2 Certificates may decline or
increase during the same period, but that the pass-through rate on the
Class A-2 Certificates may decline more slowly or increase more
rapidly.
THERE ARE RISKS RELATING TO SUBORDINATE LOANS
Approximately 1.76% of the mortgage loans in Loan Group 1 and approximately
1.93% of the mortgage loans in Loan Group 3 (by aggregate principal balance of
Loan Group 1 as of the Cut-off Date) evidence a second lien that is subordinate
to the rights of the mortgagee under a first mortgage. The proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding principal balance of such junior mortgage loans only to the
extent that the claims of any senior mortgage loans have been satisfied in full,
including any foreclosure costs. In circumstances where the Servicer determines
that it would be uneconomical to foreclose on the related mortgaged property,
the Servicer may write-off the entire outstanding principal balance of the
related mortgage loan as bad debt. The foregoing considerations will be
particularly applicable to junior mortgage loans that have high combined
loan-to-value ratios because the Servicer is more likely to determine that
foreclosure would be uneconomical. You should consider the risk that to the
extent losses on mortgage loans are not covered by available credit enhancement,
such losses will be borne by the holders of the certificates.
INTEREST PAYMENTS MAY BE INSUFFICIENT TO PAY INTEREST ON THE CERTIFICATES
When a mortgage loan is prepaid in full, the mortgagor is charged interest
only up to the date on which payment is made, rather than for an entire month,
and the amount of such prepayment is remitted in the month
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<PAGE>
following the calendar month of receipt. This may result in a shortfall in
interest collections available for payment on the next distribution date.
Similarly, with respect to simple interest mortgage loans, the mortgagor is only
charged interest up to the date on which payment is made. Therefore, if a
mortgagor makes a payment on a simple interest mortgage loan in any month less
than 30 days after the previous payment date, a shortfall in interest
collections available for payment on the next distribution date may result. The
Servicer is required to cover a portion of the shortfall in interest collections
that are attributable to prepayments in full on actuarial mortgage loans, but
only up to one-half of the Servicer's servicing fee for the related accrual
period. The Servicer is not required to cover any shortfall in interest
collections that are attributable to prepayments in full or the timing of
monthly payments on simple interest mortgage loans. The Certificate Insurer is
not required to cover either shortfall. If the other forms of credit enhancement
are insufficient to cover either shortfall in excess of the amount covered by
the Servicer, you may incur a loss.
In addition, certain shortfalls in interest collections arising from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will not be
covered by either the Servicer or the certificate guaranty insurance policy.
THERE IS A RISK THAT THERE MAY BE A DELAY IN RECEIPT OF LIQUIDATION PROCEEDS AND
LIQUIDATION PROCEEDS MAY BE LESS THAN THE MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, liquidation expenses such as legal fees,
real estate taxes and maintenance and preservation expenses will reduce the
portion of liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the mortgage loan, you will incur a loss on your
investment if the Certificate Insurer fails to perform its obligations under the
certificate guaranty insurance policy and the other credit enhancements are
insufficient to cover the loss.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater risk
of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 27.60% of the mortgage loans in Loan Group 1, 16.94% of the
mortgage loans in Loan Group 2 and 43.95% of the mortgage loans in Loan Group 3
(in each case, based on the aggregate principal balance of the mortgage loans in
that Loan Group as of the Cut-off Date), had a loan-to-value ratio in excess of
80% at origination (or, in the case of the mortgage loans that are secured by
second liens, a combined loan-to-value ratio in excess of 80% at origination)
and do not have FHA insurance, a VA guaranty or, if the mortgage is secured by a
first lien, primary mortgage insurance.
GEOGRAPHIC CONCENTRATION
The following chart lists the states with the highest concentrations of
mortgage loans for each Loan Group, based on the aggregate principal balance of
the mortgage loans in each Loan Group as of the Cut-off Date.
<TABLE>
<CAPTION>
Loan Group 1 Loan Group 2 Loan Group 3
- --------------------------------- -------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
California 13.19% California 21.92% Florida 17.36%
Texas 8.96% Florida 6.71% Georgia 13.68%
Florida 6.57% New Jersey 6.39% California 7.18%
North Carolina 6.44% Washington 5.77% Ohio 7.17%
New York 5.46% Michigan 5.62% Virginia 7.17%
Georgia 5.13% Michigan 6.18%
Pennsylvania 5.18%
New York 5.08%
</TABLE>
Property in California may be particularly susceptible to certain types of
uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact on
the mortgage loans in general:
o Economic conditions in the states listed above which may or may not
affect real property values may affect the ability of mortgagors to
repay their loans on time.
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o Declines in the residential real estate markets in the states listed
above may reduce the values of properties located in those states,
which would result in an increase in the loan-to-value ratios or
combined loan-to-value ratios related to the mortgage loans.
o Any increase in the market value of properties located in the states
listed above would reduce the loan-to-value ratios or combined
loan-to-value ratios, as applicable, and could, therefore, make
alternative sources of financing available to the mortgagors at lower
interest rates, which could result in an increased rate of prepayment
of the mortgage loans.
LACK OF LIQUIDITY
The Underwriter intends to make a secondary market in the certificates
purchased by it, but has no obligation to do so. There is no assurance that such
a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for mortgage-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
RISKS RELATED TO OWNER-FINANCED MORTGAGE LOANS
Reduced Underwriting Standards
Approximately 8.20% of the mortgage loans in Loan Group 1 (based on the
aggregate principal balance of the mortgage loans in Loan Group 1 as of the
Cut-off Date) are owner-financed mortgage loans. These mortgage loans were
originated by the individual sellers of the related mortgaged property who
generally are inexperienced in matters pertaining to mortgage banking. These
mortgage loans were originated with less stringent standards than the other
mortgage loans. The mortgagor under an owner-financed mortgage loan generally
does not complete a mortgage loan application and the seller of the related
property generally does not verify the income or employment of the related
mortgagor, nor obtain other information customarily obtained during the mortgage
loan origination process. As a result, certain information concerning the
owner-financed mortgage loans that may be of interest to you is not available.
However, the Seller obtained and reviewed the credit history and payment history
of each mortgagor in connection with an acquisition of an owner-financed loan,
and conducted an assessment of the value of the property.
Appraisals May Be Inaccurate
In acquiring owner-financed mortgage loans, the Seller assesses the value
of a property, generally using either a prior appraisal, which must be
re-certified if older than six months, or a drive-by appraisal. A drive-by
appraisal is not as accurate as a full real estate appraisal because the
appraiser does not have access to the interior of the mortgaged property and may
not have access to the rear of the mortgaged property. As a result, the
appraisal may reflect assumptions made by the appraiser regarding the interior
or the rear of the mortgaged property which may not be accurate. To the extent
the Seller has over-appraised the value of a property, such amount may not be
recovered during a liquidation proceeding.
THERE ARE RISKS RELATING TO ALTERNATIVES TO FORECLOSURE
Some of the mortgage loans are delinquent as of the Closing Date. Other
mortgage loans may become delinquent after the Closing Date. The Servicer may
either foreclose on any such mortgage loan or work out an agreement with the
mortgagor, which may involve waiving or modifying any term of the mortgage loan.
If the
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<PAGE>
Servicer extends the payment period or accepts a lesser amount than stated in
the mortgage note in satisfaction of the mortgage note, your yield may be
reduced.
RECOVERY OF DEFAULTED AMOUNTS UNDER FHA AND VA PROGRAMS IS UNCERTAIN
Approximately 25.59% of the mortgage loans in Loan Group 1 and
approximately 2.93% of the mortgage loans in Loan Group 2, in each case by the
respective Loan Group aggregate principal balance as of the Cut-off Date, are
covered by either insurance from the Federal Housing Administration or a
guaranty from the United States Department of Veterans Affairs. Recovery of
insured amounts from these agencies is dependent upon material compliance by the
originator and the Servicer with applicable regulations. These regulations are
subject to interpretative uncertainties. If upon filing a claim for recovery of
a defaulted amount, it is discovered that the mortgage loan did not comply with
a regulation, the Servicer may not be able to fully recover the insured amounts.
See "The Mortgage Pool - FHA Mortgage Loans and VA Mortgage Loans" herein.
S-16
<PAGE>
THE CERTIFICATE INSURER
The following information has been supplied by MBIA Insurance Corporation,
the Certificate Insurer, for inclusion in this prospectus supplement. The
Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Certificate Insurer set forth
under the headings, "DESCRIPTION OF THE CERTIFICATES--the Policy" and "THE
CERTIFICATE INSURER" herein. Additionally, the Certificate Insurer makes no
representation regarding the Certificates or the advisability of investing in
the Certificates.
THE INSURER
MBIA Insurance Corporation, the Certificate Insurer, is the principal
operating subsidiary of MBIA Inc., a New York Stock Exchange listed company.
MBIA Inc. is not obligated to pay the debts of or claims against the Certificate
Insurer. The Certificate Insurer is domiciled in the State of New York and
licensed to do business in and subject to regulation under the laws of all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Certificate Insurer has two European
branches, one in the Republic of France and the other in the Kingdom of Spain.
New York has laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the Certificate Insurer,
changes in control and transactions among affiliates. Additionally, the
Certificate Insurer is required to maintain contingency reserves on its
liabilities in specified amounts and for specified periods of time.
FINANCIAL INFORMATION ABOUT THE CERTIFICATE INSURER
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc. and its subsidiaries as of December 31, 1998 and
December 31, 1997 and for each of the three years in the period ended December
31, 1998, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1998 and the consolidated financial statements of the Certificate
Insurer and its subsidiaries as of September 30, 1999 and for the nine month
periods ended September 30, 1999 and September 30, 1998 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ended September 30,
1999, are hereby incorporated by reference into this prospectus supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this prospectus supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes that statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. 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 Class A-1 Certificates, Class A-2 Certificates and Class A-3 Certificates
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing those documents.
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<PAGE>
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities and generally accepted
accounting principles:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING PRACTICES
------------------------------------------------------
December 31, 1998 September 30, 1999
------------------------ ------------------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets........................................ $6,521 $6,930
Liabilities............................................ 4,231 4,571
Capital and Surplus.................................... 2,290 2,359
<CAPTION>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
------------------------------------------------------
December 31, 1998 September 30, 1999
------------------------ ------------------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets................................................. $7,488 $7,422
Liabilities............................................ 3,211 3,234
Shareholder's Equity................................... 4,277 4,188
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE CERTIFICATE INSURER
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1998 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
FINANCIAL STRENGTH RATINGS OF THE CERTIFICATE INSURER
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Certificate Insurer "AAA."
Fitch IBCA, Inc. rates the financial strength of the Certificate Insurer
"AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect each respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
The Certificate Insurer does not guaranty the market price of the securities nor
does it guaranty that the ratings on the securities will not be revised or
withdrawn.
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<PAGE>
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided by
Credit-Based Asset Servicing and Securitization LLC (the "Seller"). None of the
Depositor, the Underwriter, the Servicer, the Trustee or any of their respective
affiliates have made or will make any representation as to the accuracy or
completeness of such information.
Certain information with respect to the Mortgage Loans to be included in
each Loan Group is set forth herein. Prior to the Closing Date, Mortgage Loans
may be removed from a Loan Group and other Mortgage Loans may be substituted
therefor. The Seller believes that the information set forth herein with respect
to each Loan Group as presently constituted is representative of the
characteristics of each Loan Group as it will be constituted at the Closing
Date, although certain characteristics of the Mortgage Loans in a Loan Group may
vary.
GENERAL
The assets included in the trust (the "Trust Fund") will consist of a pool
of 2,378 closed-end, fixed-rate and adjustable-rate mortgage loans (the
"Mortgage Pool") having original terms to maturity ranging from 36 to 559 months
(the "Mortgage Loans") and an aggregate principal balance as of February 1, 2000
(the "Cut-off Date) of approximately $187,032,110.37. All Mortgage Loan
statistics set forth herein are based on principal balances, interest rates,
terms to maturity, mortgage loan counts and similar statistics as of the Cut-off
Date. All weighted averages specified herein are based on the principal balances
of the Mortgage Loans in the related Loan Group or sub-group, as applicable, as
of the Cut-off Date, as adjusted for the principal payments received or advanced
on or before such date, plus Deferred Interest (each, a " Cut-off Date Principal
Balance"). The "Principal Balance" of a Mortgage Loan, as of any date, is equal
to the principal balance of such Mortgage Loan at its origination, less the sum
of scheduled and unscheduled payments in respect of principal made on such
Mortgage Loan. References to percentages of the Mortgage Loans mean percentages
based on the aggregate of the Cut-off Date Principal Balances of the Mortgage
Loans in the related Loan Group, unless otherwise specified. The "Pool Balance"
is equal to the aggregate Principal Balances of the Mortgage Loans in the Loan
Groups.
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Mortgage Loan Purchase Agreement (the "Mortgage Loan Purchase Agreement")
dated as of the Cut-off Date between the Seller and the Depositor. Pursuant to
the Pooling and Servicing Agreement, the Depositor will cause the Mortgage Loans
to be assigned to the Trustee for the benefit of the Certificateholders. See
"The Pooling and Servicing Agreement" herein.
Each of the Mortgage Loans in the Mortgage Pool was selected from the
Seller's portfolio of mortgage loans. The Mortgage Loans were acquired by the
Seller in the secondary market in the ordinary course of its business and
re-underwritten by the Seller in accordance with its underwriting standards as
described in "The Seller - Underwriting Standards". The Mortgage Loans in the
Mortgage Pool were originated by various mortgage loan originators.
Approximately 24.94%, 18.59% and 13.03% of the Mortgage Loans in Loan Group 1
were originated by GMAC Mortgage Corporation, NationsCredit Financial Services
Corporation and NAMCO Asset Management Inc., respectively. Approximately 36.85%
and 23.63% of the Mortgage Loans in Loan Group 2 were originated by Aames
Capital Corporation and GMAC Mortgage Corporation, respectively. Approximately
35.24%, 17.41%, 14.25% and 12.67% of the Mortgage Loans in Loan Group 3 were
originated by NationsCredit Financial Services Corporation, Equicredit
Corporation of America, Pacific Thrift & Loan Company and Aames Capital
Corporation, respectively.
Under the Pooling and Servicing Agreement, the Seller will make certain
representations and covenants to the Trustee relating to, among other things,
the due execution and enforceability of the Pooling and Servicing Agreement and
certain characteristics of the Mortgage Loans and, subject to certain
limitations, will be obligated to repurchase or substitute a similar mortgage
loan for any Mortgage Loan as to which there exists deficient documentation or
an uncured breach of any such representation, warranty or covenant, if such
breach of any such representation, warranty or covenant materially and adversely
affects the Certificateholders' interests in such Mortgage Loan. The Depositor
will make no representations or warranties with respect to the Mortgage Loans
and will have no obligation to repurchase or substitute Mortgage Loans with
deficient documentation or that are otherwise defective. The Seller is selling
the Mortgage Loans without recourse and will have no obligation with
S-19
<PAGE>
respect to the Certificates in its capacity as Seller other than the repurchase
or substitution obligations described above.
The Mortgage Pool will consist of three loan groups ("Loan Group 1", "Loan
Group 2" and "Loan Group 3," respectively, and each, a "Loan Group"). Loan Group
1 and Loan Group 2 are further divided into two sub-groups each ("Sub-group 1A,"
"Sub-group 1B," "Sub-group 2A" and "Sub-group 2B"). The Mortgage Loans in
Sub-group 1A (the "Sub-group 1A Mortgage Loans") consist of 233 fixed rate
Mortgage Loans with an aggregate principal balance (the "Sub-group 1A Loan
Balance") of $19,151,291.69 as of the Cut-off Date. The Mortgage Loans in
Sub-group 1B (the "Sub-group 1B Mortgage Loans") consist of 912 fixed rate
Mortgage Loans with an aggregate principal balance (the "Sub-group 1B Loan
Balance") of $55,980,257.89 as of the Cut-off Date. The Mortgage Loans in
Sub-group 2A (the "Sub-group 2A Mortgage Loans") consist of 27 fixed-rate
Mortgage Loans with an aggregate principal balance (the "Sub-group 2A Loan
Balance") of $8,788,742.69 as of the Cut-off Date. The Mortgage Loans in
Sub-group 2B (the "Sub-group 2B Mortgage Loans") consist of 644 adjustable-rate
Mortgage Loans with an aggregate principal balance (the "Sub-group 2B Loan
Balance") of $66,627,763.46 as of the Cut-off Date. The Mortgage Loans in Loan
Group 3 (the "Group 3 Mortgage Loans") consist of 562 fixed-rate Mortgage Loans
with an aggregate principal balance (the "Loan Group 3 Loan Balance," and each
of the Sub-group 1A Loan Balance, the Sub-group 1B Loan Balance, the Sub-group
2A Loan Balance, the Sub-group 2B Loan Balance and the Group 3 Loan Balance, a
"Loan Group Balance") of $36,484,054.64 as of the Cut-off Date.
Each Loan Group consists of Performing Mortgage Loans, Sub-Performing
Mortgage Loans and Re-Performing Mortgage Loans, except for Sub-group 2A which
does not include any Re-Performing Mortgage Loans, each as defined below:
o A "Performing Mortgage Loan" is a Mortgage Loan pursuant to which no
payment due under the related mortgage note (or any modification
thereto) prior to the Cut-off Date, is 30 days Delinquent.
o A "Sub-Performing Mortgage Loan" is a Mortgage Loan pursuant to which
a payment due prior to the Cut-off Date under the terms of the related
mortgage note (or any modification thereto), is at least 30 but not
more than 89 days Delinquent. Certain Sub-Performing Mortgage Loans
have been modified in writing and are also characterized as follows:
(i) If a Sub-Performing Mortgage Loan is a "Forbearance Plan Mortgage
Loan", the related mortgagor must make monthly payments
("Modified Scheduled Payments") in an amount at least equal to
the sum of (i) the amount of the monthly scheduled payment of
principal and interest determined in accordance with such
mortgage loan's original amortization schedule ("Regular
Scheduled Payments") plus (ii) an additional amount to be applied
to pay down the total amount of scheduled monthly payments due
thereon on or before the Cut-off Date but not received prior to
the Cut-off Date plus the aggregate amount of tax and insurance
advances made with respect to such Mortgage Loan to the extent
remaining outstanding as of the Cut-off Date.
(ii) If a Sub-Performing Mortgage Loan is a "Bankruptcy Plan Mortgage
Loan," the related mortgagor defaulted and, after default, became
the subject of a case under Title 11 of the United States Code
(the "Bankruptcy Code") and, as of the Cut-off Date, had a
confirmed bankruptcy plan. Each such bankruptcy plan generally
requires the related mortgagor to make Modified Scheduled
Payments in an amount at least equal to (i) the Regular Scheduled
Payment plus (ii) an additional amount sufficient to pay down
overdue amounts resulting from the period of default, generally
over a period of three to five years from the commencement of
such bankruptcy plan.
o A "Re-Performing Mortgage Loan" is a mortgage loan (that might be a
Forbearance Plan Mortgage Loan or a Bankruptcy Plan Mortgage Loan)
which had defaulted in the past and which is currently at least 90
days Delinquent with respect to certain Regular Scheduled Payments but
which satisfies one of the following criteria (the "Re-Performance
Test"):
(i) the mortgagor has made at least three aggregate Regular Scheduled
Payments in the three calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or
the payment history of such loans prior to November 1, 1999), or
S-20
<PAGE>
(ii) the mortgagor has made at least four aggregate Regular Scheduled
Payments in the four calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or
the payment history of such loans prior to October 1, 1999), or
(iii) the mortgagor has made at least five aggregate Regular Scheduled
Payments in the five calendar months preceding the Cut-off Date
(regardless of either the timing of receipt of such payments or
the payment history of such loans prior to September 1, 1999).
A Mortgage Loan is "Delinquent" if the scheduled monthly payment of
principal and interest on such Mortgage Loan which is payable by the related
Mortgagor under the related Mortgage Note (the "Monthly Payment") due on a due
date is not paid by the close of business on the next scheduled due date for
such Mortgage Loan. Thus, a Mortgage Loan for which the mortgagor failed to make
the Monthly Payment due on January 1, 2000 will be reported as current in the
calculation of delinquency status on February 1, 2000 and Delinquent on February
2, 2000 if the payment is not made by the close of business on February 1, 2000.
With respect to certain Delinquent Mortgage Loans, the delinquent payments,
together with any outstanding servicing advances previously made by the Servicer
on such Delinquent Mortgage Loans, are referred to as the "Arrearage." No
Arrearage shall be included as part of the Trust Fund and, accordingly, payments
of principal with respect to such Delinquent Mortgage Loans shall be applied by
the Servicer to reduce such Arrearage to zero and will not be payable to the
Certificateholders as and when received. However, the Servicer shall be required
to make servicing advances on Delinquent Mortgage Loans and make advances of
delinquent payments of principal and interest on Delinquent Mortgage Loans, each
to the extent such advances are deemed recoverable, until such Mortgage Loans
become current.
TERMS OF THE MORTGAGE LOANS
The Mortgage Loans accrue interest on a simple interest basis (the "Simple
Interest Mortgage Loans") or a self-amortizing basis (the "Actuarial Mortgage
Loans"). Approximately 13.75% of the Mortgage Loans are expected to be Simple
Interest Mortgage Loans, and approximately 86.25% of the Mortgage Loans are
expected to be Actuarial Mortgage Loans, in each case as a percentage of the
Cut-off Date Principal Balance.
For Simple Interest Mortgage Loans, the Mortgage Loan is amortized over a
series of equal monthly payments. Each monthly interest payment is calculated by
multiplying the outstanding Principal Balance of the loan by the stated interest
rate. Such product is then multiplied by a fraction, the numerator of which is
the number of days elapsed since the preceding payment of interest was made and
the denominator of which is either 365 or 360, depending on applicable state
law. Payments received on a Simple Interest Mortgage Loan are applied first to
interest accrued to the date payment is received and second to reduce the unpaid
Principal Balance of the Mortgage Loan. Accordingly, if a mortgagor makes a
payment on the Mortgage Loan less than 30 days after the previous payment, the
interest collected for the period since the preceding payment was made will be
less than 30 days' interest, and the amount of principal repaid in such month
will be correspondingly greater. Conversely, if a mortgagor makes a payment on
the Mortgage Loan more than 30 days after the previous payment, the interest
collected for the period since the preceding payment was made will be greater
than 30 days' interest, and the amount of principal repaid in the month will be
correspondingly reduced. As a result, based on the payment characteristics of a
particular mortgagor, the principal due on the final due date of a Simple
Interest Mortgage Loan may vary from the principal payment that would be made if
payments for such Mortgage Loan were always made on their due dates.
For Actuarial Mortgage Loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on an Actuarial Mortgage Loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on an
Actuarial Mortgage Loan during a month, the mortgagor generally is not charged
interest on the amount of the partial prepayment during the month in which such
prepayment is made.
If a mortgagor pays more than one installment on a Simple Interest Mortgage
Loan at a time, the regular installment will be treated as described above.
However, the entire amount of the additional installment will be treated as a
receipt of one or more regular principal payments and applied to reduce the
Principal Balance of the related Mortgage Loan. Although such mortgagor will not
be required to make the next monthly installment, interest
S-21
<PAGE>
will continue to accrue on the Principal Balance of such Mortgage Loan,
as reduced by the application of the early installment. As a result, when such
mortgagor pays the next required installment on a Simple Interest Mortgage Loan,
such payment may be insufficient to cover the interest that has accrued since
the last payment by the mortgagor. Notwithstanding such insufficiency, such
Mortgage Loan would be considered to be current. This situation would continue
until the monthly installments are once again sufficient to cover all accrued
interest and to reduce the Principal Balance of such Mortgage Loan. Depending on
the Principal Balance and interest rate of the related Mortgage Loan and on the
number of installments paid early, there may be extended periods of time during
which Simple Interest Mortgage Loans in respect of which such additional
installments have been made are not amortizing and are considered current.
Sub-group 1A Mortgage Loans Statistics
Sub-group 1A consists of 233 Mortgage Loans. The Sub-group 1A Loan Balance
as of the Cut-off Date is equal to approximately $19,151,291.69 and the
Arrearage is equal to approximately $852,163.00. The Sub-group 1A Mortgage Loans
have original terms to maturity ranging from 180 to 360 months. The following
statistical information, unless otherwise specified, is based upon the Sub-group
1A Loan Balance as of the Cut-off Date.
The Sub-group 1A Mortgage Loans are each secured by a mortgage or deed of
trust or other similar security instrument (each, a "Mortgage") creating a first
lien on one- to four-family residential property consisting of one- to
four-family dwelling units and individual condominium units (each, a "Mortgaged
Property"). Approximately 98.19% of the Sub-group 1A Mortgage Loans had a
Loan-to-Value Ratio at origination in excess of 80%. There can be no assurance
that the Loan-to-Value Ratio of any Sub-group 1A Mortgage Loan determined at any
time after origination is less than or equal to its original Loan-to-Value
Ratio. All of the Sub-group 1A Mortgage Loans have scheduled Monthly Payments
due on the first day of the month (with respect to each Mortgage Loan, a "Due
Date").
Approximately 68.26% of the Sub-group 1A Mortgage Loans are FHA Mortgage
Loans. Approximately 31.74% of the Sub-group 1A Mortgage Loans are VA Mortgage
Loans. See "--FHA Mortgage Loans and VA Mortgage Loans."
Approximately 33.57% of the Sub-group 1A Mortgage Loans are Performing
Mortgage Loans. Approximately 21.07% of the Group 1A Mortgage Loans are
Sub-Performing Mortgage Loans, including 7.18% (of the Sub-group 1A Loan
Balance) that are Forbearance Plan Mortgage Loans and 2.41% (of the Sub-group 1A
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in
Sub-group 1A, approximately 9.28% are 30-59 days past due and approximately
11.79% are 60 or more days past due. Approximately 45.36% of the Sub-group 1A
Mortgage Loans are Re-Performing Mortgage Loans including 4.59% (of the
Sub-group 1A Loan Balance) that are Forbearance Plan Mortgage Loans and 37.18%
(of the Sub-group 1A Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Each Sub-group 1A Mortgage Loan accrues interest at a rate (each, a "Loan
Rate") of not less than 6.50% per annum and not more than 15.50% per annum and
as of the Cut-off Date the weighted average Loan Rate of the Sub-group 1A
Mortgage Loans was approximately 8.294% per annum.
The weighted average remaining term to maturity of the Sub-group 1A
Mortgage Loans will be approximately 314 months as of the Cut-off Date. None of
the Sub-group 1A Mortgage Loans had a first Due Date prior to February 1, 1971
or after February 1, 2000 or will have a remaining term to maturity of less than
11 months or greater than 356 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1A Mortgage Loan is October 1, 2029.
The average Principal Balance of the Sub-group 1A Mortgage Loans at
origination was approximately $85,877.15. The average Cut-off Date Principal
Balance of the Sub-group 1A Mortgage Loans was approximately $82,194.38.
No Sub-group 1A Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $256,754 or less than approximately $1,367. The
Sub-group 1A Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
S-22
<PAGE>
Cut-off Date Principal Balances of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Number of Principal Balance of Loan Group
Mortgage Outstanding as of Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
--------------------- --------------------- ------------------------ -----------------------------
<S> <C> <C> <C>
1,368 - 50,000 46 $ 1,607,625.73 8.39%
50,001 - 100,000 122 8,750,684.87 45.69
100,001 - 150,000 50 6,170,561.35 32.22
150,001 - 200,000 13 2,163,643.69 11.30
200,001 - 250,000 1 202,022.43 1.05
250,001 - 256,754 1 256,753.62 1.34
--------------------- ----------------------- ----------------------------
Total 233 $ 19,151,291.69 100.00%
===================== ======================= ============================
</TABLE>
- --------------
(1) The average Cut-off Date Principal Balance of the Sub-group 1A Mortgage
Loans was approximately $82,194.38.
Original Terms to Maturity of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number Outstanding as of Outstanding as of the
Original Term (months) of Mortgage Loans the Cut-off Date Cut-off Date
---------------------- ------------------ ---------------------- -----------------------------
<S> <C> <C> <C>
121 - 180 2 $ 85,930.08 0.45%
181 - 240 1 53,470.11 0.28
241 - 300 1 84,812.66 0.44
301 - 360 229 18,927,078.84 98.83
------------------ ----------------------- -----------------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =============================
</TABLE>
- --------------
(1) The weighted average original term of the Sub-group 1A Mortgage Loans was
approximately 358 months.
Property Types of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate Principal
Number Principal Balance Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of the
Property Type Loans the Cut-off Date Cut-off Date
- -------------------------------------------- ------------------ ----------------------- -----------------------------
<S> <C> <C> <C>
Single Family 225 $ 18,529,590.80 96.75%
Townhouse 3 197,158,.66 1.03
PUD(1) 1 132,946.41 0.69
Two Family 2 129,935.20 0.68
Mixed Use 1 101,429.98 0.53
Condominium 1 60,230.64 0.31
------------------ ----------------------- -----------------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =============================
</TABLE>
- --------------
(1) PUD refers to a Planned Unit Development.
S-23
<PAGE>
Occupancy Status of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number Outstanding as of Outstanding as of the
Occupancy Status of Mortgage Loans the Cut-off Date Cut-off Date
- -------------------------------------------- ------------------ ----------------------- -----------------------------
<S> <C> <C> <C>
Primary 223 $ 18,541,072.83 96.81%
Investor 10 610,218.86 3.19
------------------ ----------------------- -----------------------------
Total 100.00%
================== ======================= =============================
</TABLE>
- --------------
(1) Based on representations made by the mortgagors at the time of origination.
Purpose of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate Principal
Number Principal Balance Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- -------------------------------------------- ------------------ ----------------------- -----------------------------
<S> <C> <C> <C>
Purchase 205 $ 16,630,917.66 86.84%
Rate/Term Refinance 27 2,466,903.92 12.88
Equity Refinance 1 53,470.11 0.28
------------------ ----------------------- -----------------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =============================
</TABLE>
S-24
<PAGE>
Current Loan-Rates of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Current Loan Rate (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
6.001-- 6.500 1 $ 81,069.61 0.42%
6.501-- 7.000 7 726,096.52 3.79
7.001-- 7.500 40 4,286,160.63 22.38
7.501-- 8.000 53 5,000,998.75 26.11
8.001-- 8.500 62 4,832,596.46 25.23
8.501-- 9.000 19 1,414,625.15 7.39
9.001-- 9.500 19 1,149,171.25 6.00
9.501-- 10.000 17 963,590.63 5.03
10.001-- 10.500 5 208,094.27 1.09
10.501-- 11.000 3 194,980.75 1.02
11.001-- 11.500 1 46,784.55 0.24
11.501-- 12.000 3 154,944.01 0.81
12.501-- 13.000 1 40,610.03 0.21
13.001-- 14.000 1 35,913.24 0.19
15.001-- 15.500 1 15,655.84 0.08
------------------ ----------------------- ---------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =====================
</TABLE>
- ---------------
(1) The weighted average Loan Rate of the Sub-group 1A Mortgage Loans as of the
Cut-off Date was approximately 8.294%.
Original Loan-to-Value Ratios of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Number Principal Balance of Loan Group
of Mortgage Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
54.02-- 60.00 1 $ 67,575.15 0.35%
60.01-- 70.00 3 170,828.24 0.89
70.01-- 80.00 2 108,519.59 0.57
80.01-- 90.00 17 1,435,018.03 7.49
90.01-- 100.00 156 13,123,283.63 68.52
100.01-- 117.12 54 4,246,067.05 22.17
------------------ ----------------------- ---------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =====================
</TABLE>
- --------------
(1) The weighted average original Loan-to-Value Ratio of the Sub-group 1A
Mortgage Loans as of the Cut-off Date was approximately 98.008%.
S-25
<PAGE>
Geographic Distribution of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Arizona 3 $ 195,773.33 1.02%
Arkansas 4 211,511.68 1.10
California 41 4,334,569.63 22.63
Colorado 4 334,013.31 1.74
Connecticut 1 70,635.95 0.37
District of Columbia 3 483,726.04 2.53
Florida 22 1,530,124.24 7.99
Georgia 6 421,206.33 2.20
Idaho 1 132,946.41 0.69
Illinois 12 897,426.17 4.69
Indiana 4 154,824.44 0.81
Kansas 1 52,150.70 0.27
Kentucky 1 80,788.30 0.42
Louisiana 2 127,481.92 0.67
Maryland 16 1,631,375.67 8.52
Massachusetts 9 983,599.99 5.14
Michigan 2 161,818.67 0.84
Minnesota 3 267,254.15 1.40
Mississippi 2 105,200.92 0.55
Missouri 2 132,572.88 0.69
Montana 1 67,716.71 0.35
Nebraska 2 120,030.28 0.63
Nevada 2 162,047.32 0.85
New Jersey 10 746,043.44 3.90
New Mexico 1 150,841.55 0.79
New York 15 1,146,702.25 5.99
North Carolina 4 392,117.96 2.05
Ohio 7 459,586.30 2.40
Oklahoma 2 102,632.44 0.54
Oregon 1 101,256.67 0.53
Pennsylvania 6 446,300.22 2.33
South Carolina 3 43,141.33 0.23
Tennessee 8 660,899.59 3.45
Texas 21 1,475,822.02 7.71
Virginia 8 546,886.06 2.86
Washington 3 220,266.82 1.15
------------------ ----------------------- ---------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =====================
</TABLE>
- --------------
(1) The greatest ZIP Code geographic concentration of Sub-group 1A Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 1.41% in the
11550 Zip Code.
S-26
<PAGE>
Documentation Level of the Sub-group 1A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Alternate Documentation 14 $ 1,447,062.21 7.56%
Full Documentation 200 16,019,133.90 83.65
Limited Documentation 14 1,267,323.40 6.62
Streamlined Documentation 5 417,772.18 2.18
------------------ ----------------------- ---------------------
Total 233 $ 19,151,291.69 100.00%
================== ======================= =====================
</TABLE>
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Status of the Sub-group 1A Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Status of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
30 Days Past Due 19 $ 1,776,672.21 9.28%
60 Days Past Due 25 2,258,206.82 11.79
Current 76 6,429,520.91 33.57
Re-performing 113 8,686,891.75 45.36
------------------ ----------------------- ---------------------
Total 233 $ 19,151,291.69 100.00%
================= ====================== ====================
</TABLE>
Sub-group 1B Mortgage Loans Statistics
Sub-group 1B consists of 912 Mortgage Loans. The Sub-group 1B Loan Balance
as of the Cut-off Date is equal to approximately $55,980,257.89 and the
Arrearage is equal to approximately $439,861.00. The Sub-group 1B Mortgage Loans
have original terms to maturity ranging from 36 to 364 months. The following
statistical information, unless otherwise specified, is based upon the Sub-group
1B Loan Balance as of the Cut-off Date.
The Sub-group 1B Mortgage Loans are each secured by a Mortgage creating
a first or second lien on the related Mortgaged Property. Approximately 37.04%
of the Sub-group 1B Mortgage Loans had a Combined Loan-to-Value Ratio at
origination in excess of 80% and do not have FHA insurance, a VA guaranty or
primary mortgage insurance. There can be no assurance that the Loan-to-Value
Ratio of any Sub-group 1B Mortgage Loan determined at any time after origination
is less than or equal to its original Loan-to-Value Ratio. Approximately 62.36%
of the Sub-group 1B Mortgage Loans have a Due Date on the first day of the
month.
Approximately 0.13% of the Sub-group 1B Mortgage Loans are FHA Mortgage
Loans; none of the Sub-group 1B Mortgage Loans are VA Mortgage Loans.
Approximately 9.73% of the Sub-group 1B Mortgage Loans are covered by primary
mortgage insurance.
Approximately 73.92% of the Sub-group 1B Mortgage Loans are Performing
Mortgage Loans. Approximately 18.13% of the Sub-group 1B Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.06% (of the Sub-group 1B Loan
Balance) that are Forbearance Plan Mortgage Loans and 0.90% (of the Sub-group 1B
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in
Sub-group 1B, approximately 10.04% are 30-59 days past due and approximately
8.09% are 60 or more days past due. Approximately 7.96% of the Sub-group
S-27
<PAGE>
1B Mortgage Loans are Re-Performing Mortgage Loans including 3.32% (of the
Sub-group 1B Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 5.23% of the Sub-group 1B Mortgage Loans will not fully
amortize by their respective maturity dates (each, a "Balloon Loan"). The
Monthly Payment for each Balloon Loan is based on an amortization schedule
ranging from 120 months to 585 months, except for the final payment (the
"Balloon Payment") which is due and payable between the 36th month and the 360th
month following origination of such Mortgage Loan, depending on the terms of the
related Mortgage Note. With respect to the majority of the Balloon Loans, the
Monthly Payments for such Balloon Loans amortize over 360 months, but the
Balloon Payment is due on the 180th month. The amount of the Balloon Payment on
each Balloon Loan is substantially in excess of the amount of the scheduled
Monthly Payment for such Mortgage Loan.
Approximately 11.01% of the Sub-group 1B Mortgage Loans are Owner-Financed
Mortgage Loans.
Each Sub-group 1B Mortgage Loan accrues interest at a Loan Rate of not less
than 6.000% per annum and not more than 17.440% per annum and as of the Cut-off
Date the weighted average Loan Rate of the Sub-group 1B Mortgage Loans was
approximately 10.627% per annum.
The weighted average remaining term to maturity of the Sub-group 1B
Mortgage Loans will be approximately 272 months as of the Cut-off Date. None of
the Sub-group 1B Mortgage Loans had a first Due Date prior to June 11, 1978 or
after February 1, 2000 or will have a remaining term to maturity of less than 2
months or greater than 359 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 1B Mortgage Loan is January 1, 2030.
The average Principal Balance of the Sub-group 1B Mortgage Loans at
origination was approximately $64,328.68. The average Cut-off Date Principal
Balance of the Sub-group 1B Mortgage Loans was approximately $61,381.86.
No Sub-group 1B Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $262,149 or less than approximately $1,983. The
Sub-group 1B Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Principal Balance ($) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
1,984-- 50,000 448 $ 13,676,295.62 24.43%
50,001-- 100,000 320 22,412,784.02 40.04
100,001-- 150,000 103 12,449,360.98 22.24
150,001-- 200,000 32 5,464,348.94 9.76
200,001-- 250,000 8 1,715,319.98 3.06
250,000-- 262,148 1 262,148.35 0.47
- -------------------------------------------- ------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
(1) The average Cut-off Date Principal Balance of the Sub-group 1B Mortgage
Loans was approximately $61,381.86.
S-28
<PAGE>
Original Terms to Maturity of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
36-- 60 12 $ 236,941.58 0.42%
61-- 120 86 2,062,086.97 3.68
121-- 180 250 11,543,810.22 20.62
181-- 240 100 5,596,907.23 10.00
241-- 300 36 2,194,314.31 3.92
301-- 360 426 34,222,451.58 61.13
361-- 364 2 123,746.00 0.22
------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
- -------------
(1) The weighted average original term of the Sub-group 1B Mortgage Loans was
approximately 297 months.
Property Type of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Property Type of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Single Family 789 $ 47,566,970.22 84.97%
Condominium 27 2,064,498.64 3.69
Two Family 23 1,839,657.05 3.29
Townhouse 25 1,266,791.37 2.26
Manufactured/Mobile Home 23 1,167,055.33 2.08
PUD(1) 13 1,131,590.41 2.02
Multi-Family 7 448,907.84 0.80
Four Family 4 476,718.84 0.85
Three Family 1 18,068.19 0.03
------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
- -----------
(1) PUD refers to a Planned Unit Development.
S-29
<PAGE>
Occupancy Status of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Primary 790 $ 49,594,841.78 88.59%
Investment 76 3,814,883.79 6.81
Second Home 46 2,570,532.32 4.59
------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
Purpose of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Purpose of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Equity Refinance 393 $ 23,504,705.63 41.99%
Purchase 364 22,084,659.40 39.45
Rate/Term Refinance 155 10,390,892.86 18.56
------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
S-30
<PAGE>
Current Loan Rates of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Current Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
5.501-- 6.000 1 $ 26,109.67 0.05%
6.001-- 6.500 1 38,503.20 0.07
6.501-- 7.000 18 777,180.75 1.39
7.001-- 7.500 13 888,667.07 1.59
7.501-- 8.000 42 2,170,109.94 3.88
8.001-- 8.500 28 2,080,190.49 3.72
8.501-- 9.000 56 3,559,453.71 6.36
9.001-- 9.500 66 4,825,946.19 8.62
9.501-- 10.000 116 7,095,191.88 12.67
10.001-- 10.500 87 6,117,942.13 10.93
10.501-- 11.000 126 8,896,123.76 15.89
11.001-- 11.500 71 5,096,699.60 9.10
11.501-- 12.000 87 4,756,052.29 8.50
12.001-- 12.500 54 3,270,634.50 5.84
12.501-- 13.000 39 2,101,122.03 3.75
13.001-- 13.500 27 1,302,106.05 2.33
13.501-- 14.000 30 1,115,416.74 1.99
14.001-- 14.500 14 688,304.42 1.23
14.501-- 15.000 20 792,437.74 1.42
15.001-- 15.500 3 137,935.74 0.25
15.501-- 16.000 8 150,305.47 0.27
16.001-- 16.500 2 60,448.29 0.11
16.501-- 17.000 2 24,817.37 0.04
17.001-- 17.500 1 8,558.86 0.02
------------------ ----------------------- ---------------------
Total 912 $ 55,980,257.89 100.00%
================== ======================= =====================
</TABLE>
(1) The weighted average Loan Rate of the Sub-group 1B Mortgage Loans as of the
Cut-off Date was approximately 10.627%.
S-31
<PAGE>
Geographic Distribution of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number Outstanding as of Outstanding as of the
Location of Mortgage Loans the Cut-off Date Cut-off Date
- -------------------------------- ------------------------- ------------------------ ---------------------------
<S> <C> <C> <C>
Alabama 45 $ 1,927,791.37 3.44%
Alaska 1 103,499.70 0.18
Arizona 12 632,172.07 1.13
Arkansas 2 95,592.63 0.17
California 58 5,578,670.06 9.97
Colorado 7 284,405.26 0.51
Connecticut 6 439,493.42 0.79
Delaware 2 103,492.84 0.18
District of Columbia 4 328,688.98 0.59
Florida 57 3,402,858.57 6.08
Georgia 27 1,751,741.91 3.13
Hawaii 2 188,307.34 0.34
Idaho 3 192,318.10 0.34
Illinois 27 1,770,209.02 3.16
Indiana 8 393,613.42 0.70
Iowa 7 372,110.46 0.66
Kansas 5 194,805.89 0.35
Kentucky 3 117,871.91 0.21
Louisiana 16 882,676.15 1.58
Maine 7 359,641.49 0.64
Maryland 23 1,673,862.47 2.99
Massachusetts 14 1,148,268.84 2.05
Michigan 43 2,976,810.73 5.32
Minnesota 6 391,419.10 0.70
Mississippi 23 1,383,698.25 2.47
Missouri 8 409,644.55 0.73
Nebraska 3 65,111.18 0.12
Nevada 3 249,341.70 0.45
New Hampshire 10 915,396.75 1.64
New Jersey 23 1,984,878.89 3.55
New Mexico 8 461,228.38 0.82
New York 28 2,959,220.88 5.29
North Carolina 85 4,447,093.48 7.94
Ohio 8 516,653.69 0.92
Oklahoma 18 503,868.67 0.90
Oregon 6 458,316.78 0.82
Pennsylvania 40 2,491,624.30 4.45
Rhode Island 1 216,155.62 0.39
South Carolina 47 2,498,897.38 4.46
South Dakota 1 22,405.50 0.04
Tennessee 40 2,563,796.35 4.58
Texas 124 5,256,385.81 9.39
Utah 1 98,043.79 0.18
Vermont 6 554,097.89 0.99
Virginia 11 711,991.93 1.27
Washington 13 666,437.63 1.19
West Virginia 7 362,555.86 0.65
Wisconsin 13 873,090.90 1.56
------------------------- ------------------------ ---------------------------
Total 912 $ 55,980.257.89 100.00%
========================= ======================== ===========================
</TABLE>
- --------------
(1) The greatest ZIP Code geographic concentration of Sub-group 1B Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 1.09% in the
94544 ZIP Code.
S-32
<PAGE>
Documentation Level of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Alternate Documentation 107 $ 7,151,731.88 12.78%
Full Documentation 586 36,756,960.17 65.66
Limited Documentation 39 2,971,602.72 5.31
No Documentation 129 5,142,800.93 9.19
Stated Income 47 3,815,829.82 6.82
Streamlined Documentation 4 141,332.37 0.25
---------- ---------------- ----------
Total 912 $ 55,980,257.89 100.00%
========== ================ ==========
</TABLE>
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Combined Loan-to-Value Ratios of the Sub-group 1B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Combined Loan-to-Value Ratio (%) Loans the Cut-off Date Cut-off Date
- -------------------------------------- --------- ----------------- ----------------------------------
<S> <C> <C> <C>
12.05 - 20.00 10 $ 305,410.88 0.55%
20.01 - 30.00 12 235,646.42 0.42
30.01 - 40.00 19 629,144.52 1.12
40.01 - 50.00 27 1,044,787.33 1.87
50.01 - 60.00 67 3,265,295.46 5.83
60.01 - 70.00 112 6,787,549.83 12.12
70.01 - 80.00 238 17,453,268.88 31.18
80.01 - 90.00 206 13,907,139.16 24.84
90.01 - 100.00 129 7,013,510.44 12.53
100.01 - 110.00 71 4,595,163.97 8.21
110.01 - 120.00 18 587,691.49 1.05
120.01 - 130.00 1 31,039.66 0.06
140.01 - 150.00 1 18,737.00 0.03
170.01 - 179.30 1 105,872.85 0.19
---------- --------------------- ---------
Total 912 $ 55,980,257.89 100.00%
========== ===================== =========
</TABLE>
(1) The weighted average Combined Loan-to-Value Ratio of the Sub-group 1B
Mortgage Loans as of the Cut-off Date was approximately 80.39%
S-33
<PAGE>
Status of the Sub-group 1B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Status Loans the Cut-off Date Cut-off Date
- ---------------- --------- ----------------- -----------------------------------
<S> <C> <C> <C>
30 Days Past Due 96 $ 5,618,506.11 10.04%
60 Days Past Due 84 4,526,157.42 8.09
Current 655 41,378,267.43 73.92
Re-performing 77 4,457,326.93 7.96
------------ --------------------- -----------------
Total 912 $ 55,980,257.89 100.00%
============ ===================== =================
</TABLE>
Sub-group 2A Mortgage Loans Statistics
Sub-group 2A consists of 27 fixed-rate Mortgage Loans with
non-conforming balances. The Sub-group 2A Loan Balance as of the Cut-off Date is
equal to approximately $8,788,742.69 and the Arrearage is equal to approximately
$31,175.00. The Sub-group 2A Mortgage Loans have original terms to maturity
ranging from 180 months to 360 months. The following statistical information,
unless otherwise specified, is based upon the Sub-group 2A Loan Balance as of
the Cut-off Date.
The Sub-group 2A Mortgage Loans are each secured by a Mortgage creating
a first lien on the related Mortgaged Property. Approximately 25.39% of the
Sub-group 2A Mortgage Loans had a Combined Loan-to-Value Ratio at origination in
excess of 80.00% and do not have FHA insurance, a VA guaranty or primary
mortgage insurance. There can be no assurance that the Loan-to-Value Ratio of
any Sub-Group 2A Mortgage Loan determined at any time after origination is less
than or equal to its original Loan-to-Value Ratio. Except for 16.81% of the
Sub-group 2A Mortgage Loans, all of the Sub-group 2A Mortgage Loans have Due
Dates on the first day of the month.
None of the Sub-group 2A Mortgage Loans are insured by the FHA or
guaranteed by the VA. Approximately 3.68% of the Sub-group 2A Mortgage Loans are
insured by primary mortgage insurance.
Approximately 93.92% of the Sub-group 2A Mortgage Loans are Performing
Mortgage Loans. Approximately 6.08% of the Sub-group 2A Mortgage Loans are
Sub-Performing Mortgage Loans. None of the Sub-group 2A Mortgage Loans are
Re-Performing Mortgage Loans.
Approximately 19.70% of the Sub-group 2A Mortgage Loans provide for
payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-group 2A Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made for the period specified in the related mortgage note
which generally does not exceed five years from the date of origination of such
Sub-group 2A Mortgage Loan. The amount of the prepayment charge is provided in
the related mortgage note.
There are 3 Sub-group 2A Mortgage Loans (representing approximately
10.49% of the Sub-group 2A Loan Balance) that are Balloon Loans. The monthly
payment for each Balloon Loan is based on an amortization schedule ranging from
276 months to 360 months, except for the Balloon Payment which is due and
payable between the 180th month and the 318th month following origination of
such Mortgage Loan, depending on the terms of the related Mortgage Note. With
respect to the majority of these Balloon Loans, the monthly payments for such
Balloon Loans amortize over 360 months, but the Balloon Payment is due on the
180th month. The amount of the Balloon Payment on each Balloon Loan is
substantially in excess of the amount of the scheduled monthly payment for such
Mortgage Loan.
There are no Sub-group 2A Mortgage Loans that are Owner-Financed
Mortgage Loans.
S-34
<PAGE>
Each Sub-group 2A Mortgage Loan accrues interest at a Loan Rate of not
less than 6.880% per annum and not more than 11.990% per annum and as of the
Cut-off Date the weighted average Loan Rate of the Sub-group 2A Mortgage Loans
was approximately 9.669% per annum.
The weighted average remaining term to maturity of the Sub-group 2A
Mortgage Loans will be approximately 291 months as of the Cut-off Date. None of
the Sub-group 2A Mortgage Loans had a first Due Date prior to September 1, 1989
or after January 1, 2000 or will have a remaining term to maturity of less than
66 months or greater than 358 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 2A Mortgage Loan is December 1, 2029.
The average Principal Balance of the Sub-group 2A Mortgage Loans at
origination was approximately $342,743.12. The average Cut-off Date Principal
Balance of the Sub-group 2A Mortgage Loans was approximately $325,508.99.
No Sub-group 2A Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $592,538 or less than approximately $160,340. The
Sub-group 2A Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Principal Balance ($) Loans the Cut-off Date Cut-off Date
- --------------------------------- -------------- ---------------------- --------------------------------------
<S> <C> <C> <C>
160,341 - 200,000 1 $ 160,341.18 1.82%
200,001 - 250,000 1 236,394.35 2.69
250,001 - 300,000 11 2,977,106.61 33.87
300,001 - 350,000 6 1,933,022.52 21.99
350,001 - 400,000 3 1,098,091.92 12.49
400,001 - 450,000 2 815,896.98 9.28
450,001 - 500,000 2 975,352.08 11.10
550,001 - 592,538 1 592,537.05 6.74
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
- -----------------------
(1) The average Cut-off Date Principal Balance of the Sub-group 2A Mortgage
Loans was approximately $325,508.99.
Original Terms to Maturity of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Original Term (months) Loans the Cut-off Date Cut-off Date
- ------------------------------- -------------- --------------------- -----------------------------------------
<S> <C> <C> <C>
121 - 180 2 $ 471,227.92 5.63%
241 - 300 5 1,737,261.05 19.77
301 - 360 20 6,580,253.72 74.87
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
- -----------------------
(1) The weighted average original term of the Sub-group 2A Mortgage Loans was
approximately 331 months.
S-35
<PAGE>
Property Types of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Property Type Loans the Cut-off Date Cut-off Date
- --------------------------- --------------- ---------------------- -----------------------------------------
<S> <C> <C> <C>
Single Family 25 $ 8,019,179.79 91.24%
Three Family 1 482,735.63 5.49
PUD(1) 1 286,827.27 3.26
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
- -------------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Occupancy Status Loans the Cut-off Date Cut-off Date
- --------------------------- --------------- ---------------------- -----------------------------------------
<S> <C> <C> <C>
Primary 26 $ 8,306,007.06 94.51%
Investment 1 482,735.63 5.49
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
Purpose of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- --------------------------- --------------- ---------------------- -----------------------------------------
<S> <C> <C> <C>
Purchase 15 $ 4,852,946.67 55.22%
Equity Refinance 7 2,521,241.60 28.69
Rate/Term Refinance 5 1,414,554.42 16.10
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
Current Loan Rates of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance
Mortgage Outstanding as of the % of Aggregate Principal Balance of Loan
Current Loan Rate (%) Loans Cut-off Date Group Outstanding as of the Cut-off Date
- --------------------------- --------------- ---------------------- -----------------------------------------
<S> <C> <C> <C>
6.501 - 7.000 1 $ 277,672.93 3.16%
7.001 - 7.500 1 286,827.27 3.26
7.501 - 8.000 1 272,842.50 3.10
8.001 - 8.500 1 407,056.51 4.63
8.501 - 9.000 8 2,753,861.65 31.33
9.001 - 9.500 1 357,615.88 4.07
9.501 - 10.000 1 261,150.20 2.97
10.001 - 10.500 6 1,850,329.51 21.05
10.501 - 11.000 3 855,368.79 9.73
11.001 - 11.500 2 867,969.69 9.88
11.501 - 12.000 2 598,047.76 6.80
---------- ------------------ --------------------
Total 27 $ 8,788,742.69 100.00%
========== ================== ====================
</TABLE>
- ----------
(1) The weighted average Loan Rate of the Sub-group 2A Mortgage Loans as of the
Cut-off Date was approximately 9.669%.
S-36
<PAGE>
Combined Loan-to-Value Ratios of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Combined Loan-to-Value Rate (%) Loans the Cut-off Date Cut-off Date
- -------------------------------------- --------------- ------------------- ------------------------------------------
<S> <C> <C> <C>
53.20 - 60.00 1 $ 160,341.18 1.82%
60.01 - 70.00 6 1,988,158.16 22.62
70.01 - 80.00 12 4,085,306.21 46.48
80.01 - 90.00 6 1,960,926.91 22.31
100.01 - 100.06 2 594,010.23 6.76
---------- -------------------- ---------------------
Total 27 $ 8,788,742.69 100.00%
========== ==================== =====================
</TABLE>
- --------------
(1) The weighted average Combined Loan-to-Value Ratio of the Subgroup 2A
Mortgage Loans as of the Cut-off Date was approximately 78.38%.
Geographic Distribution of the Sub-Group 2A Mortgaged Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance
Mortgage Outstanding as of the % of Aggregate Principal Balance of Loan
Location Loans Cut-off Date Group Outstanding as of the Cut-off Date
- ------------------------------- --------------- ---------------------- ------------------------------------------
<S> <C> <C> <C>
California 7 $ 2,225,257.87 25.32%
Connecticut 1 408,840.47 4.65
Florida 1 492,616.45 5.61
Georgia 2 662,180.51 7.53
Hawaii 2 546,826.50 6.22
Iowa 1 310,610.90 3.53
Maryland 1 251,978.46 2.87
Massachusetts 1 339,990.25 3.87
Michigan 2 520,557.09 5.92
New Jersey 2 950,152.93 10.81
New York 4 1,067,739.39 12.51
Tennessee 1 310,886.74 3.54
Texas 1 294,048.62 3.35
Washington 1 407,056.51 4.63
------------ ---------------------- -----------------------------
Total 27 $ 8,788,742.69 100.00%
============ ====================== =============================
</TABLE>
- ----------
(1) The greatest geographic concentration of Sub-group 2A Mortgage Loans, by
Cut-off Date Principal Balance, was approximately 6.74% in the 07458 ZIP
Code.
S-37
<PAGE>
Documentation Level of the Sub-group 2A Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Alternate Documentation 4 $ 1,241,414.56 14.13%
Full Documentation 21 6,862,598.69 78.08
Limited Documentation 2 684,729.44 7.79
---------- ---------------- ---------------
Total 27 $ 8,788.742.69 100.00%
========== ================ ===============
</TABLE>
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Status of the Sub-group 2A Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Status Loans the Cut-off Date Cut-off Date
- ----------------------------------- --------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
30 Days Past Due 2 $ 534,301.64 6.08%
Current 25 8,254,441.05 93.92
----------- -------------------- --------------
Total 27 $ 8,788,742.69 100.00%
=========== ==================== ==============
</TABLE>
Sub-group 2B Mortgage Loans Statistics
Sub-group 2B consists of 644 adjustable-rate Mortgage Loans that may
have conforming or non-conforming balances. The Sub-group 2B Loan Balance as of
the Cut-off Date is equal to approximately $66,627,763.46 and the Arrearage is
equal to approximately $519,671.00. The Sub-group 2B Mortgage Loans have
original terms to maturity ranging from 84 months to 360 months. The following
statistical information, unless otherwise specified, is based upon the Sub-group
2B Loan Balance as of the Cut-off Date.
The Sub-group 2B Mortgage Loans are each secured by a Mortgage creating
a first lien on the related Mortgaged Property. Approximately 15.83% of the
Sub-group 2B Mortgage Loans had a Loan-to-Value Ratio at origination in excess
of 80.00% and do not have FHA insurance, a VA guaranty or primary mortgage
insurance. There can be no assurance that the Loan-to-Value Ratio of any
Sub-group 2B Mortgage Loan determined at any time after origination is less than
or equal to its original Loan-to-Value Ratio. Except for 5.44% of the Sub-group
2B Mortgage Loans, all of the Sub-group 2B Mortgage Loans have first Due Dates
on the first day of the month.
Approximately 2.99% of the Sub-group 2B Mortgage Loans are FHA Mortgage
Loans. Approximately 0.33% of the Sub-group 2B Mortgage Loans are VA Mortgage
Loans. Approximately 14.08% of the Sub-group 2B Mortgage Loans are covered by
primary mortgage insurance.
Approximately 85.34% of the Sub-group 2B Mortgage Loans are Performing
Mortgage Loans. Approximately 6.87% of the Sub-group 2B Mortgage Loans are
Sub-Performing Mortgage Loans, including 0.74% (of the Sub-group 2B Loan
Balance) that are Forbearance Plan Mortgage Loans and 0.31% (by Sub-group 2B
Loan Balance) that are Bankruptcy Plan Mortgage Loans. Approximately 7.79% of
the Sub-group 2B Mortgage Loans are Re-Performing Mortgage Loans including 1.15%
(by Sub-group 2B Loan Balance) that are Forbearance Plan Mortgage Loans and
3.44% (by Sub-group 2B Loan Balance) that are Bankruptcy Plan Mortgage Loans.
Approximately 44.56% of the Sub-group 2B Mortgage Loans provide for
payment by the Mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Sub-group 2B Mortgage Loan provides
for payment of a prepayment charge on certain partial prepayments and all
prepayments in full made for the period specified in the related mortgage note
which generally does not exceed five years from the date of
S-38
<PAGE>
origination of such Sub-group 2B Mortgage Loan. The amount of the prepayment
charge is provided in the related mortgage note.
The weighted average remaining term to maturity of the Sub-group 2B
Mortgage Loans will be approximately 345 months as of the Cut-off Date. None of
the Sub-group 2B Mortgage Loans had a first Due Date prior to November 1, 1983
or after February 1, 2000 or will have a remaining term to maturity of less than
10 months or greater than 359 months as of the Cut-off Date. The month of the
latest maturity date of any Sub-group 2B Mortgage Loan is January 1, 2030.
The average Principal Balance of the Sub-group 2B Mortgage Loans at
origination was approximately $104,180.33. The average Cut-off Date Principal
Balance of the Sub-group 2B Mortgage Loans was approximately $103,459.26.
Generally, the Sub-group 2B Mortgage Loans provide for semi-annual
adjustment to the Loan Rate thereon and for corresponding adjustments to the
monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, that the
first adjustment for such Mortgage Loans will occur after an initial period of
one year, in the case of 0.13% of the Sub-group 2B Mortgage Loans, two years, in
the case of 60.95% of the Sub-group 2B Mortgage Loans, three years, in the case
of 18.24% of the Sub-group 2B Mortgage Loans, five years, in the case of 0.92%
of the Sub-group 2B Mortgage Loans, and ten years, in the case of 0.20% of the
Sub-group 2B Mortgage Loans (each such Mortgage Loan, a "Delayed First
Adjustment Mortgage Loan"). On each Adjustment Date for each Sub-group 2B
Mortgage Loan, the Loan Rate thereon will be adjusted to equal the sum, rounded
to the nearest multiple of 0.125%, of the index applicable to determining the
Loan Rate on each Mortgage Loan (the "Index") and a fixed percentage amount (the
"Gross Margin"). The Loan Rate on each such Sub-group 2B Mortgage Loan will not
increase or decrease by more than 6.00% per annum on the first related
Adjustment Date (the "Initial Periodic Rate Cap") and 3.00% on any Adjustment
Date thereafter (the "Periodic Rate Cap"). The Sub-group 2B Mortgage Loans have
a weighted average Initial Periodic Rate Cap of approximately 2.63% per annum
and a weighted average Periodic Rate Cap of approximately 1.16% per annum
thereafter (excluding those Mortgage Loans without periodic rate caps). Each
Loan Rate on each such Sub-group 2B Mortgage Loan will not exceed a specified
maximum Loan Rate over the life of such Sub-group 2B Mortgage Loan (the "Maximum
Loan Rate") or be less than a specified minimum Loan Rate over the life of such
Sub-group 2B Mortgage Loan (the "Minimum Loan Rate"), except that 28.65% of the
Sub-group 2B Mortgage Loans do not have Minimum Loan Rates. Effective with the
first monthly payment due on each Sub-group 2B Mortgage Loan after each related
Adjustment Date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding Principal Balance of the related Mortgage
Loan over its remaining term, and pay interest at the Loan Rate as so adjusted.
Due to the application of the Initial Periodic Rate Caps, the Periodic Rate Caps
and the Maximum Loan Rates, the Loan Rate on each such Mortgage Loan, as
adjusted on any related Adjustment Date, may be less than the sum of the Index
and the related Gross Margin, rounded as described herein. See "--The Index"
herein. None of the Sub-group 2B Mortgage Loans permit the related mortgagor to
convert the adjustable Loan Rate thereon to a fixed Loan Rate.
The Sub-group 2B Mortgage Loans had Loan Rates as of the Cut-off Date
of not less than 5.44% per annum and not more than 16.02% per annum and the
weighted average Loan Rate was approximately 10.240% per annum. As of the
Cut-off Date, the Sub-group 2B Mortgage Loans had Gross Margins ranging from
2.00% to 10.62%, Minimum Loan Rates ranging from 0.00% to 16.02% per annum and
Maximum Loan Rates ranging from 10.00% per annum to 22.04% per annum. As of the
Cut-off Date, the weighted average Gross Margin was approximately 6.09%, the
weighted average Minimum Loan Rate was approximately 9.324% per annum (exclusive
of the Mortgage Loans that do not have a Minimum Loan Rate) and the weighted
average Maximum Loan Rate was approximately 16.29% per annum (exclusive of the
Mortgage Loans that do not have a Maximum Loan Rate). The latest next Adjustment
Date following the Cut-off Date on any Sub-group 2B Mortgage Loan occurs in
October 1, 2009 and the weighted average next Adjustment Date for all of the
Sub-group 2B Mortgage Loans following the Cut-off Date is July 21, 2001.
There are no Sub-group 2B Mortgage Loans that are Owner-Financed
Mortgage Loans.
No Sub-group 2B Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $399,722 or less than approximately $5,803. The
Sub-group 2B Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
S-39
<PAGE>
Cut-off Date Principal Balances of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance
Mortgage Outstanding as of the % of Aggregate Principal Balance of Loan
Principal Balance ($) Loans Cut-off Date Group Outstanding as of the Cut-off Date
- ------------------------------ -------------- ----------------------- -------------------------------------------
<S> <C> <C> <C>
5,803 - 50,000 118 $ 4,392,189.85 6.59%
50,001 - 100,000 264 19,535,876.15 29.32
100,001 - 150,000 147 17,960,386.49 26.96
150,001 - 200,000 61 10,388,234.38 15.59
200,001 - 250,000 22 4,735,873.91 7.11
250,001 - 300,000 21 5,771,481.15 8.66
300,001 - 350,000 6 1,958,216.30 2.94
350,001 - 399,722 5 1,885,505.23 2.83
----------- ---------------------- ---------------
Total 644 $ 66,627,763.46 100.00%
=========== ====================== ===============
</TABLE>
- -----------
(1) The average Cut-off Date Principal Balance of the Sub-group 2B Mortgage
Loans was approximately $103,459.26.
Original Terms to Maturity of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance
Mortgage Outstanding as of the % of Aggregate Principal Balance of Loan
Original Term (months) Loans Cut-off Date Group Outstanding as of the Cut-off Date
- ------------------------------ -------------- ----------------------- -------------------------------------------
<S> <C> <C> <C>
84 - 120 4 $ 448,958.15 0.67%
121 - 180 18 1,260,194.21 1.89
181 - 240 1 44,622.80 0.07
301 - 360 621 64,873,988.30 97.37
------------ --------------------- -------------
Total 644 $ 66,627,763.46 100.00%
============ ===================== =============
</TABLE>
- ----------
(1) The weighted average original term of the Sub-group 2B Mortgage Loans was
approximately 355 months.
S-40
<PAGE>
Property Types of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of the Loan Group Outstanding as of the
Property Type Loans Cut-off Date Cut-off Date
- ----------------------------------- -------------- ----------------------- ---------------------------------------
<S> <C> <C> <C>
Single Family 541 $ 56,280,161.82 84.47%
Condominium 35 3,579,165.74 5.37
Two Family 19 1,879,913.86 2.82
PUD(1) 12 1,658,930.68 2.49
Manufactured/Mobile Home 15 1,069,181.12 1.60
Three Family 8 738,970.82 1.11
Multi-Family 4 448,882.46 0.67
Four Family 3 409,682.55 0.61
Townhouse 6 407,944.46 0.61
2-4 Family Property 1 154,929.95 0.23
-------------- ----------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============== ======================= =======================================
</TABLE>
- ------------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Sub-group 2B Mortgage Loans (1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Occupancy Status Loans the Cut-off Date Cut-off Date
- ----------------------------------- -------------- ----------------------- ---------------------------------------
<S> <C> <C> <C>
Primary 594 $ 62,770,210.31 94.21%
Investment 32 2,307,897.85 3.46
Second Home 18 1,549,655.30 2.33
-------------- ----------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============== ======================= =======================================
</TABLE>
Purpose of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- ----------------------------------- -------------- ----------------------- ---------------------------------------
<S> <C> <C> <C>
Equity Refinance 282 $ 28,550,590.27 42.85%
Purchase 232 24,705,330.00 37.08
Rate/Term Refinance 130 13,371,843.19 20.07
-------------- ----------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============== ======================= =======================================
</TABLE>
S-41
<PAGE>
Current Loan Rates of the Sub-group 2B Mortgage Loans (1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance
Mortgage Outstanding as of of Loan Group Outstanding as of the
Current Loan Rate (%) Loans the Cut-off Date Cut-off Date
- ------------------------------------- -------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
5.001 - 5.500 1 $ 88,402.03 0.13%
5.501 - 6.000 1 113,315.08 0.17
6.001 - 6.500 2 187,345.43 0.28
6.501 - 7.000 3 263,270.92 0.40
7.001 - 7.500 10 1,344,615.09 2.02
7.501 - 8.000 20 2,793,208.09 4.19
8.001 - 8.500 31 4,214,918.31 6.33
8.501 - 9.000 54 7,688,425.84 11.54
9.001 - 9.500 46 5,927,417.07 8.90
9.501 - 10.000 60 6,069,076.13 9.11
10.001 - 10.500 76 8,609,792.20 12.92
10.501 - 11.000 123 11,024,403.29 16.55
11.001 - 11.500 70 7,198,304.38 10.80
11.501 - 12.000 53 3,994,539.14 6.00
12.001 - 12.500 32 2,493,578.60 3.74
12.501 - 13.000 23 1,929,909.96 2.90
13.001 - 13.500 10 1,035,761.67 1.55
13.501 - 14.000 9 612,813.73 0.92
14.001 - 14.500 5 225,433.33 0.34
14.501 - 15.000 9 553,665.69 0.83
15.001 - 15.500 3 124,561.72 0.19
15.501 - 16.000 2 114,208.12 0.17
16.001 - 16.500 1 20,797.64 0.03
-------------- ----------------------- --------------------------------------
Total 644 $ 66,617,763.46 100.00%
============== ======================= ======================================
</TABLE>
- -----------
(1) The weighted average Loan Rate of the Sub-group 2B Mortgage Loans as of the
Cut-off Date was approximately 10.240%.
S-42
<PAGE>
Original Loan-to-Value Ratios of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Original Loan-to-Value Ratio (%) Loans the Cut-off Date Cut-off Date
- ------------------------------------ -------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
10.97 - 20.00 2 $ 119,209.93 0.18%
30.01 - 40.00 8 277,462.89 0.42
40.01 - 50.00 17 1,131,527.00 1.70
50.01 - 60.00 40 2,791,046.69 4.19
60.01 - 70.00 118 11,414,527.39 17.13
70.01 - 80.00 269 28,854,258.60 43.31
80.01 - 90.00 155 18,373,842.85 27.58
90.01 - 100.00 32 3,360,508.00 5.04
100.01 - 102.00 3 305,380.11 0.46
-------------- ----------------------- --------------------------------------
Total 644 $ 66,627,763.46 100.00%
============== ======================= ======================================
</TABLE>
(1) The weighted average original Loan-to-Value Ratio of the Sub-group 2B
Mortgage Loans as of the Cut-off Date was approximately 77.65%.
S-43
<PAGE>
Geographic Distribution of the Sub-group 2B Mortgaged Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Location Loans the Cut-off Date Cut-off Date
- -------------------------------------- ------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
Arizona 7 $ 617,684.40 0.93%
California 87 14,302,324.74 21.47
Colorado 7 765,213.29 1.15
Connecticut 14 1,355,031.63 2.03
District of Columbia 2 238,744.08 0.36
Florida 60 4,566,019.30 6.85
Georgia 25 3,209,373.38 4.82
Hawaii 4 497,270.95 0.75
Idaho 4 214,344.44 0.32
Illinois 40 3,471,073.14 5.21
Indiana 28 1,867,755.55 2.80
Kansas 4 232,920.61 0.35
Kentucky 12 655,169.78 0.98
Louisiana 7 469,282.67 0.70
Maine 1 122,831.44 0.18
Maryland 11 1,283,726.27 1.93
Massachusetts 14 1,662,103.81 2.49
Michigan 41 3,720,108.01 5.58
Minnesota 11 878,429.24 1.32
Mississippi 2 134,665.20 0.20
Missouri 11 641,580.12 0.96
Montana 4 718,240.25 1.08
Nebraska 3 210,657.24 0.32
Nevada 9 1,191,965.36 1.79
New Hampshire 5 421,734.39 0.63
New Jersey 30 3,871,114.59 5.81
New Mexico 1 78,498.79 0.12
New York 15 1,970,356.42 2.96
North Carolina 8 666,447.53 1.00
Ohio 34 2,453,371.46 3.68
Oklahoma 5 388,381.58 0.58
Oregon 12 1,456,630.50 2.19
Pennsylvania 11 837,102.72 1.26
Rhode Island 3 266,101.17 0.40
South Carolina 10 659,840.87 0.99
Tennessee 11 1,016,216.93 1.53
Texas 27 2,615,528.31 3.93
Utah 9 941,347.15 1.41
Virginia 9 932,617.98 1.40
Washington 33 3,942,152.73 5.92
West Virginia 2 90,730.76 0.14
Wisconsin 11 993,074.68 1.49
------------- --------------------- ---------------------------------------
Total 64 $66,627,763.46 100.00%
============= ===================== =======================================
</TABLE>
- -----------
(1) The greatest ZIP Code geographic concentration of Sub-group 2B Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 0.85% in the
95121 ZIP Code.
S-44
<PAGE>
Documentation Levels of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Documentation Level Loans the Cut-off Date Cut-off Date
- -------------------------------------- ------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
Full Documentation 404 $ 40,324,170.16 60.52%
Stated Income 121 13,546,450.36 20.33
Alternate Documentation 32 3,807,442.70 5.71
Limited Documentation 39 3,608,529.75 5.42
Streamlined Documentation 29 3,087,283.97 4.63
No Documentation 19 2,253,886.52 3.38
- -------------------------------------- ------------- --------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============= ===================== =======================================
</TABLE>
- -----------
(1) For a description of each documentation level, see "The Seller --
Underwriting Standards" herein.
Status of the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance
Mortgage Outstanding as of the % of Aggregate Principal Balance of Loan
Status Loans Cut-off Date Group Outstanding as of the Cut-off Date
- ------------------------------- -------------- ----------------------- -----------------------------------------
<S> <C> <C> <C>
30 Days Past Due 31 $ 2,614,027.28 3.92%
60 Days Past Due 22 1,966,268.62 2.95
Current 533 56,857,095.89 85.34
Re-performing 58 5,190,371.67 7.79
-------------- ----------------------- -----------------------------------------
Total 644 66,627,763.46 100.00%
============== ======================= =========================================
</TABLE>
S-45
<PAGE>
Maximum Loan Rates of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Maximum Loan Rate (%) Loans the Cut-off Date Cut-off Date
- -------------------------------------- ------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
10.00 - 10.00 1 $ 113,315.08 0.17%
10.01 - 10.50 1 115,078.86 0.17
10.51 - 11.00 2 194,590.07 0.29
11.01 - 11.50 9 864,598.61 1.30
11.51 - 12.00 5 527,078.50 0.79
12.01 - 12.50 2 186,359.62 0.28
12.51 - 13.00 6 728,460.98 1.09
13.01 - 13.50 7 987,690.98 1.48
13.51 - 14.00 10 1,544,461.22 2.32
14.01 - 14.50 21 3,062,393.35 4.60
14.51 - 15.00 42 5,937,040.10 8.91
15.01 - 15.50 40 5,261,666.00 7.90
15.51 - 16.00 67 7,483,219.82 11.23
16.01 - 16.50 77 8,775,067.89 13.17
16.51 - 17.00 115 10,402,090.80 15.61
17.01 - 17.50 84 8,691,774.21 13.05
17.51 - 18.00 60 4,558,022.13 6.84
18.01 - 18.50 28 2,114,833.98 3.17
18.51 - 19.00 22 1,780,928.43 2.67
19.01 - 19.50 12 952,922.21 1.43
19.51 - 20.00 11 1,149,720.32 1.73
20.01 - 20.50 6 308,732.65 0.46
20.51 - 21.00 9 465,987.34 0.70
21.01 - 21.50 2 62,928.62 0.09
21.51 - 22.00 3 260,191.64 0.39
22.01 - 22.04 2 98,610.15 0.15
------------- --------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============= ===================== =======================================
</TABLE>
- -----------
(1) The weighted average Maximum Loan Rate of the Sub-group 2B Mortgage Loans as
of the Cut-off Date was approximately 16.29%.
S-46
<PAGE>
Minimum Loan Rates of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Number of Principal Balance Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Minimum Loan Rate (%) Loans the Cut-off Date Cut-off Date
- -------------------------------------- ------------------ ---------------------- ---------------------------------------
<S> <C> <C> <C>
0.00 - 0.50 187 $ 20,542,827.06 30.83 %
0.51 - 1.00 2 194,590.07 0.29
1.01 - 1.50 8 776,196.58 1.16
1.51 - 2.00 4 391,116.34 0.59
2.01 - 2.50 2 186,359.62 0.28
2.51 - 3.00 3 273,214.75 0.41
3.01 - 3.50 1 84,102.50 0.13
3.51 - 4.00 1 97,872.90 0.15
5.01 - 5.50 1 88,402.03 0.13
5.51 - 6.00 1 131,607.76 0.20
6.51 - 7.00 1 121,451.17 0.18
7.01 - 7.50 6 862,375.90 1.29
7.51 - 8.00 12 1,806,135.65 2.71
8.01 - 8.50 26 3,897,694.42 5.85
8.51 - 9.00 51 7,205,719.39 10.81
9.01 - 9.50 41 5,286,718.25 7.93
9.51 - 10.00 51 5,129,390.34 7.70
10.01 - 10.50 54 5,511,952.95 8.27
10.51 - 11.00 77 5,999,722.50 9.00
11.01 - 11.50 34 2,643,838.42 3.97
11.51 - 12.00 22 1,341,399.52 2.01
12.01 - 12.50 11 695,622.42 1.04
12.51 - 13.00 14 1,164,215.59 1.75
13.01 - 13.50 7 675,492.39 1.01
13.51 - 14.00 8 510,825.17 0.77
14.01 - 14.50 5 225,433.33 0.34
14.51 - 15.00 9 553,665.69 0.83
15.01 - 15.50 2 94,814.98 0.14
15.51 - 16.00 2 114,208.12 0.17
16.01 - 16.02 1 20,797.64 0.03
------------- --------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============= ===================== =======================================
</TABLE>
- -----------
(1) The weighted average Minimum Loan Rate of the Sub-group 2B Mortgage Loans
as of the Cut-off Date was approximately 9.324% (exclusive of the Mortgage
Loans that do not have a Minimum Loan Rate).
S-47
<PAGE>
Gross Margins of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Gross Margins (%) Loans the Cut-off Date Cut-off Date
- -------------------------------------- ------------------ ---------------------- ---------------------------------------
<S> <C> <C> <C>
1.51 - 2.00 4 $ 289,103.74 0.43%
2.01 - 2.50 2 191,378.88 0.29
2.51 - 3.00 23 2,641,566.65 3.96
3.01 - 3.50 4 462,260.27 0.69
3.51 - 4.00 7 763,290.82 1.15
4.01 - 4.50 8 931,846.11 1.40
4.51 - 5.00 40 4,456,239.36 6.69
5.01 - 5.50 56 7,337,499.11 11.01
5.51 - 6.00 135 15,715,648.38 23.59
6.01 - 6.50 106 11,139,943.72 16.72
6.51 - 7.00 126 11,338,530.64 17.02
7.01 - 7.50 67 5,917,584.93 8.88
7.51 - 8.00 27 2,349,983.23 3.53
8.01 - 8.50 19 1,615,612.75 2.42
8.51 - 9.00 10 655,131.33 0.98
9.01 - 9.50 3 262,109.51 0.39
9.51 - 10.00 5 397,234.54 0.60
10.01 - 10.50 1 77,812.51 0.12
10.51 - 10.62 1 84,986.98 0.13
------------------ ---------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00 %
================== ====================== =======================================
</TABLE>
- ------------
(1) The weighted average Gross Margin of the Sub-group 2B Mortgage Loans as of
the Cut-off Date was approximately 6.09%.
S-48
<PAGE>
Next Adjustment Date for the Sub-group 2B Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Outstanding as of the Outstanding as of the
Next Adjustment Date Number of Mortgage Loans Cut-off Date Cut-off Date
- ----------------------------- ---------------------------- --------------------------- ----------------------------
<S> <C> <C> <C>
03/01/2000 5 $ 444,510.36 0.67%
03/11/2000 1 5,803.18 0.01
04/01/2000 18 1,976,584.13 2.97
05/01/2000 17 1,781,468.14 2.67
05/10/2000 1 34,222.95 0.05
05/28/2000 1 17,822.41 0.03
06/01/2000 22 2,686,288.33 4.03
06/03/2000 1 98,713.01 0.15
06/15/2000 1 50,390.05 0.08
06/27/2000 2 142,456.27 0.21
07/01/2000 32 3,529,075.73 5.30
08/01/2000 21 2,107,634.60 3.16
08/14/2000 1 108,180.04 0.16
09/01/2000 23 2,349,571.61 3.53
09/04/2000 1 86,439.95 0.13
09/28/2000 1 114,760.78 0.17
10/01/2000 17 1,608,933.49 2.41
10/02/2000 1 163,781.65 0.25
11/01/2000 14 1,381,083.78 2.07
11/28/2000 1 36,272.51 0.05
12/01/2000 6 395,754.54 0.59
12/18/2000 1 85,023.62 0.13
12/24/2000 1 111,810.41 0.17
01/01/2001 18 1,640,082.48 2.46
01/18/2001 1 103,195.74 0.15
02/01/2001 13 988,159.95 1.48
03/01/2001 9 1,096,660.90 1.65
03/03/2001 1 192,541.30 0.29
03/29/2001 1 307,274.39 0.46
04/01/2001 6 532,101.25 0.80
04/15/2001 1 165,960.33 0.25
04/23/2001 1 88,094.24 0.13
05/01/2001 12 1,156,583.19 1.74
05/03/2001 1 106,185.59 0.16
05/10/2001 1 279,032.04 0.42
05/28/2001 1 95,687.40 0.14
06/01/2001 9 940,848.84 1.41
06/03/2001 1 58,176.54 0.09
06/25/2001 1 252,272.35 0.38
07/01/2001 7 917,306.95 1.38
08/01/2001 17 1,866,742.24 2.80
08/05/2001 1 112,797.13 0.17
09/01/2001 34 3,567,487.07 5.35
10/01/2001 37 3,917,052.63 5.88
10/10/2001 1 103,836.91 0.16
11/01/2001 78 9,208,966.70 13.82
12/01/2001 76 8,296,664.51 12.45
01/01/2002 4 620,365.00 0.93
02/01/2002 1 134,392.27 0.20
02/15/2002 1 159,063.07 0.24
04/01/2002 1 87,238.67 0.13
05/01/2002 3 292,805.86 0.44
07/01/2002 1 86,799.27 0.13
08/01/2002 2 91,789.14 0.14
09/01/2002 3 269,549.59 0.40
10/01/2002 5 519,550.92 0.78
11/01/2002 40 3,314,523.62 4.97
12/01/2002 61 4,966,745.92 7.50
08/01/2003 1 71,364.46 0.11
09/01/2003 1 78,456.61 0.12
09/01/2004 1 190,766.44 0.29
10/01/2004 1 273,238.29 0.41
10/01/2009 1 130,822.12 0.20
---------------------------- --------------------------- ----------------------------
Total 644 $66,597,763.46 100.00%
============================ =========================== ============================
</TABLE>
S-49
<PAGE>
Indices of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number of Mortgage Outstanding as of the Outstanding as of the
Index Loans Cut-off Date Cut-off Date
- ----------------------------------- ---------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
6 month LIBOR 592 $ 61,506,090.76 92.31%
1 Year CMT 48 4,992,852.75 7.49
Others 4 128,819.95 0.19
---------------------- -------------------------- ---------------------------
Total 644 $ 66,627,763.46 100.00%
====================== ========================== ===========================
</TABLE>
- ------------
(1) Each of these Indices are described under "--The Index."
Initial Periodic Rate Caps of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Principal Balance Balance of Loan Group
Number of Mortgage Outstanding as of the Outstanding as of the
Initial Periodic Rate Cap (%) Loans Cut-off Date Cut-off Date
- ----------------------------------- ---------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
0.00 1 $ 17,822.41 0.03%
1.00 83 9,339,686.35 14.02
1.50 28 3,565,586.93 5.35
2.00 28 2,895,608.19 4.35
3.00 499 49,957,317.47 74.98
5.00 2 413,040.03 0.62
6.00 3 438,702.06 0.66
---------------------- -------------------------- ---------------------------
Total 644 $ 66,627,763.46 100.00%
====================== ========================== ===========================
</TABLE>
- ------------
(1) Relates solely to initial rate adjustments
S-50
<PAGE>
Subsequent Periodic Rate Caps of the Sub-group 2B Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate Principal
Number of Principal Balance Balance of Loan Group
Subsequent Periodic Rate Cap Mortgage Outstanding as of Outstanding as of the
(%) Loans the Cut-off Date Cut-off Date
- ------------------------------------- ------------------ ---------------------------- -------------------------------
<S> <C> <C> <C>
0.00 1 $ 17,822.41 0.03%
1.00 521 54,965,107.75 82.50
1.50 74 6,442,591.53 9.67
2.00 29 3,199,636.54 4.80
3.00 19 2,002,605.23 3.01
------------- --------------------- ---------------------------------------
Total 644 $ 66,627,763.46 100.00%
============= ===================== =======================================
</TABLE>
- ------------
(1) Relates to all rate adjustments subsequent to the initial rate adjustments.
Group 3 Mortgage Loans Statistics
Group 3 consists of 562 Mortgage Loans. The Group 3 Loan Balance as of the
Cut-off Date is equal to $36,484,054.64 and the Arrearage is equal to
approximately $179,875.00. The Group 3 Mortgage Loans have original terms to
maturity ranging from 60 to 559 months. The following statistical information,
unless otherwise specified, is based upon the Group 3 Loan Balance as of the
Cut-off Date.
The Group 3 Mortgage Loans are each secured by a Mortgage creating a first
or second lien on the related Mortgaged Property. Approximately 43.95% of the
Group 3 Mortgage Loans had a Combined Loan-to-Value Ratio at origination in
excess of 80% and do not have FHA insurance, a VA guaranty or primary mortgage
insurance. There can be no assurance that the Loan-to-Value Ratio of any Group 3
Mortgage Loan determined at any time after origination is less than or equal to
its original Loan-to-Value Ratio. Approximately 52.93% of the Group 3 Mortgage
Loans have a first Due Date on the first day of the month.
None of the Group 3 Mortgage Loans are insured by the FHA or guaranteed by
the VA. Approximately 4.11% of the Group 3 Mortgage Loans are insured by primary
mortgage insurance.
Approximately 58.85% of the Group 3 Mortgage Loans are Performing Mortgage
Loans. Approximately 33.89% of the Group 3 Mortgage Loans are Sub-Performing
Mortgage Loans, including 0.94% (of the Group 3 Loan Balance) that are
Bankruptcy Plan Mortgage Loans. Of the Mortgage Loans in Group 3, approximately
17.61% are 30-59 days past due and approximately 16.28% are 60 or more days past
due. Approximately 7.25% of the Group 3 Mortgage Loans are Re-Performing
Mortgage Loans including 0.29% (of the Group 3 Loan Balance) that are Bankruptcy
Plan Mortgage Loans.
Approximately 14.22% of the Group 3 Mortgage Loans are Balloon Loans. The
Monthly Payment for each Balloon Loan is based on an amortization schedule
ranging from 180 months to 360 months, except for the Balloon Payment which is
due and payable between the 63rd month and the 240th month following origination
of such Mortgage Loan, depending on the terms of the related Mortgage Note. With
respect to the majority of the Balloon Loans, the Monthly Payments for such
Balloon Loans amortize over 360 months, but the Balloon Payment is due on the
180th month. The amount of the Balloon Payment on each Balloon Loan is
substantially in excess of the amount of the scheduled Monthly Payment for such
Mortgage Loan.
Each Group 3 Mortgage Loan accrues interest at a Loan Rate of not less than
7.200% per annum and not more than 19.500% per annum and as of the Cut-off Date
the weighted average Loan Rate of the Group 3 Mortgage Loans was approximately
10.707% per annum.
The weighted average remaining term to maturity of the Group 3 Mortgage
Loans will be approximately 277 months as of the Cut-off Date. None of the Group
3 Mortgage Loans had a first Due Date prior to December 3, 1986 or after
February 1, 2000 or will have a remaining term to maturity of less than 9 months
or greater than 527 months as of the Cut-off Date. The month of the latest
maturity date of any Group 3 Mortgage Loan is January 1, 2030.
S-51
<PAGE>
The average Principal Balance of the Group 3 Mortgage Loans at origination
was approximately $66,018.35. The average Cut-off Date Principal Balance of the
Group 3 Mortgage Loans was approximately $64,918.25.
No Group 3 Mortgage Loan had a Cut-off Date Principal Balance of greater
than approximately $232,075 or less than approximately $3,230. The Group 3
Mortgage Loans are expected to have the following characteristics as of the
Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
Cut-off Date Principal Balances of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Principal Balance ($) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
3,230-- 50,000 251 $ 8,576,925.85 23.51%
50,001-- 100,000 221 15,250,230.65 41.80
100,001-- 150,000 60 7,212,394.10 19.77
150,001-- 200,000 23 3,882,561.79 10.64
200,001-- 232,075 7 1,561,942.25 4.28
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
- ---------------
(1) The average Cut-off Date Principal Balance of the Group 3 Mortgage Loans was
approximately $64,918.25.
Original Terms to Maturity of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
0-- 60 4 $ 148,688.69 0.41%
61-- 120 31 979,940.11 2.69
121-- 180 174 9,443,614.68 25.88
181-- 240 60 3,625,248.39 9.94
241-- 300 26 1,731,178.21 4.75
301-- 360 266 20,530,060.66 56.27
361-- 559 1 25,323.90 0.07
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
- -------------
(1) The weighted average original term of the Group 3 Mortgage Loans was
approximately 291 months.
S-52
<PAGE>
Property Type of the Group 3 Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Property Type of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Single Family 479 $ 30,451,327.57 83.46%
Multi-Family 14 1,237,584.36 3.39
Manufactured/Mobile Home 21 1,067,511.83 2.93
Two Family 18 1,022,304.76 2.80
Condominium 9 775,864.43 2.13
PUD(1) 5 589,441.26 1.62
Three Family 6 485,511.08 1.33
Four Family 2 455,090.54 1.25
Townhouse 8 399,418.81 1.09
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
- -----------
(1) PUD refers to a Planned Unit Development.
Occupancy Status of the Group 3 Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Occupancy Status of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Primary 490 $ 32,174,121.30 88.19%
Investment 42 2,351,518.27 6.45
Second Home 30 1,958,415.07 5.36
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
Purpose of the Group 3 Mortgage Loans
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Purpose of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Equity Refinance 332 $ 19,741,762.49 54.11%
Purchase 141 10,320,252.45 28.29
Rate/Term Refinance 89 6,422,039.70 17.60
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
S-53
<PAGE>
Current Loan Rates of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Current Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
7.001-- 7.500 9 $ 432,696.07 1.19%
7.501-- 8.000 14 963,824.96 2.64
8.001-- 8.500 22 1,860,629.32 5.10
8.501-- 9.000 22 1,954,250.63 5.36
9.001-- 9.500 30 1,858,401.26 5.09
9.501-- 10.000 56 4,226,072.69 11.58
10.001-- 10.500 65 4,864,124.91 13.33
10.501-- 11.000 112 7,404,635.00 20.30
11.001-- 11.500 66 4,299,749.08 11.79
11.501-- 12.000 50 3,063,751.58 8.40
12.001-- 12.500 33 1,875,797.75 5.14
12.501-- 13.000 25 1,233,279.23 3.38
13.001-- 13.500 17 942,047.34 2.58
13.501-- 14.000 10 428,623.77 1.17
14.001-- 14.500 8 310,451.08 0.85
14.501-- 15.000 7 307,005.94 0.84
15.001-- 15.500 9 256,978.23 0.70
15.501-- 16.000 2 78,625.55 0.22
16.001-- 16.500 2 73,370.13 0.20
16.501-- 17.000 1 14,218.01 0.04
17.501-- 18.000 1 7,909.49 0.02
19.001-- 19.500 1 27,612.62 0.08
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
- -------------
(1) The weighted average Loan Rate of the Group 3 Mortgage Loans as of the
Cut-off Date was approximately 10.707%.
S-54
<PAGE>
Geographic Distribution of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Alabama 2 $ 151,607.29 0.42%
Arizona 11 556,550.80 1.53
Arkansas 2 56,942.29 0.16
California 34 2,620,819.79 7.18
Colorado 5 309,748.19 0.85
Connecticut 4 339,315.39 0.93
Delaware 3 182,511.12 0.50
District of Columbia 2 249,693.78 0.68
Florida 96 6,334,402.29 17.36
Georgia 84 4,992,008.62 13.68
Illinois 3 338,598.83 0.93
Indiana 24 1,412,957.89 3.87
Kansas 4 170,625.67 0.47
Kentucky 7 430,159.94 1.18
Louisiana 15 679,214.40 1.86
Maryland 9 503,871.46 1.38
Massachusetts 2 262,334.83 0.72
Michigan 33 2,255,126.45 6.18
Minnesota 1 56,297.87 0.15
Mississippi 20 825,314.41 2.26
Missouri 12 484,250.65 1.33
Montana 3 170,406.43 0.47
Nevada 4 304,291.81 0.83
New Hampshire 4 371,581.39 1.02
New Mexico 1 92,566.95 0.25
New York 21 1,852,146.95 5.08
North Carolina 13 817,795.56 2.24
Ohio 39 2,614,673.99 7.17
Oregon 4 251,808.68 0.69
Pennsylvania 26 1,889,891.68 5.18
Rhode Island 1 75,224.36 0.21
South Carolina 3 131,269.15 0.36
Tennessee 14 800,798.27 2.19
Texas 5 370,083.59 1.01
Utah 3 314,992.36 0.86
Virginia 38 2,616,938.54 7.17
Washington 7 490,357.77 1.34
West Virginia 3 106,875.20 0.29
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
================== ======================= =====================
</TABLE>
- --------------
(1) The greatest ZIP Code geographic concentration of Group 3 Mortgage Loans,
by Cut-off Date Principal Balance, was approximately 1.12% in the 30005 ZIP
Code.
S-55
<PAGE>
Documentation Level of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
% of Aggregate
Principal Balance
Principal Balance of Loan Group
Number Outstanding as of Outstanding as of
Documentation Level of Mortgage Loans the Cut-off Date the Cut-off Date
- -------------------------------------------- ------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Alternate Documentation 42 $ 2,940,383.60 8.06%
Full Documentation 454 28,570,385.32 78.31
Limited Documentation 22 1,394,352.28 3.82
No Documentation 6 648,578.48 1.78
Stated Income 18 1,343,014.95 3.68
Streamlined Documentation 20 1,587,340.01 4.35
------------------ ----------------------- ---------------------
Total 562 $ 36,484,054.64 100.00%
- -------------------------------------------- ------------------ ----------------------- ---------------------
</TABLE>
- --------------
(1) For a description of each documentation level, see "The Seller -
Underwriting Standards" herein.
Combined Loan-to-Value Ratios of the Group 3 Mortgage Loans(1)
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Combined Loan-to-Value Ratio (%) Loans the Cut-off Date Cut-off Date
- ---------------------------------------- ------------- ----------------------- ------------------------------------------
<S> <C> <C> <C>
3.77 - 10.00 1 $ 27,511.98 0.08%
10.01 - 20.00 7 158,659.63 0.43
20.01 - 30.00 7 207,553.22 0.57
30.01 - 40.00 13 490,489.57 1.34
40.01 - 50.00 30 1,493,553.86 4.09
50.01 - 60.00 33 1,476,012.85 4.05
60.01 - 70.00 73 3,973,212.78 10.89
70.01 - 80.00 164 11,167,796.02 30.61
80.01 - 90.00 113 9,187,086.77 25.18
90.01 - 100.00 72 5,358,505.64 14.69
100.01 - 110.00 45 2,725,446.26 7.47
110.01 - 119.55 4 218,226.06 0.60
------------- ----------------------- ------------------------------------------
Total 562 $ 36,484,054.64 100.00%
============= ======================= ==========================================
</TABLE>
(1) The weighted average Combined Loan-to-Value Ratio of the Group 3 Mortgage
Loans as of the Cut-off Date was approximately 80.15%
Status of the Group 3 Mortgage Loans
<TABLE>
<CAPTION>
Number of Principal Balance % of Aggregate Principal Balance of
Mortgage Outstanding as of Loan Group Outstanding as of the
Status Loans the Cut-off Date Cut-off Date
- -------------------------- ----------------- --------------------------- -------------------------------------------
<S> <C> <C> <C>
30 Days Past Due 93 $ 6,426,662.96 17.61%
60 Days Past Due 94 5,939,227.62 16.28
Current 333 21,472,452.39 58.85
Re-performing 42 2,645,711.67 7.25
----------------- --------------------------- -------------------------------------------
Total 562 $ 36,484,054.64 100.00%
================= =========================== ===========================================
</TABLE>
S-56
<PAGE>
THE INDEX
With respect to approximately 7.49% of the Sub-group 2B Mortgage Loans, the
Index is the weekly average yield on United States Treasury securities adjusted
to a constant maturity of one year as published by the Federal Reserve Board in
Statistical Release H.15(519) and most recently available as of a day specified
in the related note ("One Year CMT"); with respect to approximately 92.31% of
the Sub-group 2B Mortgage Loans, the Index is the average of interbank offered
rates for six-month U.S. dollar deposits in the London market based on
quotations of major banks, and most recently available as of a day and pursuant
to a calculation as specified in the related mortgage note ("Six Month LIBOR");
and with respect to approximately 0.19% of the Sub-group 2B Mortgage Loans, the
Index is an index other than Six Month LIBOR or One Year CMT. Listed below are
some historical values for the months indicated for the One Year CMT and Six
Month LIBOR indices.
ONE YEAR CMT
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------------
MONTH 1999 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January.................................. 4.51% 5.24% 5.61% 5.09% 7.05% 3.54%
February................................. 4.70% 5.31% 5.53% 4.94% 6.70% 3.87%
March.................................... 4.78% 5.39% 5.80% 5.34% 6.43% 4.32%
April.................................... 4.69% 5.38% 5.99% 5.54% 6.27% 4.82%
May...................................... 4.85% 5.44% 5.87% 5.64% 6.00% 5.31%
June..................................... 5.10% 5.41% 5.69% 5.81% 5.64% 5.27%
July..................................... 5.03% 5.36% 5.54% 5.85% 5.59% 5.48%
August................................... 5.20% 5.21% 5.56% 5.67% 5.75% 5.56%
September................................ 5.25% 4.71% 5.52% 5.83% 5.62% 5.76%
October.................................. 5.43% 4.12% 5.46% 5.55% 5.59% 6.11%
November................................. 5.55% 4.53% 5.46% 5.42% 5.43% 6.54%
December................................. 5.84% 4.52% 5.53% 5.47% 5.31% 7.14%
SIX MONTH LIBOR
<CAPTION>
YEAR
---------------------------------------------------------------
MONTH 2000 1999 1998 1997 1996 1995
- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January.................................. 5.86% 5.04% 5.75% 5.71% 5.34% 6.69%
February................................. N/A 5.17% 5.78% 5.68% 5.29% 6.44%
March.................................... N/A 5.08% 5.80% 5.96% 5.52% 6.44%
April.................................... N/A 5.08% 5.87% 6.08% 5.42% 6.31%
May...................................... N/A 5.19% 5.81% 6.01% 5.64% 6.06%
June..................................... N/A 5.63% 5.87% 5.94% 5.84% 5.88%
July..................................... N/A 5.68% 5.82% 5.83% 5.92% 5.88%
August................................... N/A 5.91% 5.69% 5.86% 5.74% 5.94%
September................................ N/A 5.97% 5.36% 5.85% 5.75% 5.99%
October.................................. N/A 6.14% 5.31% 5.80% 5.58% 5.95%
November................................. N/A 6.06% 5.28% 6.04% 5.55% 5.74%
December................................. N/A 6.14% 5.17% 6.01% 5.62% 5.56%
</TABLE>
S-57
<PAGE>
If any Index becomes unpublished or is otherwise unavailable, the Servicer
will select an alternative index which is based upon comparable information.
FHA MORTGAGE LOANS AND VA MORTGAGE LOANS
As noted above, 25.59% of the Group 1 Mortgage Loans are subject to either
FHA insurance as described herein (the "FHA Mortgage Loans") or are subject to a
VA guarantee as described herein (the "VA Mortgage Loans") and 2.93% of the
Group 2 Mortgage Loans are FHA Mortgage Loans or VA Mortgage Loans. All FHA
Mortgage Loans and VA Mortgage Loans must conform to the United States
Department of Housing and Urban Development ("HUD") or VA origination
guidelines, as the case may be, at the time of origination. The FHA Mortgage
Loans will be insured by the Federal Housing Administration ("FHA") of HUD as
authorized under the National Housing Act of 1934, as amended (the "National
Housing Act"), and the United States Housing Act of 1937, as amended (the
"United States Housing Act"). No FHA Mortgage Loan may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such FHA Mortgage Loan.
The VA Mortgage Loans will be partially guaranteed by The United States
Department of Veterans Affairs (the "VA") under the Servicemen's Readjustment
Act of 1944, as amended. The Servicemen's Readjustment Act of 1944, as amended,
permits a veteran (or in certain instances the spouse of a veteran) to obtain a
mortgage loan guarantee by the VA covering mortgage financing of the purchase of
a one- to four-family dwelling unit at interest rates permitted by the VA. The
program has a current mortgage loan limit of $203,000, requires no down payment
from the purchaser and permits the guarantee of mortgage loans of generally up
to 30 years' duration. However, no VA Mortgage Loan will have an original
principal amount greater than five times the amount of the related guarantee.
Insurance premiums for the FHA Mortgage Loans are collected by the Servicer
and are paid to the FHA. The regulations governing FHA-insured single-family
mortgage insurance programs generally provide that insurance benefits are
payable upon foreclosure (or other acquisition of possession) and conveyance of
the mortgaged premises to HUD. With respect to a defaulted FHA Mortgage Loan,
the Servicer may be limited in its ability to initiate foreclosure proceedings.
Historically, pursuant to an assignment program (the "Assignment Program"), HUD
in certain circumstances offered qualified mortgagors who had defaulted on an
FHA insured mortgage loan an opportunity to avoid foreclosure and retain their
homes. Under the Assignment Program, the FHA serviced FHA-insured mortgage loans
that had defaulted and been assigned to HUD under the Assignment Program. In
addition, HUD gave forbearance for a period of no longer than 36 months to
mortgagors who had demonstrated a temporary inability to make full payments due
to circumstances beyond the mortgagor's control such as a reduction in income or
increase in expenses. The Assignment Program was terminated and replaced with
mandatory loss mitigation procedures in April 1996 whereby servicers of
defaulted FHA-insured mortgage loans must choose from a variety of tools to cure
a default prior to filing an FHA insurance claim.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims for most programs are being paid in
cash and, for the most part, claims have not been paid in debentures since 1965.
HUD debentures issued in satisfaction of FHA insurance claims bear interest at
the applicable HUD debenture interest rate.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted FHA Mortgage Loan, adjusted to
reimburse the Servicer of that FHA Mortgage Loan for certain costs and expenses
and to deduct certain amounts received or retained by the Servicer after
default. When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance to HUD, the Servicer is
generally compensated for no more than two-thirds of its foreclosure costs and
attorneys' fees (which costs are evaluated based upon Fannie Mae guidelines
(which are state specific)), and is compensated for
S-58
<PAGE>
accrued and unpaid mortgage interest for a limited period prior to the
institution of foreclosure or other acquisition in general only to the extent it
was allowed pursuant to a forbearance plan approved by HUD, and the Servicer is
otherwise in material compliance with FHA regulations. Provided that the
Servicer is in material compliance with FHA regulations, the Servicer will
generally be entitled to the debenture interest which would have been earned, as
of the date the cash payment is received, had the benefits been paid in
debentures. Except where unpaid mortgage interest is recoverable pursuant to an
approved special forbearance plan, such debenture interest is generally payable
from a date 60 days after the mortgagor's first uncorrected failure to perform
any obligation or make any payment due under the mortgage loan, which results in
no recovery of interest accrued during the first two months of delinquency.
Under certain circumstances, as set forth in the regulations, HUD is
authorized to request or require the Servicer to pursue a deficiency judgment
against any defaulting mortgagor. In this regard, HUD may request or require the
Servicer (as the case may be under the regulations) to pursue a deficiency
judgment in connection with the foreclosure. Under neither case would the
Servicer be responsible for collecting on the judgment. Further, in all cases,
HUD may reimburse the Servicer for all additional costs of seeking the judgment.
As of the date hereof, the maximum guarantees that may be issued by the VA
under a VA Mortgage Loan are generally (a) as to mortgage loans with an original
principal amount of $45,000 or less, 50% of such mortgage loan, (b) as to
mortgage loans with an original principal amount of greater than $45,000, but
not more than $56,250, $22,500; (c) as to mortgage loans with an original
principal amount of more than $56,250, but not more than $144,000, the lesser of
$36,000 or 40% of the mortgage loan, and (d) as to mortgage loans with an
original principal amount of more than $144,000 (for an owner-occupied,
single-family home or condominium unit), the lesser of $50,750 or 25% of the
mortgage loan. The liability on the guaranty is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guaranty exceed the amount of the original
guaranty. The VA may, at its option and without regard to the guaranty, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
With respect to a defaulted VA Mortgage Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. However, notwithstanding
the foregoing, the regulations require the Servicer to take immediate action if
it determines that the mortgaged property to be foreclosed upon has been
abandoned by the debtor or has been or may be subject to extraordinary waste or
if there exist conditions justifying the appointment of a receiver for the
property. Generally, a claim for the guaranty is submitted after liquidation of
the mortgaged property. Upon default and subsequent termination of a
VA-guaranteed mortgage loan by a servicer, the VA makes a determination, using a
formula, whether it will reduce its maximum claim liability by acquiring and
reselling the property or by paying the claim on its guaranty without such
acquisition. If the VA determines it will acquire the mortgaged property, it
will establish a maximum price, known as the specified amount, which the
Servicer may bid at the foreclosure sale in order for the Servicer to
subsequently convey the mortgaged property to the VA. If the Servicer purchases
the mortgaged property at the sale for no more than such specified amount, it
may convey the mortgaged property to the VA in return for the payment of such
amount. The VA also pays, up to the maximum amount of the loan guaranty, the
claim for the difference between the price paid for the mortgaged property and
any balance remaining on the mortgage loan. If, however, the VA determines that
acquiring and disposing of the mortgaged property would increase rather than
reduce the government's loss, it will not establish a maximum bid price for the
holder to bid at the foreclosure sale (thus, a "no-bid"), but rather will solely
pay the guaranty claim up to the maximum amount of the guaranty, once the loss
on the mortgage loan has been established. In the event of a no-bid, the
Servicer must foreclose on the defaulted VA Mortgage Loan and thus a loss may be
incurred on such mortgage loan in an amount equal to the difference between (a)
the total indebtedness and (b) the sum of (i) the guaranteed amount and (ii) the
proceeds of any foreclosure.
The amount payable under the guaranty will be the percentage of the VA
Mortgage Loan originally guaranteed applied to the indebtedness outstanding as
of the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the VA
Mortgage Loan, interest accrued on the unpaid balance thereof to the appropriate
date of computation and limited expenses of the mortgagee, but in each case only
to the extent that such amounts have not been recovered through liquidation of
the
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mortgaged property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
THE SELLER
GENERAL
Credit-Based Asset Servicing and Securitization LLC is a Delaware limited
liability company with its principal place of business in New York, New York.
The information set forth in the following paragraphs has been provided by the
Seller and neither the Depositor nor any other party makes any representation as
to the accuracy or completeness of such information.
The Seller was established in July 1996 as a venture of Mortgage Guaranty
Insurance Corporation ("MGIC"), Enhance Financial Services Group, Inc. ("EFSG")
and certain members of management of the Seller. Each of MGIC and EFSG has
approximately a 46% interest in the Seller with the remainder owned by
management of the Seller. EFSG and MGIC are publicly traded companies which file
periodic reports with the Securities and Exchange Commission (the "Commission")
as are required by the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder, as interpreted by the staff
of the Commission thereunder.
At December 31, 1999, the Seller had approximately $934.6 million in
assets, approximately $744.8 million in liabilities and approximately $189.8
million in equity.
The Seller's principal business is the purchasing of performing,
sub-performing and non-performing residential mortgage loans from banks and
other financial institutions and individuals and mortgage-related securities,
including non-investment grade subordinated securities, for investment and
securitization. All mortgage loans owned by the Seller are serviced by its
wholly-owned subsidiary, Litton Loan Servicing LP. The Seller does not originate
mortgages. The Seller is a HUD-approved investing mortgagee.
UNDERWRITING STANDARDS
Each Mortgage Loan included in the Trust Fund has satisfied the credit,
appraisal and underwriting guidelines established by the Seller that are
described below. To determine satisfaction of such guidelines, the Seller or a
loan reviewer reviewed the files related to the Mortgage Loans in connection
with the acquisition of the Mortgage Loans by the Seller. These files include
the documentation pursuant to which the mortgage loan was originally
underwritten, as well as the mortgagor's payment history on the mortgage loan.
The Seller's underwriting guidelines when reunderwriting mortgage loans are
intended to evaluate the mortgagor's credit standing, repayment ability and
willingness to repay debt, as well as the value and adequacy of the mortgaged
property as collateral. In general, to establish the adequacy of the mortgaged
property as collateral, the Seller will obtain a current appraisal, broker's
price opinion, and/or drive-by or desk review of such mortgaged property,
prepared within six months of the Seller's purchase. A mortgagor's ability and
willingness to repay debts (including the mortgage loan) in a timely fashion
must be demonstrated by the quality, quantity and durability of income history,
history of debt management, history of debt repayment, and net worth
accumulation. Accordingly, the Seller also obtains and reviews a current credit
report for the mortgagor.
The Seller purchases mortgage loans that were originated pursuant to one of
the following documentation programs:
Full Documentation. Mortgage loans originally underwritten with "Full
Documentation" include a detailed application designed to provide pertinent
credit information. As part of the description of the mortgagor's financial
condition, the mortgagor was required to fill out a detailed application
designed to provide pertinent credit information. As part of the description of
the mortgagor's financial condition, the mortgagor provided a balance sheet,
current as of the origination of the mortgage loan, describing assets and
liabilities and a statement of income and expenses, as well as authorizing the
originator to obtain a credit report which summarizes the mortgagor's credit
history with local merchants and lenders and any record of bankruptcy. In
addition, an employment verification was
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obtained wherein the employer reported the length of employment with that
organization, the mortgagor's salary as of the mortgage loan's origination, and
an indication as to whether it is expected that the mortgagor will continue such
employment after the mortgage loan's origination. If a mortgagor was
self-employed when such mortgagor's loan was originated, the mortgagor submitted
copies of signed tax returns. The originator was also provided with deposit
verification at all financial institutions where the mortgagor had demand or
savings accounts.
In determining the adequacy of the property as collateral at origination,
an independent appraisal was made of each property considered for financing. The
appraiser inspected the property and verified that it was in good condition and
that construction, if new, had been completed at the time of the mortgage loan's
origination. Such appraisal was based on the appraiser's judgment of values,
giving appropriate weight to both the then market value of comparable homes and
the cost of replacing the property.
Other Levels of Documentation. Other mortgage loans purchased and
reunderwritten by the Seller were originally underwritten pursuant to
alternative documentation programs that require less documentation and
verification than do traditional "full documentation" programs, including "No
Documentation," "Limited Documentation," "Alternative Documentation,"
"Streamlined Documentation" and "Stated Income" programs for certain qualifying
mortgage loans. Under a "No Documentation" program, no verification of a
mortgagor's income or assets is undertaken by the originator. Under a "Limited
Documentation" program, certain underwriting documentation concerning income and
employment verification is waived. "Alternative Documentation" programs allow a
mortgagor to provide W-2 forms instead of tax returns, permits bank statements
in lieu of verification of deposits and permits alternative methods of
employment verification. Under a "Streamlined Documentation" program, certain
underwriting documentation concerning income and employment verification is
waived, and a new appraisal is generally not obtained. Under a "Stated Income"
program, a mortgagor's income is deemed to be that stated on the mortgage
application and is not independently verified by the originator. These are
underwriting programs designed to streamline the underwriting process by
eliminating the requirement for income verification. Depending on the facts and
circumstances of a particular case, the originator of the mortgage loan may have
accepted other mortgage loans based on limited documentation that eliminated the
need for either income verification and/or asset verification. The objective use
of limited documentation is to shift the emphasis of the underwriting process
from the credit standing of the mortgagor to the value and adequacy of the
mortgaged property as collateral.
OWNER-FINANCED MORTGAGE LOANS
The Seller routinely purchases mortgage loans which are owner-financed
mortgage loans. Owner-financed mortgage loans are originated by the individual
sellers of the related mortgaged properties who generally are inexperienced in
matters pertaining to mortgage banking. These mortgage loans were originated
with less stringent standards than the other mortgage loans typically purchased
by the Seller. The mortgagor under an owner-financed mortgage loan generally
does not complete a mortgage loan application and the seller of the related
property generally does not verify the income or employment of the related
mortgagor. In connection with the Seller's acquisition of an owner-financed
mortgage loan, the Seller obtained and reviewed the credit history and payment
history of the mortgagor. In deciding to purchase owner-financed mortgage loans,
the Seller generally places considerable emphasis on the value of the mortgaged
property. The Seller, in connection with its underwriting of an owner-financed
mortgage loan, calculates the loan-to-value ratio of the mortgage loan at the
time of acquisition for underwriting purposes to determine the mortgagor's
equity in the related mortgaged property. The Seller generally obtains a
drive-by appraisal of the market value of each mortgaged property relating to an
owner-financed mortgage loan within 90 days prior to the purchase by the Seller
of such mortgage loan. However, in certain instances, the Seller may have
utilized a previous appraisal if it was completed within one year prior to the
purchase by the Seller, in which case the Seller will generally require the
appraiser to recertify the value in such appraisal. The Seller may have acquired
an owner-financed mortgage loan based upon a statistical valuation provided by
independent data providers of the mortgaged property and subsequently obtained a
drive-by appraisal, generally within three months of acquisition.
For a discussion of the certain risks related to owner-financed
mortgage loans that a Certificateholder should consider prior to purchase, see
"Risk Factors - Risks Related to Owner-Financed Mortgage Loans."
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THE SERVICER
The information set forth in the following paragraphs has been provided by
Litton Loan Servicing LP. None of the Depositor, the Seller, the Trustee, the
Underwriter or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
Litton Loan Servicing LP, (the "Servicer") a Delaware limited partnership,
and, effective as of January 1, 2000, a wholly-owned subsidiary of the Seller,
will act as the servicer of the Mortgage Loans pursuant to the Pooling and
Servicing Agreement. Litton Loan Servicing, Inc. was formed in December 1996,
with all of the general and limited partnership interests owned by EFSG, MGIC
and C-BASS Holding LLC. On October 1, 1998 Litton Loan Servicing, Inc., a
wholly-owned subsidiary of EFSG, transferred its business to the Servicer. From
and after October 1, 1998 all activities formerly conducted by Litton Loan
Servicing, Inc. are being conducted by Litton Loan Servicing LP. The Servicer
currently employs approximately 202 individuals. The main office of the Servicer
is located at 5373 W. Alabama, Houston, Texas 77056. The Servicer is currently a
Fannie Mae and Freddie Mac approved servicer and an approved FHA and VA lender
with a servicing portfolio in excess of $3.688 billion. The Servicer specializes
in servicing sub-performing mortgage loans and entering into workouts with the
related mortgagors. Other transactions for which the Servicer acts as servicer
include Housing Securities, Inc. 1995-RP1, C-BASS ABS, LLC 1997-1, C-BASS ABS,
LLC 1997-3, C-BASS ABS, LLC 1998-1, Merrill Lynch Mortgage Investors, Inc.,
Series 1998-FF2, Series 1998-FF3, Series 1998-GN3, Series 1999-H1, Series
1999-H2, Series 1999-CB1, Series 1999-CB2, Series 1999-CB4 and Series 1999-NC1,
New Century Mortgage Securities, Inc., Series 1999-NCC, Financial Asset
Securities Corporation, Series 1998-3, Series 1999-CB5, Asset Backed Funding
Corporation, Series 1999-1 and The Prudential Home Mortgage Securities Company,
Inc., Series 1990-09, Series 1990-14, Series 1991-05, Series 1991-10, Series
1991-14, Series 1991-20, Series 1992-06, Series 1992-12, Series 1992-16, Series
1992-23, Series 1992-31, Series 1992-36, Series 1992-44 and Series 1993-5.
Fitch IBCA, Inc. ("Fitch") assigned the Servicer its RSS1 residential
special servicer rating on November 16, 1999. The rating is based on the
Servicer's ability to manage and liquidate nonperforming residential mortgage
loans and real estate owned assets. This RSS1 rating is the highest special
servicer rating attainable from Fitch which reflects the Servicer's
sophisticated proprietary default management technology, the financial strength
of its well-capitalized parent and its highly experienced management and staff.
Fitch assigned the Servicer its RPS2 primary servicer rating for sub-prime
and high loan-to-value ratio product. The RPS2 rating is currently the highest
subprime primary servicer rating attainable from Fitch for any subprime
servicer, which is based on the strength of the Servicer's loan administration
processes including new loan set-up procedures and related technology, loan
accounting/cash management and loan reporting. The RPS2 rating for high
loan-to-value ratio product is based on the Servicer's intensive focus on early
collection and loss mitigation.
In addition, Duff & Phelps Credit Rating Co. ("DCR") has assigned the
Servicer its Special Servicer Designation(TM)for residential mortgages.
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 dates indicated. The Servicer's portfolio of mortgage loans
may differ significantly from the Mortgage Loans in the Trust Fund 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 in the Trust Fund 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 in the Trust Fund will
depend, among other things, upon the value of the real estate securing the
Mortgage Loans in the Trust Fund and the ability of the related mortgagor to
make required payments. It should be noted that the Servicer's business
emphasizes to a certain degree the acquisition of servicing rights with respect
to non-performing and subperforming mortgage loans and the Servicer has been an
active participant in the market for these servicing rights during 1999. The
acquisition of these servicing rights may have affected the delinquency and
foreclosure experience of the Servicer in the period ending on December 31, 1999
as compared with the annual periods ending on December 31, 1998 and December 31,
1997.
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<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1997
------------------------ ----------------------- -----------------------
NO. % BY NO. % BY NO. % BY
OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPA
LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE
----- ---------- ------- ----- ---------- ------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Loans 37,105 $2,580,776,677 69.98% 39,063 $2,489,678,138 78.01% 28,982 $1,360,468,860 80.48%
Period of
Delinquency(3)
30 Days 4,638 $ 323,122,291 8.76% 3,689 $ 233,734,152 7.32% 2,534 $ 111,026,184 6.57%
60-89 1,886 $ 133,339,006 3.62% 1,497 $ 87,944,51 2.76% 728 $ 29,739,19 1.76%
90 Days or more 2,056 $ 127,745,979 3.46% 2,578 $ 121,504,523 3.81% 1,348 $ 50,772,58 3.00%
------ -------------- ------ ------ -------------- ------ ------ -------------- ------
TOTAL DELINQUENCY 8,580 $ 584,207,276 15.84% 7,764 $ 443,183,187 13.89% 4,610 $ 191,537,962 11.33%
Foreclosures/
Bankrupt(4) 5,503 $ 433,109,387 11.74% 2,780 $ 197,668,255 6.19% 1,344 $ 98,380,74 5.82%
Real Estate Owned 1,264 $ 89,691,707 2.43% 1,009 $ 60,867,154 1.91% 427 $ 39,978,35 2.37%
------ -------------- ------ ------ -------------- ------ ------ -------------- ------
TOTAL
PORTFOLIO 52,452 $3,687,785,047 100.00% 50,616 $3,191,396,734 100.00% 35,363 $1,690,365,926 100.00%
====== ============== ====== ====== ============== ====== ====== ============== ======
</TABLE>
- --------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the REO Properties, the principal balance is at the time of
foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in Period of
Delinquency.
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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 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. The
Servicer does not have significant historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of
estimating the future delinquency and loss experience of the Mortgage Loans.
There can be no assurance that the Mortgage Loans comprising the Mortgage Pool
will perform consistent with the delinquency or foreclosure experience described
herein. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by the Servicer. In addition, adverse economic conditions may affect the timely
payment by Mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of February 1, 2000 (the "Pooling and Servicing Agreement"),
among the Depositor, the Seller, the Servicer and the Trustee. The Trust Fund
created under the Pooling and Servicing Agreement will consist of:
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 due
after the Cut-off Date, together with any proceeds thereof,
o any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues
received thereon,
o the rights of the Trustee under all insurance policies required to be
maintained pursuant to the Pooling and Servicing Agreement and
o the rights of the Depositor under the Mortgage Loan Purchase Agreement
between the Depositor and the Seller.
The Class A Certificates will be transferable and exchangeable at the
corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust Fund all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
notes, mortgages and other related documents (collectively, the "Related
Documents"), including all scheduled payments with respect to each such Mortgage
Loan due after the Cut-off Date. The Trustee, concurrently with such transfer,
will deliver the Certificates to the Depositor. Each Mortgage Loan transferred
to the Trust Fund will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Pooling and Servicing
Agreement. Such schedule will include information such as the Principal Balance
of each Mortgage Loan as of the Cut-off Date, its Loan Rate as well as other
information.
The Pooling and Servicing Agreement will require that, within the time
period specified therein, the Seller will deliver or cause to be delivered to
the Trustee (or a custodian, as the Trustee's agent for such purpose) the
mortgage notes endorsed to the Trustee on behalf of the Certificateholders or in
blank and the Related Documents. In lieu of delivery of original mortgages or
mortgage notes, if such original is not available or lost, the Seller may
deliver or cause to be delivered true and correct copies thereof, or, with
respect to a lost mortgage note, a lost note affidavit executed by the Seller.
Within 45 days of the Closing Date, the Trustee (or a custodian, as the
Trustee's agent for such purpose) will review the Mortgage Loans and the Related
Documents pursuant to the Pooling and Servicing Agreement and if
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any Mortgage Loan or Related Document is found to be defective in any
material respect and such defect is not cured within 90 days following
notification thereof to the Seller by the Trustee, the Seller will be obligated
to either (i) substitute for such Mortgage Loan an Eligible Substitute Mortgage
Loan; however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust Fund as a REMIC or
result in a prohibited transaction tax under the Code or (ii) purchase such
Mortgage Loan at a price (the "Purchase Price") equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate through the end
of the calendar month in which the purchase is effected, plus the amount of any
unreimbursed Advances and Servicing Advances made by the Servicer. The Purchase
Price will be deposited in the Collection Account on or prior to the next
succeeding Determination Date after such obligation arises. The obligation of
the Seller to repurchase or substitute for a Defective Mortgage Loan is the sole
remedy regarding any defects in the Mortgage Loans and Related Documents
available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan, together with one month's interest
thereon at the applicable Loan Rate.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution:
o have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage
Loan, an aggregate Principal Balance), not in excess of, and not more
than 5% less than, the Principal Balance of the Defective Mortgage
Loan;
o have a Loan Rate, with respect to a Group 1 Mortgage Loan or a
Sub-group 2A Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the Loan
Rate of such Defective Mortgage Loan or, with respect to a Sub-group
2B Mortgage Loan, have a Maximum Loan Rate and Minimum Loan Rate not
less than the respective rate for the Defective Mortgage Loan and have
the same Index as the Defective Mortgage Loan and a Gross Margin equal
to or greater than the Defective Mortgage Loan;
o have the same Due Date as the Defective Mortgage Loan;
o have a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the Defective
Mortgage Loan;
o comply with each representation and warranty as to the Mortgage Loans
set forth in the Pooling and Servicing Agreement (deemed to be made as
of the date of substitution);
o have been reunderwritten by the Seller in accordance with the same
underwriting criteria and guidelines as the Mortgage Loan being
replaced;
o must be of the same or better credit quality as the Mortgage Loan
being replaced; and
o satisfy certain other conditions specified in the Pooling and
Servicing Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificate Insurer or the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the Seller will be obligated to (i)
substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage Loan
or (ii) purchase such Defective Mortgage Loan from the Trust Fund. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a
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result of a breach of a representation or warranty in the Pooling and
Servicing Agreement that materially and adversely affects the interests of the
Certificate Insurer or the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Pooling and Servicing Agreement, the Servicer will service
and administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Advances and Servicing Advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Pooling and Servicing
Agreement) maturing no later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Distribution
Account. The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date unless such Eligible Investments are invested in
investments managed or advised by the Trustee or an affiliate thereof, in which
case such Eligible Investments may mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is
o an account or accounts maintained with a federal or state chartered
depository institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository institution or
trust company that is the principal subsidiary of a holding company,
the short-term unsecured debt obligations of such holding company) are
rated P-1 by Moody's and A-1 by S&P (or comparable ratings if Moody's
and S&P are not the rating agencies) at the time any amounts are held
on deposit therein,
o an account or accounts the deposits in which are fully insured by the
Federal Deposit Insurance Corporation (to the limits established by
such corporation), the uninsured deposits in which account are
otherwise secured such that, as evidenced by an opinion of counsel
delivered to the Trustee and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such
account or a perfected first priority security interest against such
collateral (which shall be limited to Eligible Investments) securing
such funds that is superior to claims of any other depositors or
creditors of the depository institution with which such account is
maintained,
o a trust account or accounts maintained with the trust department of a
federal or state chartered depository institution, national banking
association or trust company acting in its fiduciary capacity or
o otherwise acceptable to each Rating Agency and the Certificate Insurer
without reduction or withdrawal of their then current ratings of the
Certificates as evidenced by a letter from each Rating Agency to the
Trustee.
Eligible Investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of the Rating Agencies and
the Certificate Insurer from time to time as being consistent with their then
current ratings of the Certificates.
ADVANCES
Subject to the limitations in the paragraph below, the Servicer will be
obligated to advance or cause to be advanced the Business Day prior to each
Distribution Date its own funds, or funds in the Collection Account that are
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not included in the Total Amount Available for such Distribution Date, (any
such advance, an "Advance") in an amount equal to the aggregate of:
o all payments of principal and interest, net of the Servicing Fee that
was due during the related Prepayment Period on the Actuarial Mortgage
Loans, other than Balloon Payments, and that were delinquent on the
related Determination Date,
o plus certain amounts representing assumed payments not covered by any
current net income on the Mortgaged Properties acquired by foreclosure
or deed in lieu of foreclosure, and,
o plus, with respect to Balloon Loans, with respect to which the Balloon
Payment is not made when due, an assumed monthly payment that would
have been due on the related Due Date based on the original principal
amortization schedule for such Balloon Loan.
The Servicer will not make any Advances of principal or interest with
respect to Simple Interest Mortgage Loans.
Advances with respect to Actuarial Mortgage Loans are required to be made
only to the extent they are deemed by the Servicer to be recoverable from
related late collections, insurance proceeds or liquidation proceeds. The
purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required, however, to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Relief Act. Subject to the
recoverability standard above, the Servicer's obligation to make Advances as to
any Actuarial Mortgage Loan will continue until the Mortgage Loan is paid in
full or until the recovery of all Liquidation Proceeds thereon.
All Advances will be reimbursable to the Servicer from late collections,
insurance proceeds and liquidation proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made. In addition, any Advances previously made in
respect of any Mortgage Loan that are deemed by the Servicer to be
nonrecoverable from related late collections, insurance proceeds or liquidation
proceeds may be reimbursed to the Servicer out of any funds in the Collection
Account prior to the distributions on the Certificates. In the event the
Servicer fails in its obligation to make any such advance, the Trustee, in its
capacity as successor Servicer, will be obligated to make any such advance, to
the extent required in the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary "out-of-pocket" costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (1) the preservation, restoration and protection of the Mortgaged
Properties, (2) any enforcement or judicial proceedings, including foreclosures,
and (3) the management and liquidation of Mortgaged Properties acquired in
satisfaction of the related mortgage. Each such expenditure will constitute a
"Servicing Advance."
The Servicer's right to reimbursement for Servicing Advances is limited to
late collections on the related Mortgage Loan, including liquidation proceeds,
released mortgaged property proceeds, insurance proceeds and such other amounts
as may be collected by the Servicer from the related Mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed, unless such amounts are deemed to be nonrecoverable by the Servicer, in
which event reimbursement will be made to the Servicer from funds in the
Collection Account.
THE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, will act as
trustee (the "Trustee") for the Certificates pursuant to the Agreement. The
Trustee's offices for notices under the Agreement are located at 450 West 33rd
Street, New York, New York 10001, Attention: Capital Markets Fiduciary Services
and its telephone number is (212) 946-3246. The principal compensation (the
"Trustee Fee")to be paid to the Trustee in respect of its obligations under the
Pooling and Servicing Agreement will be 0.0125% (1.25 basis points) per annum on
the 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
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the compensation and the expenses and disbursements of its agents and
counsel, in the ordinary course of the Trustee's performance in accordance with
the provisions of the Agreement) incurred by the Trustee arising out of or in
connection with the acceptance or administration of its obligations and duties
under the Agreement, other than any loss, liability or expense (i) that
constitutes a specific liability of the Trustee under the Agreement or (ii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Servicer
in respect of its servicing activities for the Certificates will be at the
"Servicing Fee Rate" of 0.50% (50 basis points) per annum on the Principal
Balance of each Mortgage Loan (other than a Mortgage Loan in Sub-group 1A). The
Servicing Fee Rate on a Mortgage Loan in Sub-group 1A will be 0.375% (37.5 basis
points) per annum. As additional servicing compensation, the Servicer is
entitled to retain all service-related fees (other than prepayment penalties),
including assumption fees, modification fees, extension fees and late payment
charges, to the extent collected from mortgagors, together with any interest or
other income earned on funds held in the Collection Account and any escrow
accounts. The Servicer is obligated to offset any Prepayment Interest Shortfall
on Actuarial Mortgage Loans on any Distribution Date (payments made by the
Servicer in satisfaction of such obligation, "Compensating Interest") by an
amount not in excess of one-half of its Servicing Fee for such Distribution
Date. The Servicer will not offset any Prepayment Interest Shortfall on Simple
Interest Mortgage Loans on any Distribution Date. With respect to any
Determination Date and each Mortgage Loan as to which a principal prepayment in
full was applied during the prior calendar month, the "Prepayment Interest
Shortfall" is an amount equal to the interest at the applicable Loan Rate (net
of the Servicing Fee) on the amount of such principal prepayment for the number
of days commencing on the date on which the principal prepayment is applied and
ending on the last day of the prior calendar month. The Servicer is obligated to
pay certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement and is entitled to
reimbursement therefor as provided in the Pooling and Servicing Agreement.
The Servicer, in its capacity as a special servicer is also entitled to an
additional servicing fee (the "Special Servicing Fee"), in connection with
Mortgage Loans that are 90 or more days delinquent. As more fully described in
the Pooling and Servicing Agreement, the Special Servicing Fee is equal to $150
per month for each Mortgage Loan which is 90 or more days delinquent, payable
monthly for eighteen consecutive months commencing in the first month after the
Cut-off Date in which payments on such Mortgage Loan are 90 or more days
delinquent, unless such Mortgage Loan becomes less than 90 days delinquent. The
Servicer shall remain entitled to receive any Special Servicing Fees owed, but
not paid, from previous Distribution Dates.
The "Determination Date" with respect to any Distribution Date will be the
15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the Voting
Rights allocated among holders of the Class A Certificates shall be 98% and
shall be allocated among the Classes of such Certificates in the proportion that
the aggregate Certificate Principal Balance of all the Certificates of such
Class then outstanding bear to the aggregate Certificate Principal Balance of
all Class A Certificates then outstanding. With respect to any date of
determination, the percentage of all the Voting Rights allocated among holders
of the Class X Certificates shall be 2%. If no Insurer Default exists and is
continuing and the Class A Certificates are outstanding or any amounts are owed
to the Certificate Insurer under the Insurance Agreement, all of the Voting
Rights allocated to the Class A Certificateholders shall be vested in the
Certificate Insurer. However, if an Insurer Default does exist and is
continuing, the Voting Rights shall be allocated among holders of the Class A
Certificates as described above. The Voting Rights allocated to a Class of
Certificates shall be allocated among all holders of each such Class in
proportion to the outstanding certificate balances (or percentage interests) of
such Certificates. The Class BB Certificates and the Class R Certificates will
not have any Voting Rights.
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AMENDMENT
The Pooling and Servicing Agreement may be amended by the Seller, the
Depositor, the Servicer and the Trustee, without the consent of the holders of
the Certificates but with the consent of the Certificate Insurer (if no Insurer
Default exists and is continuing and the Class A Certificates are outstanding or
any amounts are owed to the Certificate Insurer under the Insurance Agreement),
for any of the purposes set forth under "Description of the
Agreements--Amendment" in the Prospectus. In addition, the Pooling and Servicing
Agreement may with the written consent of the Certificate Insurer (if no Insurer
Default exists and is continuing and the Class A Certificates are outstanding or
any amounts are owed to the Certificate Insurer) be amended by the Seller, the
Depositor, the Servicer and the Trustee and the holders of a majority in
interest of any Class of Class A Certificates affected thereby for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling and Servicing Agreement or of modifying in any manner
the rights of the holders of any Class of Class A Certificates; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, distributions required to be made on any Class of Class A
Certificates without the consent of the holders of such Certificates; (ii)
adversely affect in any material respect the interests of the holders of any
Class of Class A Certificates in a manner other than as described in clause (i)
above, without the consent of the holders of such Class evidencing percentage
interests aggregating at least 66%; or (iii) reduce the aforesaid percentage of
Voting Rights required by a Class of Certificate to consent to any such
amendment, without the consent of the holders of all such Certificates.
PLEDGE AND ASSIGNMENT OF SERVICER'S RIGHTS
On the Closing Date, the Servicer will pledge and assign all of its right,
title and interest in, to and under the rights granted to it in the Pooling and
Servicing Agreement to First Union National Bank, as the representative of
certain lenders. In the event that an Event of Servicing Termination (as defined
below) occurs, the Trustee and the Depositor have agreed to the appointment of
First Union National Bank or its designee as the successor servicer, provided
that at the time of such appointment First Union National Bank or such designee
meets the requirements of a successor servicer described in the Pooling and
Servicing Agreement (including being acceptable to the Rating Agencies and the
Certificate Insurer) and that First Union National Bank or such designee agrees
to be subject to the terms of the Pooling and Servicing Agreement.
TERMINATION
The Seller, or if the Seller does not exercise such option, the Certificate
Insurer, will have the right to purchase all of the Mortgage Loans and Mortgaged
Properties acquired by the Trust Fund ("REO Property") and thereby effect the
early retirement of the Certificates, on any Distribution Date on which the
aggregate Principal Balance of the Mortgage Loans and REO Properties in the
Trust Fund is less than 10% of the aggregate Principal Balance of the Mortgage
Loans in the Trust Fund as of the Cut-off Date. The first Distribution Date on
which such option could be exercised is referred to herein as the "Optional
Termination Date". In the event that the option is exercised, the purchase will
be made at a price (the "Termination Price") generally equal to par plus accrued
interest for each Mortgage Loan at the related Loan Rate to but not including
the first day of the month in which such purchase price is distributed plus the
amount of any unreimbursed Advances and Servicing Advances made by the Servicer
plus any amounts due to the Certificate Insurer under the Insurance Agreement
and the Trustee under the Pooling and Servicing Agreement. Proceeds from such
purchase will be included in the Total Amount Available and will be distributed
to the holders of the Certificates in accordance with the Pooling and Servicing
Agreement. Any such purchase of the Mortgage Loans and REO Properties will
result in the early retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 60 days or more,
the Seller may, at its option, purchase such Mortgage Loan from the Trust Fund
at the Purchase Price for such Mortgage Loan.
EVENTS OF SERVICING TERMINATION
Events of Servicing Termination will consist, among other things, of:
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(1) (a) any failure by the Servicer to make an Advance and (b) any other
failure by the Servicer to deposit in the Collection Account or
Distribution Account the required amounts or remit to the Trustee any
payment which continues unremedied for one Business Day following
written notice to the Servicer;
(2) any failure of the Servicer to make any Advance or to cover any
Prepayment Interest Shortfalls, as described herein, which failure
continues unremedied for one Business Day;
(3) any failure by the Servicer to observe or perform in any material
respect any other of its covenants or agreements in the Pooling and
Servicing Agreement, which continues unremedied for 30 days after the
first date on which (x) the Servicer has knowledge of such failure or
(y) written notice of such failure is given to the Servicer;
(4) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to pay
its obligations; or
(5) cumulative Realized Losses or Delinquencies as of any Distribution
Date exceed the amount specified in the Pooling and Servicing
Agreement.
RIGHTS UPON EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee at the direction of the
Certificate Insurer (so long as (i) no Insurer Default exists and is continuing
and (ii) the Class A Certificates are outstanding or any amounts are owed to the
Certificate Insurer under the Insurance Agreement) or the holders of Class A
Certificates (if an Insurer Default exists and is continuing or the Class A
Certificates are no longer outstanding and no amounts are owed to the
Certificate Insurer under the Insurance Agreement) evidencing not less than 51%
of the Voting Rights shall terminate all of the rights and obligations of the
Servicer in its capacity as servicer with respect to the Mortgage Loans, as
provided in the Pooling and Servicing Agreement, whereupon the Trustee will
succeed to all of the responsibilities and duties of the Servicer under the
Pooling and Servicing Agreement, including the obligation to make Advances,
subject to the pledge and assignment to First Union National Bank described
above. No assurance can be given that termination of the rights and obligations
of the Servicer under the Pooling and Servicing Agreement would not adversely
affect the servicing of the related Mortgage Loans, including the delinquency
experience of such Mortgage Loans.
No holder of a Class A Certificate, solely by virtue of such holder's
status as a holder of a Class A Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless (i) if no Insurer Default exists and is continuing, the
Certificate Insurer so agrees or (ii) if an Insurer Default exists and is
continuing, the holders of Class A Certificates having not less than 51% of the
Voting Rights evidenced by the Class A Certificates so agree and have offered
reasonable indemnity to the Trustee.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Class A Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and Servicing
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The trust will issue the Class A-1, Class A-2 and Class A-3 Certificates
(together, the "Class A Certificates"), the Class BB Certificates, the Class X
Certificates and the Class R Certificates (the "Residual
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Certificates"). The Class A Certificates, the Class BB Certificates, the Class X
Certificates and the Residual Certificates are collectively referred to herein
as the "Certificates." Only the Class A Certificates are offered hereby.
The Class A Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
MBIA Insurance Corporation (the "Certificate Insurer") for the benefit of the
holders of the Class A Certificates, pursuant to which the Certificate Insurer
will guarantee payments to such Certificateholders as described herein.
The Class A Certificates will have the respective original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus ten percent. The Class BB, the Class X and the Class R
Certificates will not have an original Certificate Principal Balance and will
not bear interest.
The Class A Certificates will be issued in book-entry form as described
below. The Class A Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity date (each, an "Assumed
Final Distribution Date") for each Class of Class A Certificates is February 25,
2031.
Distributions on the Class A Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in March 2000 (each, a "Distribution Date"),
to the persons in whose names such Certificates are registered at the close of
business on the Record Date. With respect to the Class A-1 and Class A-3
Certificates, the "Record Date" is the last day of the month immediately
preceding the month in which the related Distribution Date occurs (except that
the record date for the first Distribution Date is the closing date). With
respect to the Class A-2 Certificates, the "Record Date" is the day immediately
preceding such Distribution Date (except that the record date for the first
Distribution Date is the closing date); provided, however, that if any Class A-2
Certificate becomes a Definitive Certificate (as defined herein), the Record
Date for such Certificate will be the last day of the month immediately
preceding the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Class A
Certificates ("Certificate Owners") will hold such Certificates through DTC in
the United States, or Clearstream, Luxembourg or Euroclear (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for Clearstream, Luxembourg and The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations of $50,000. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Class A Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling and Servicing Agreement.
Certificate Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's
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Financial Intermediary is not a DTC participant and on the records of
Clearstream, Luxembourg or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Book-Entry Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Book-Entry Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Book-Entry Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream, Luxembourg Participants on such
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Material Federal
Income Tax Consequences--Tax Characterization of a Trust Fund as a
Partnership--Tax Consequences to Holder of the Certificates--Tax Consequences to
Foreign Certificateholders", "--Backup Withholding" and "New Withholding
Regulations" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, such cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream, Luxembourg Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
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DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
Clearstream Banking, societe anonyme (formerly Cedelbank, "Clearstream,
Luxembourg"), 67 Bd Grande-Duchesse Charlotte, L-2967 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream,
Luxembourg is owned by banks, securities dealers and financial institutions, and
currently has about 92 shareholders, including U.S. financial institutions or
their subsidiaries. No single entity may own more than five percent of
Clearstream, Luxembourg's stock.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such
is subject to regulation by the Institute Monetaire Luxembourgeois, "IML", the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions by electronic book-entry transfers between their
accounts. Clearstream, Luxembourg provides various services, including
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in several countries through established
depository and custodial relationships. Clearstream, Luxembourg has established
an electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Clearstream,
Luxembourg currently accepts over 70,000 securities issues on its books.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's United States customers are
limited to securities brokers and dealers and banks. Currently, Clearstream,
Luxembourg has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada, and the United States. Indirect
access to Clearstream, Luxembourg is available to other institutions which clear
through or maintain a custodial relationship with an account holder of
Clearstream, Luxembourg.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 29 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of
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specific certificates to specific securities clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co. Distributions with respect to
Certificates held through Clearstream, Luxembourg or Euroclear will be credited
to the cash accounts of Clearstream, Luxembourg Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Consequences--Tax Characterization
of a Trust Fund as a Partnership--Tax Consequences to Holder of the
Certificates--Tax Consequences to Foreign Certificateholders", "--Backup
Withholding" and "New Withholding Regulations" in the Prospectus. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream, Luxembourg or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Certificateholder
under the Pooling and Servicing Agreement on behalf of a Clearstream, Luxembourg
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Book-Entry Certificates which
conflict with actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor is
unable to locate a qualified successor, (b) the Depositor, at its sole option,
elects to terminate a book-entry system through DTC or (c) after the occurrence
of an Event of Default, beneficial owners having Percentage Interests
aggregating not less than 51% of the Book-Entry Certificates advise the Trustee
and DTC through the Financial Intermediaries and the DTC participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the
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Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling and Servicing Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Certificates
among participants of DTC, Clearstream, Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
Neither the Depositor, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing date ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
ALLOCATION OF AVAILABLE FUNDS
On each Distribution Date the Trustee (based upon the information provided
to it in the Remittance Report, upon which the Trustee may conclusively rely,
and the calculations required to be made by the Trustee) shall withdraw from the
Distribution Account the Total Amount Available, and make the following
disbursements and transfers as described below and to the extent of the Total
Amount Available.
(A) From Group 1 Available Funds in the following order of priority:
first, to the Trustee, the Trustee Fee for Loan Group 1 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Class A-1 Certificates;
second, to the Class A-1 Certificates, the related Interest
Distributable Amount for the Class A-1 Certificates for such Distribution
Date;
third, to the Class A-1 Certificates, the Principal Distribution
Amount for the Class A-1 Certificates for such Distribution Date; provided,
that if the Overcollateralization Target Amount for the Class A-1
Certificates is reduced below the then existing amount of
overcollateralization, the amount of the Principal Distribution Amount on
any Distribution Date will be correspondingly reduced by the amount of such
reduction or by the
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amount necessary such that the overcollateralization will not exceed the
Overcollateralization Target Amount for the Class A-1 Certificates for that
Distribution Date;
fourth, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for
prior draws made on the Policy in respect of the Class A-1 Certificates and
any other amounts owing to the Certificate Insurer under the Insurance
Agreement with respect to the Class A-1 Certificates;
fifth, to the Trustee, reimbursement for expenses; and
sixth, to the Servicer, current and due and owing Special Servicing
Fees in respect of Loan Group 1.
(B) From Group 2 Available Funds in the following order of priority:
first, to the Trustee, the Trustee Fee for Loan Group 2 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Class A-2 Certificates;
second, to the Class A-2 Certificates, the related Interest
Distributable Amount for the Class A-2 Certificates for such Distribution
Date;
third, to the Class A-2 Certificates, the Principal Distribution
Amount for the Class A-2 Certificates for such Distribution Date; provided
that if the Overcollateralization Target Amount for the Class A-2
Certificates is reduced below the then existing amount of
overcollateralization, the amount of the Principal Distribution Amount on
any Distribution Date will be correspondingly reduced by the amount of such
reduction or by the amount necessary such that the overcollateralization
will not exceed the Overcollateralization Target Amount for the Class A-2
Certificates for that Distribution Date;
fourth, to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for reimbursement for
prior draws made on the Policy in respect of the Class A-2 Certificates and
any other amounts owing to the Certificate Insurer under the Insurance
Agreement with respect to the Class A-2 Certificates;
fifth, to the Trustee, reimbursement for expenses; and
sixth, to the Servicer, current and due and owing Special Servicing
Fees in respect of Loan Group 2.
(C) From Group 3 Available Funds in the following order of priority:
first, to the Trustee, the Trustee Fee for Loan Group 3 for such
Distribution Date and to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium payable
in respect of the Class A-3 Certificates;
second, to the Class A-3 Certificates, the related Interest
Distributable Amount for the Class A-3 Certificates for such Distribution
Date;
third, to the Class A-3 Certificates, the Principal Distribution Amount
for the Class A-3 Certificates for such Distribution Date; provided, that
if the Overcollateralization Target Amount for the Class A-3 Certificates
is reduced below the then existing amount of overcollateralization, the
amount of the Principal Distribution Amount on any Distribution Date will
be correspondingly reduced by the amount of such reduction or by the amount
necessary such that the overcollateralization will not exceed the
Overcollateralization Target Amount for the Class A-3 Certificates for that
Distribution Date;
fourth, to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws
made on the Policy in respect of the Class A-3 Certificates and
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any other amounts owing to the Certificate Insurer under the Insurance
Agreement with respect to the Class A-3 Certificates;
fifth, to the Trustee, reimbursement for expenses; and
sixth, to the Servicer, current and due and owing Special Servicing
Fees in respect of Loan Group 3.
(D) On any Distribution Date, to the extent the Available Funds for the
related Class of Class A Certificates are insufficient to make the distributions
above pursuant to the first through fourth subclauses of (A), (B) or (C) above,
the Available Funds relating to the other Class of Class A Certificates
remaining after making the distributions required to be made pursuant to the
first through fourth subclauses of (A), (B) or (C) above with respect to that
other Class of Class A Certificates shall be distributed to the extent of such
insufficiency in accordance with the first through fourth subclauses of (A), (B)
or (C) above with respect to the Class of Class A Certificates experiencing the
insufficiency.
(E) Concurrently, to each Class of Class A Certificates, to the extent of
the related Available Funds remaining, the related Distributable Excess Spread
for such Distribution Date, until their respective Certificate Principal
Balances are reduced to zero.
(F) After making the distributions referred to in (A) through (E) above,
the Trustee shall make distributions in the following order of priority, to the
extent of the balance of the remaining Total Amount Available:
first, concurrently, to each Class of Class A Certificates, the excess of
the Distributable Excess Spread for such Distribution Date over the amount
thereof distributed pursuant to (E) above on such Distribution Date in respect
of such Class, until its respective Certificate Principal Balance is reduced to
zero;
second, certain amounts in respect of indemnification that may be required
to be paid by the Trust Fund pursuant to the Pooling and Servicing Agreement;
third, if a successor Servicer has been appointed, to the successor
Servicer, the Certificate Insurer or the Trustee, as applicable, any Transition
Costs; and
fourth, to the Class X Certificates, for deposit into the Excess Reserve
Fund Account first to cover any Class A-2 Available Funds Cap Carryover Amount
(to the extent not covered by amounts already on deposit in the Excess Reserve
Fund Account and only to the extent of any remaining Group 2 Available Funds)
and then to cover any Required Reserve Amount, and then to be released to the
Class X Certificates, such amounts, if any, as described in the Pooling and
Servicing Agreement.
(F) To the Class R Certificates, the remaining amount.
On each Distribution Date, all amounts representing prepayment penalties
from the Mortgage Loans in each Loan Group received during the related
Prepayment Period will be distributed to the Class X Certificates.
DEFINITIONS
Many of the defined terms listed below may apply to each Loan Group/Class
of Class A Certificates and are sometimes used in this prospectus supplement to
refer to a particular Loan Group/Class of Class A Certificates by the adjectival
use of the words "Group 1," "Group 2" and "Group 3".
The "Accrual Period" for the Class A-1 and Class A-3 Certificates for a
given Distribution Date will be the calendar month preceding the month of such
Distribution Date based on a 360-day year consisting of twelve 30-day months.
The "Accrual Period" for the Class A-2 Certificates for a given
Distribution Date will be the actual number of days (based on a 360-day year)
included in the period commencing on the immediately preceding Distribution Date
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and ending on the day immediately preceding the current Distribution Date;
provided, however, that the initial Accrual Period for the Class A-2
Certificates will be the actual number of days included in the period commencing
on the Closing Date and ending on March 26, 2000.
The "Certificate Principal Balance" of any Class of Class A Certificates on
any Distribution Date will be equal to the original Certificate Principal
Balance specified on the cover of this prospectus supplement reduced by all
amounts actually distributed in respect of principal of such Class on all prior
Distribution Dates.
The "HLTV Account Allocation" for any Loan Group and Distribution Date is
equal to, with respect to each conventional Mortgage Loan with an LTV in excess
of 100% (as of the Cut-off Date) (each, an "HLTV Loan") which was liquidated
during the related Collection Period, the lesser of (i) the HLTV Initial
Allocation and (ii) the HLTV Liquidation Allocation.
The "HLTV Initial Allocation" for any HLTV Loan is the dollar amount by
which the Cut-off Date Principal Balance of such HLTV Loan exceeded the
Appraised Value of the related Mortgaged Property (as of the Cut-off Date).
The "HLTV Liquidation Allocation" for any liquidated HLTV Loan is equal to
the excess, if any, of the Principal Balance of such HLTV Loan as of the date of
liquidation over the related net liquidation proceeds.
The "Available Funds" for a Loan Group and Distribution Date will be equal
to the sum of:
o the aggregate amount of monthly payments on the related Mortgage Loans
due on the related Due Date and received by the Trustee one business
day prior to the related Distribution Date, after deducting the
Servicing Fee, primary mortgage insurance and any accrued and unpaid
Servicing Fee,
o certain unscheduled payments in respect of the Mortgage Loans,
including prepayments, insurance proceeds, net liquidation proceeds
(including any HLTV Account Allocation) and proceeds from repurchases
of and substitutions for the Mortgage Loans occurring during the
related Prepayment Period, excluding prepayment penalties and
Arrearages, and
o payments from the Servicer in connection with Advances and Prepayment
Interest Shortfalls for the Distribution Date,
minus
o amounts reimbursable therefrom to the Servicer.
The "Prepayment Period" is the prior calendar month.
The "Total Amount Available" for any Distribution Date will equal the sum
of the Available Funds for all three Loan Groups.
"Principal Distribution Amount" for a Class of Class A Certificates and any
Distribution Date shall equal the sum of:
o each scheduled payment of principal collected or advanced on the
related Mortgage Loans by the Servicer in respect of the related Due
Date,
o the principal portion of all partial and full principal prepayments of
related Mortgage Loans applied by the Servicer during the related
Prepayment Period,
o the principal portion of all related net liquidation proceeds and
insurance proceeds received during the related Prepayment Period on
the related Mortgage Loans,
o that portion of the Purchase Price, representing principal of any
repurchased Mortgage Loan in the related Loan Group, required to be
deposited to the Collection Account during the related Prepayment
Period,
o the principal portion of any related Substitution Adjustments required
to be deposited in the Collection Account during the related
Prepayment Period, and
o on the Distribution Date on which the Trust Fund is to be terminated
in accordance with the Pooling and Servicing Agreement, that portion
of the Termination Price in respect of principal for the related Loan
Group required to be distributed to the Certificateholders.
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With respect to any Distribution Date, the related Due Date is the date in
the month of such Distribution Date, if the Due Date is the first day of that
month, otherwise the related Due Date is the date in the prior calendar month.
The "Distributable Excess Spread" with respect to a Class of Class A
Certificates and any Distribution Date, is the amount, if any, required to be
distributed on such Distribution Date to satisfy the Overcollateralization
Target Amount for such Class on such Distribution Date.
The "Interest Distributable Amount" for any Distribution Date and a Class
of Class A Certificates, equals the sum of (i) the related Monthly Interest
Distributable Amount for such Class for such Distribution Date and (ii) the
related Unpaid Interest Shortfall Amount for such Class for such Distribution
Date. The Interest Distributable Amount for a Class of Class A Certificates will
be reduced on each Distribution Date by the amount of Relief Act Shortfalls.
The "Monthly Interest Distributable Amount" for any Distribution Date and a
Class of Class A Certificates, equals the amount of interest accrued during the
related Accrual Period at the related Pass-Through Rate on the Certificate
Principal Balance of such Class immediately prior to such Distribution Date (or,
in the case of the first Distribution Date and the Class A-2 Certificates, from
the Closing Date).
The "Overcollateralization Target Amount" means with respect to each Class
of Class A Certificates, the amount specified in the Pooling and Servicing
Agreement which may vary over time.
A "Transition Cost" means any documented fees and expenses and allocated
costs reasonably incurred by a successor Servicer, the Certificate Insurer or
the Trustee in connection with a transfer of servicing from the Servicer to a
successor Servicer.
The "Unpaid Interest Shortfall Amount" means
(1) for each Class of Class A Certificates and the first Distribution
Date, zero, and
(2) with respect to each Class of Class A Certificates and any
Distribution Date after the first Distribution Date,
(a) the sum of (x) the Monthly Interest Distributable Amount for such
Class for the immediately preceding Distribution Date and (y) the
outstanding Unpaid Interest Shortfall Amount, if any, for such
Class for such preceding Distribution Date,
(b) minus the aggregate amount distributed on such Class in respect
of interest on such preceding Distribution Date, and
(3) plus interest on the amount calculated in clause (2), if any, to the
extent permitted by law, at the Pass-Through Rate for such Class for
the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to the Class
A-1 Certificates will equal the lesser of (i) 7.99% per annum and (ii) the Class
A-1 Net WAC Cap. The "Class A-1 Net WAC Cap" for any Distribution Date shall
equal the difference between (A) the average of the Loan Rates of the Group 1
Mortgage Loans as of the first day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, the Closing
Date), weighted on the basis of the related Principal Balances as of such date
and (B) the sum of the Servicing Fee Rate and the rates at which the Trustee
Fee, the premium payable to the Certificate Insurer and the lender paid mortgage
insurance with respect to the Class A-1 Certificates are calculated. Interest in
respect of any Distribution Date will accrue on the Class A-1 Certificates
during the related Accrual Period on the basis of a 360-day year consisting of
twelve 30-day months.
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The "Pass-Through Rate" on any Distribution Date with respect to the Class
A-2 Certificates will equal the lesser of (i) the Class A-2 Formula Rate and
(ii) the Class A-2 Available Funds Cap for such Distribution Date. With respect
to the Class A-2 Certificates, interest in respect of any Distribution Date will
accrue during the related Accrual Period on the basis of a 360-day year and the
actual number of days elapsed. The "Class A-2 Formula Rate" is the sum of the
interbank offered rate for one-month United States dollar deposits in the London
market (the "Certificate Index") as of the related LIBOR Determination Date (as
defined herein) plus a margin (the "Certificate Margin"). The Certificate Margin
on each Distribution Date on or prior to the Optional Termination Date will
equal 0.32% and on each Distribution Date after the Optional Termination Date,
the Certificate Margin will equal 0.64%. The "Class A-2 Available Funds Cap" for
any Distribution Date shall equal the difference between (A) the average of the
Loan Rates of the Group 2 Mortgage Loans as of the first day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, the Closing Date), weighted on the basis of the related
Principal Balances as of such date and (B) the sum of the Servicing Fee Rate and
the rates at which the Trustee Fee, the premium payable to the Certificate
Insurer and the lender paid mortgage insurance with respect to the Class A-2
Certificates are calculated and, beginning with the Distribution Date in March
2001, 0.50% (computed on the basis of a 360-day year and the actual number of
days elapsed during the related Accrual Period).
The "Pass-Through Rate" on any Distribution Date with respect to the
Class A-3 Certificates will equal the lesser of (i) 8.03% per annum and (ii) the
Class A-3 Net WAC Cap. The "Class A-3 Net WAC Cap" for any Distribution Date
shall equal the difference between (A) the average of the Loan Rates of the
Group 3 Mortgage Loans as of the first day of the month preceding the month of
such Distribution Date (or, in the case of the first Distribution Date, the
Closing Date), weighted on the basis of the related Principal Balances as of
such date and (B) the sum of the Servicing Fee Rate and the rates at which the
Trustee Fee, the premium payable to the Certificate Insurer and the lender paid
mortgage insurance with respect to the Class A-3 Certificates are calculated.
Interest in respect of any Distribution Date will accrue on the Class A-3
Certificates during the related Accrual Period on the basis of a 360-day year
consisting of twelve 30-day months.
The "Class A-2 Available Funds Cap Carryover Amount" is calculated on any
Distribution Date when the Pass-Through Rate for the Class A-2 Certificates is
based upon the Group 2 Available Funds Cap and equals the excess of
(1) the amount of interest the Class A-2 Certificates would have been
entitled to receive on such Distribution Date had their Pass-Through
Rate not been subject to the Group 2 Available Funds Cap, up to the
Maximum Cap, over
(2) the amount of interest the Class A-2 Certificates received on such
Distribution Date based on the Group 2 Available Funds Cap, plus
(3) the unpaid portion of any such excess from prior Distribution Dates
(and interest accrued thereon at the then applicable Pass-Through Rate
on the Class A-2 Certificates, without giving effect to the Group 2
Available Funds Cap up to the Maximum Cap).
Any Class A-2 Available Funds Cap Carryover Amount on the Class A-2 Certificates
will be paid on future Distribution Dates from and to the extent of funds
available therefor in the Group 2 Excess Reserve Fund Account (as described
herein). The Policy does not cover the payment, nor do the ratings assigned to
the Class A-2 Certificates address the likelihood of the payment, of any Class
A-2 Available Funds Cap Carryover Amount.
The "Maximum Cap" for any Distribution Date is the weighted average of the
Mortgage Loan Rates on the Sub-group 2A Mortgage Loans and the Maximum Loan
Rates on the Sub-group 2B Mortgage Loans, excluding those Mortgage Loans that
have no fixed Maximum Loan Rate.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period following the initial Accrual Period (each
such date, a "LIBOR Determination Date"), the Trustee (except for the first
Accrual Period) will determine the Certificate Index for such Accrual Period for
the Class A-2 Certificates
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on the basis of the offered rates of the Reference Banks for one-month
United States dollar deposits, as such rates appear on the Telerate Page 3750,
as of 11:00 a.m. (London time) on such LIBOR Determination Date. As used in this
section, "LIBOR 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 such 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 Depositor and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Telerate Page 3750 on
the LIBOR Determination Date in question, (iii) which have been designated as
such by the Depositor and (iv) not controlling, controlled by or under common
control with, the Depositor, the Servicer or any successor Servicer. On the
Closing Date, the Certificate Index for the initial Accrual Period will be
determined on the second LIBOR Business Day preceding the Closing Date.
On each LIBOR Determination Date, the Certificate Index for the related
Accrual Period for the Class A-2 Certificates will be established by the Trustee
as follows:
(a) If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two Reference Banks
provide such offered quotations, the Certificate Index for the related
Accrual Period will be the higher of (x) the Certificate Index as
determined on the previous LIBOR Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" will be the rate per annum that
the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 0.0625%) of the
one-month United States dollar lending rates which New York City banks
selected by the Depositor are quoting on the relevant LIBOR Determination
Date to the principal London offices of leading banks in the London
interbank market or (ii) in the event that the Trustee can determine no
such arithmetic mean, in the case of any LIBOR Determination Date after the
initial LIBOR Determination Date, the lowest one-month United States dollar
lending rate which New York City banks selected by the Depositor are
quoting on such LIBOR Determination Date to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A-2 Certificates for the related Accrual Period will (in the
absence of manifest error) be final and binding.
HLTV RESERVE ACCOUNT
The Pooling and Servicing Agreement establishes an account (the "HLTV
Reserve Account"), which is not part of the Trust Fund, but is held in trust by
the Trustee on behalf of the Certificateholders. The HLTV Reserve Account will
not be an asset of any REMIC. Holders of the Certificates will be entitled to
receive payments from the HLTV Reserve Account to the extent of amounts on
deposit therein in an amount equal to any required HLTV Account Allocation.
On the Closing Date, the Seller will deposit an amount equal to the
aggregate of the HLTV Initial Allocations for each HLTV Loan in the HLTV Reserve
Account. Thereafter, upon the liquidation of any HLTV Loan, an amount equal to
the related HLTV Account Allocation will be deposited on the Distribution Date
following such liquidation to the Distribution Account as a portion of Available
Funds for the related Loan Group.
With respect to each HLTV Loan, any excess of the HLTV Initial Allocation
over the HLTV Account Allocation will be remitted to the Seller on the
Distribution Date on which an HLTV Account Allocation is made and under certain
other circumstances described in the Pooling and Servicing Agreement.
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EXCESS RESERVE FUND ACCOUNT
The Pooling and Servicing Agreement establishes for the Class A-2
Certificates an account (the "Excess Reserve Fund Account"), which is held in
trust, as part of the Trust Fund, by the Trustee on behalf of the Class A-2
Certificateholders. The Excess Reserve Fund Account will not be an asset of any
REMIC. Holders of the Class A-2 Certificates will be entitled to receive
payments from the Excess Reserve Fund Account to the extent of amounts on
deposit therein in an amount equal to any Class A-2 Available Funds Cap
Carryover Amount.
On the Closing Date, $5,000 will be deposited into the Excess Reserve Fund
Account. Thereafter, if the Group 2 Available Funds Cap does not exceed the
Pass-Through Rate by at least 0.25%, the amount to be held in the Excess Reserve
Fund on any Distribution Date thereafter will equal the greater of (i) 0.50% of
the outstanding Certificate Principal Balance of the Class A-2 Certificates as
of such Distribution Date and (ii) $5,000 and will be funded from amounts
otherwise to be paid to the Class X Certificates. Thereafter, if the Group 2
Available Funds Cap for any Distribution Date exceeds the Pass-Through Rate by
0.25% or more, the Required Reserve Amount for such Distribution Date will be
$5,000. Any distribution by the Trustee from amounts in the Excess Reserve Fund
Account shall be made on the applicable Distribution Date. The amount required
to be on deposit in the Excess Reserve Fund Account at any time is referred to
herein as the "Required Reserve Amount."
Amounts on deposit in the Excess Reserve Fund Account in excess of the
Required Reserve Amount will be released therefrom and distributed to the
holders of the Class X Certificates on any Distribution Date on which the Group
2 Available Funds Cap exceeds the Pass-Through Rate by 0.25% or more.
THE POLICY
The following information has been supplied by the Certificate Insurer for
inclusion in this prospectus supplement. Accordingly, none of the Depositor, the
Seller or the Servicer makes any representation as to the accuracy and
completeness of such information.
The Certificate Insurer, in consideration of the payment of a premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Class A Certificateholder that an amount equal to each full
and complete Insured Payment will be received from the Certificate Insurer by
the Trustee or its successors, as Trustee for the Class A Certificateholders, on
behalf of the Class A Certificateholders, for distribution by the Trustee to
each Class A Certificateholder of that certificateholder's proportionate share
of the Insured Payment.
The Certificate Insurer's obligations under the Policy, with respect to a
particular Insured Payment, will be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not those
funds are properly applied by the Trustee. Insured Payments will be made only at
the time set forth in the Policy, and no accelerated Insured Payments will be
made regardless of any acceleration of the Class A Certificates, unless the
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any liability for withholding taxes). The Policy does not cover any
Prepayment Interest Shortfalls, Class A-2 Available Funds Cap Carryover Amounts
or Relief Act Interest Shortfalls.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by the
Certificate Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the Certificate Insurer that the
order is final and not subject to appeal;
o an assignment in a form that is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Class A Certificateholder relating to or arising
under the Class A Certificates against the debtor which made the
preference payment or otherwise with respect to the preference
payment; and
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o appropriate instruments to effect the appointment of the Certificate
Insurer as agent for the Class A Certificateholder in any legal
proceeding related to the preference payment, which instruments are in
a form satisfactory to the Certificate Insurer;
provided that if these documents are received after 12:00 p.m., New York
time, on that business day, they will be deemed to be received on the following
business day. Payments by the Certificate Insurer will be disbursed to the
receiver or the trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Class A Certificateholder and not to
any Class A Certificateholder directly unless the Class A Certificateholder has
returned principal or interest paid on the Class A Certificates to the receiver
or trustee in bankruptcy, in which case that payment will be disbursed to the
Class A Certificateholder.
The Certificate Insurer will pay any other amount payable under the Policy
no later than 12:00 p.m., New York time, on the later of the Distribution Date
on which the related Deficiency Amount is due or the second business day
following receipt in New York, New York on a business day by State Street Bank
and Trust Company, N.A., as fiscal agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer of a notice from the
Trustee specifying the Insured Payment which is due and owing on the applicable
Distribution Date, provided that if the notice is received after 12:00 p.m., New
York time, on that business day, it will be deemed to be received on the
following business day. If any notice received by the Certificate Insurer's
fiscal agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under the Policy, it will be deemed not to have been received
by the Certificate Insurer's fiscal agent for the purposes of this paragraph,
and the Certificate Insurer or the fiscal agent, as the case may be, will
promptly so advise the Trustee and the Trustee may submit an amended notice.
Insured Payments due under the Policy, unless otherwise stated therein,
will be disbursed by the Certificate Insurer's fiscal agent to the Trustee, on
behalf of the Class A Certificateholders, by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of the Insured Payment and legally available therefor.
The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to the Class A Certificateholders for
any acts of the fiscal agent or any failure of the Certificate Insurer to
deposit or cause to be deposited sufficient funds to make payments due under the
Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Deficiency Amount" means for any Distribution Date (a) the excess, if any,
of (i) the Interest Distributable Amount for the Class A Certificates (net of
any Relief Act Interest Shortfalls and any Prepayment Interest Shortfalls) over
(ii) funds on deposit in the Distribution Account available to be distributed
therefor on such Distribution Date and (b) the Guaranteed Principal Amount.
"Final Distribution Date" means the Distribution Date in February 2031 with
respect to the Class A-1 Certificates, the Distribution Date in February 2031
with respect to the Class A-2 Certificates and the Distribution Date in February
2031 with respect to the Class A-3 Certificates.
"Guaranteed Principal Amount" means (a) for any Distribution Date (other
than the Final Distribution Date) the amount, if any, by which the sum of the
Certificate Principal Balances of the Class A-1, Class A-2 and the Class A-3
Certificates exceeds the aggregate principal balance of the Mortgage Loans at
the end of the previous month (after giving effect to all distributions of
principal on the Class A Certificates on such Distribution Date) and (b) on the
Final Distribution Date (after giving effect to all other distributions of
principal on the Class A Certificates), an amount equal to the Certificate
Principal Balance of the Class A Certificates.
"Insured Payment" means (a) as of any Distribution Date, any Deficiency
Amount and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to a Class A
Certificateholder on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
S-83
<PAGE>
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from
time to time in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the Pooling and Servicing Agreement
as of the date of execution of the Policy, without giving effect to any
subsequent amendment to or modification of the Pooling and Servicing Agreement
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
The Policy is being issued under and pursuant to, and will be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
OVERCOLLATERALIZATION
Each Class of Class A Certificates is overcollateralized as of the Closing
Date (i.e. the aggregate principal balance of the Mortgage Loans in the related
Loan Group exceeds the Certificate Principal Balance of such Class). As of the
Cut-off Date, the Group 1 Loan Balance will exceed the Certificate Principal
Balance of the Class A-1 Certificates by approximately $4,320,549.58, which
represents 5.75% of the Group 1 Loan Balance as of that date. As of the Cut-off
Date, the Group 2 Loan Balance will exceed the Certificate Principal Balance of
the Class A-2 Certificates by approximately $4,223,506.15, which represents
5.60% of the Group 2 Loan Balance as of that date. As of the Cut-off Date, the
Group 3 Loan Balance will exceed the Certificate Principal Balance of the Class
A-3 Certificates by approximately $2,098,054.64, which represents 5.75% of the
Group 3 Loan Balance as of that date. The overcollateralization will be
available to absorb losses on the Mortgage Loans prior to any draw on the
Policy. Excess interest collections on the Mortgage Loans in a Loan Group will
be applied to principal distributions on the Class A Certificates related to
such Loan Group in order to maintain the Overcollateralization Target Amount.
The Pooling and Servicing Agreement provides that the Overcollateralization
Target Amount with respect to a Loan Group may increase or decrease over time
based upon the performance of the Mortgage Loans in such Loan Group. Any such
decrease may have the effect of reducing the amortization of the Class A
Certificates of the related Loan Group below what it otherwise would have been.
CROSSCOLLATERALIZATION
Certain Available Funds with respect to one Loan Group will be available to
make certain distributions with respect to the Class A Certificates relating to
another Loan Group, as described above under "--Priority of Distributions".
Available Funds generated by Loan Group 1 or Loan Group 3 are not, however,
available to pay any Class A-2 Available Funds Cap Carryover Amount due to
holders of the Class A-2 Certificates.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each holder of a
Certificate, the Certificate Insurer and the Rating Agencies a statement (based
upon the information provided to it in the Remittance Report, upon which the
Trustee may conclusively rely, and the calculations required to be made by the
Trustee) with respect to certain information as set forth in the Pooling and
Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
S-84
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of the Class A Certificates will be sensitive to
defaults on the Mortgage Loans in the related Loan Group. If a purchaser of a
Class A Certificate calculates its anticipated yield based on an assumed rate of
default and amount of losses that is lower than the default rate and amount of
losses actually incurred, its actual yield to maturity will be lower than that
so calculated. In general, the earlier a loss occurs, the greater is the effect
on an investor's yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans.
Because the Mortgage Loans were underwritten in accordance with standards less
stringent than those generally acceptable to FNMA and FHLMC with regard to a
mortgagor's credit standing and repayment ability, the risk of delinquencies
with respect to, and losses on, the Mortgage Loans will be greater than that of
mortgage loans underwritten in accordance with FNMA and FHLMC standards.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of the Class A Certificates will be related to the rate
and timing of payments of principal on the Mortgage Loans in the related Loan
Group. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Mortgage Loans due to defaults, casualties or
condemnations and repurchases by the Seller). Because certain of the Mortgage
Loans contain prepayment penalties, the rate of principal payments may be less
than the rate of principal payments for mortgage loans which did not have
prepayment penalties. The Mortgage Loans are subject to the "due-on-sale"
provisions included therein. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase) will result in distributions on the
related Class of Class A Certificates of principal amounts which would otherwise
be distributed over the remaining terms of the Mortgage Loans. Since the rate of
payment of principal on the Mortgage Loans will depend on future events and a
variety of other factors, no assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the yield to maturity of a Class
of Class A Certificates may vary from the anticipated yield will depend upon the
degree to which such Class of Certificates is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans in the related
Loan Group. Further, an investor should consider the risk that, in the case of
any Class A Certificate purchased at a discount, a slower than anticipated rate
of principal payments (including prepayments) on the Mortgage Loans in the
related Loan Group could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Class A Certificate
purchased at a premium, a faster than anticipated rate of principal payments on
the Mortgage Loans in the related Loan Group could result in an actual yield to
such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Loan Rates on the Mortgage Loans,
such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. As is the case with the Group 1 Mortgage Loans and the
Sub-group 2A Mortgage Loans, the Sub-group 2B Mortgage Loans may be subject to a
greater rate of principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, mortgagors with
adjustable-rate Mortgage Loans may be inclined to refinance their
adjustable-rate Mortgage Loans with a fixed-rate loan to "lock in" a lower
interest rate. The existence of the applicable Periodic Rate Cap and Maximum
Rate also may affect the likelihood of prepayments resulting from refinancings
of Sub-group 2B Mortgage Loans. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments. In addition, the delinquency and loss experience of the Sub-group
2B Mortgage Loans may differ from that on the Group 1 Mortgage Loans and the
Sub-group 2A Mortgage Loans because the amount of the monthly payments on the
Sub-group 2B Mortgage Loans are subject to adjustment on each Adjustment Date.
In addition, a majority of the Sub-group 2B Mortgage Loans will not have their
initial Adjustment Date for two to five years after the origination thereof. The
prepayment experience of the Delayed First Adjustment Mortgage Loans may differ
from that of the other Sub-group 2B Mortgage Loans. The Delayed First Adjustment
Mortgage Loans may be subject to greater rates of prepayments as they approach
their
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<PAGE>
initial Adjustment Dates even if market interest rates are only slightly
higher or lower than the Loan Rates on the Delayed First Adjustment Mortgage
Loans as mortgagors seek to avoid changes in their monthly payments.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Class A Certificates with the Commission in a
report on Form 8-K and may file certain additional yield tables and other
computational materials with respect to one or more Classes of Class A
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by Merrill Lynch & Co. (the "Underwriter") at the
request of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such tables
and assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal prepayments is consistent with such investor's
expectation. In general, the earlier a principal prepayment on the Mortgage
Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Class A
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The projected weighted average life of each Class of Class A Certificates
is the average amount of time that will elapse from the Closing Date, until each
dollar of principal is scheduled to be repaid to the investors in such Class of
Class A Certificates. Because it is expected that there will be prepayments and
defaults on the Mortgage Loans, the actual weighted average lives of the Class A
Certificates are expected to vary substantially from the weighted average
remaining terms to stated maturity of the Mortgage Loans as set forth herein
under "The Mortgage Pool."
The "Assumed Final Maturity Date" for each Class of Class A Certificates is
as set forth herein under "Description of the Certificates--General". The
Assumed Final Maturity Date for each Class of Class A Certificates is the
Distribution Date in the thirteenth month following the latest maturity date of
any Mortgage Loan in a Loan Group. The weighted average life of each Class of
Class A Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumptions, and
the final Distribution Date with respect to the Class A Certificates could occur
significantly earlier than the related Assumed Final Maturity Date because (i)
prepayments are likely to occur, (ii) excess cashflow, if any, may be applied as
principal of the Class A Certificates as described herein, and (iii) the Seller
or the Certificate Insurer may cause a termination of the Trust Fund as provided
herein.
The model used in this prospectus supplement, the "Constant Prepayment
Rate" or "CPR" represents an assumed rate of prepayment each month expressed as
an annual rate relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
Each of the Prepayment Scenarios in the table below assumes the respective
percentages of CPR described thereunder.
The tables on pages S-92 through S-94 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There are
certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of original Certificate
Principal Balances outstanding and weighted average lives of the Class A
Certificates set forth in those tables. In addition, since the actual Mortgage
Loans in the Trust Fund will have
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<PAGE>
characteristics that differ from those assumed in preparing the tables set
forth below, the distributions of principal of the Class A Certificates may be
made earlier or later than indicated in the tables.
The percentages and weighted average lives in the tables that follow were
determined assuming that (the "Structuring Assumptions"):
o the Mortgage Loans consist of three pools of mortgage loans with the
characteristics set forth in the table below,
o the closing date for the Class A Certificates occurs on March 2, 2000
and the Class A Certificates were sold to investors on such date,
o distributions on the Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually
occurs, commencing in March 2000, in accordance with the allocation of
Available Funds set forth above under "Description of the
Certificates--Allocation of Available Funds",
o the prepayment rates are the percentages of CPR set forth in the
"Prepayment Scenarios" table below,
o prepayments include thirty days' interest thereon,
o the Seller is not required to substitute or repurchase any or all of
the Mortgage Loans pursuant to the Pooling and Servicing Agreement and
no optional termination is exercised, except with respect to the
entries identified by the row heading "Weighted Average Life (years)
to Optional Termination" in the tables below,
o the Overcollateralization Target Amounts are set initially as
specified in the Pooling and Servicing Agreement and thereafter vary
as described in the definition thereof,
o scheduled payments for all Mortgage Loans are received on the first
day of each month commencing in March 2000, the principal portion of
such payments is computed prior to giving effect to prepayments
received in such month and there are no losses or delinquencies with
respect to such Mortgage Loans,
o all Mortgage Loans prepay at the same rate and all such payments are
treated as prepayments in full of individual Mortgage Loans, with no
shortfalls in collection of interest,
o such prepayments are received on the last day of each month commencing
in the month prior to the Closing Date, o the Certificate Index is at
all times equal to 5.88%,
o the Pass-Through Rates for the Class A Certificates are as set forth
herein,
o the Loan Rate for each Adjustable Rate Mortgage Loan is adjusted on
its next Adjustment Date (and on subsequent Adjustment Dates, if
necessary) to equal the sum of
o the assumed level of the Index and
o the respective Gross Margin (such sum being subject to the applicable
Periodic Rate Caps, Minimum Loan Rates and Maximum Loan Rates), and
o with respect to the Adjustable Rate Mortgage Loans, o Six Month LIBOR
is equal to 6.35%; and o the One Year CMT Index is equal to 6.27%.
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
Based on the foregoing assumptions and the following prepayment scenarios and
assumed mortgage loan characteristics, the following tables indicate the
projected weighted average lives of each Class of Class A Certificates, and set
forth the percentages of the original Certificate Principal Balance of each such
Class that would be outstanding after each of the dates shown, at various
Prepayment Scenarios.
S-87
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT SCENARIOS (% CPR)
Loan Group Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
---------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Group 1
Sub-group 1A 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% 21.0%
Sub-group 1B 5.5 11.0 16.5 22.0 27.5 33.0 38.5
Group 2
Sub-group 2A 5.5 11.0 16.5 22.0 27.5 33.0 38.5
Sub-group 2B 7.5 15.0 22.5 30.0 37.5 45.0 52.5
Group 3 4.5 9.0 13.5 18.0 22.5 27.0 31.5
</TABLE>
S-88
<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
AMORTIZED AMORTIZED
REMAINING ORIGINAL ORIGINAL REMAINING MONTHS TO
TERM TO TERM TO BALLOON BALLOON RATE PERIODIC
COLLATERAL PRINCIPAL LOAN RATE MATURITY MATURITY TERM TERM GROSS LIFETIME LIFETIME ADJUSTMENT RATE CAP
DESCRIPTION BALANCE ($) (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS) MARGIN(%) CAP(%) FLOOR(%) DATE (%)
----------- ----------- --------- -------- -------- -------- -------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 1
Sub-group 1A
FHA/VA 1,709,385 10.211 200 345 N/A N/A N/A N/A N/A N/A N/A
FHA/VA 1,865,680 9.187 269 357 N/A N/A N/A N/A N/A N/A N/A
FHA/VA 15,576,227 7.977 332 360 N/A N/A N/A N/A N/A N/A N/A
Sub-group 1B
Fixed 17,962,070 10.743 165 199 N/A N/A N/A N/A N/A N/A N/A
Fixed 5,010,295 9.575 271 338 N/A N/A N/A N/A N/A N/A N/A
Fixed 30,078,569 10.710 348 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 2,929,324 10.863 340 360 177 157 N/A N/A N/A N/A N/A
GROUP 2
Sub-group 2A
Fixed 2,313,360 10.209 222 317 N/A N/A N/A N/A N/A N/A N/A
Fixed 1,719,928 8.407 271 325 N/A N/A N/A N/A N/A N/A N/A
Fixed 2,412,955 10.158 354 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 757,765 10.956 342 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 662,466 8.458 356 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 611,384 8.750 353 360 294 287 N/A N/A N/A N/A N/A
Fixed 310,887 10.100 351 360 180 171 N/A N/A N/A N/A N/A
</TABLE>
S-89
<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
AMORTIZED AMORTIZED
REMAINING ORIGINAL ORIGINAL REMAINING MONTHS TO
TERM TO TERM TO BALLOON BALLOON RATE PERIODIC
COLLATERAL PRINCIPAL LOAN RATE MATURITY MATURITY TERM TERM GROSS LIFETIME LIFETIME ADJUSTMENT RATE CAP
DESCRIPTION BALANCE ($) (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS) MARGIN(%) CAP(%) FLOOR(%) DATE (%)
----------- ----------- --------- -------- -------- -------- -------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 2
Sub-group 2B
6 month LIBOR 6,071,055 10.548 319 338 N/A N/A 6.168 16.301 6.859 4 0.985
6 month LIBOR 87,079 12.875 342 360 N/A N/A 7.250 19.625 12.625 6 1.000
6 month LIBOR 166,351 10.336 350 360 N/A N/A 7.168 16.554 10.336 4 1.219
6 month LIBOR 897,962 10.311 346 360 N/A N/A 6.510 16.047 8.631 5 1.080
6 month LIBOR 17,822 11.959 26 180 N/A N/A 6.650 17.500 0.000 4 0.000
6 month LIBOR 1,706,709 8.932 353 360 N/A N/A 5.770 15.195 8.838 4 1.090
6 month LIBOR 87,311 11.125 345 360 N/A N/A 6.375 15.125 0.000 9 2.000
6 month LIBOR 2,653,870 10.624 350 357 N/A N/A 6.263 16.793 4.134 17 1.122
6 month LIBOR 374,829 11.102 353 360 N/A N/A 5.826 17.882 11.102 17 1.880
6 month LIBOR 6,875,367 9.556 356 360 N/A N/A 6.165 15.594 9.056 20 1.014
6 month LIBOR 4,661,955 10.446 349 360 N/A N/A 6.473 16.994 9.628 14 1.168
6 month LIBOR 6,045,915 9.708 341 344 N/A N/A 6.452 16.040 9.707 21 1.234
6 month LIBOR 4,299,264 11.029 346 360 N/A N/A 6.427 16.895 4.720 24 1.082
6 month LIBOR 236,757 11.454 344 360 N/A N/A 5.770 17.180 10.996 23 1.000
6 month LIBOR 6,082,794 10.483 350 355 N/A N/A 6.275 16.579 10.148 31 1.046
6 month LIBOR 1,492,589 9.825 352 354 N/A N/A 5.888 15.972 9.825 33 1.071
6 month LIBOR 44,618 13.390 358 360 N/A N/A 7.500 19.390 13.390 34 1.000
6 month LIBOR 78,457 9.550 343 360 N/A N/A 5.950 16.050 9.550 43 1.500
6 month LIBOR 71,364 9.550 162 180 N/A N/A 5.950 16.050 9.550 42 1.500
1 Year Treasury 3,751,414 8.741 324 360 N/A N/A 3.800 13.581 2.136 7 1.359
1 Year Treasury 329,454 10.337 340 360 N/A N/A 5.115 15.744 9.084 7 2.000
1 Year Treasury 464,005 8.286 356 360 N/A N/A 2.750 13.695 0.000 56 2.000
1 Year Treasury 130,822 8.750 356 360 N/A N/A 2.500 14.750 0.000 116 2.000
</TABLE>
S-90
<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
AMORTIZED AMORTIZED
REMAINING ORIGINAL ORIGINAL REMAINING MONTHS TO
TERM TO TERM TO BALLOON BALLOON RATE PERIODIC
COLLATERAL PRINCIPAL LOAN RATE MATURITY MATURITY TERM TERM GROSS LIFETIME LIFETIME ADJUSTMENT RATE CAP
DESCRIPTION BALANCE ($) (%) (MONTHS) (MONTHS) (MONTHS) (MONTHS) MARGIN(%) CAP(%) FLOOR(%) DATE (%)
----------- ----------- --------- -------- -------- -------- -------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 3
Fixed 120,854 8.981 156 180 N/A N/A N/A N/A N/A N/A N/A
Fixed 6,488,175 11.366 171 195 N/A N/A N/A N/A N/A N/A N/A
Fixed 2,398,813 9.510 190 195 N/A N/A N/A N/A N/A N/A N/A
Fixed 1,595,806 10.916 275 302 N/A N/A N/A N/A N/A N/A N/A
Fixed 182,534 12.264 288 300 N/A N/A N/A N/A N/A N/A N/A
Fixed 760,173 11.012 355 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 339,594 10.090 352 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 12,558,872 10.839 347 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 6,849,584 10.174 356 360 N/A N/A N/A N/A N/A N/A N/A
Fixed 27,426 12.600 350 360 180 170 N/A N/A N/A N/A N/A
Fixed 78,296 10.375 348 360 180 168 N/A N/A N/A N/A N/A
Fixed 4,918,401 10.709 353 360 177 164 N/A N/A N/A N/A N/A
Fixed 165,528 11.344 354 360 180 174 N/A N/A N/A N/A N/A
</TABLE>
S-91
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A-1
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100
February 2001..................... 93 88 83 78 73 68 63
February 2002..................... 87 78 69 61 53 46 39
February 2003..................... 81 68 57 47 38 31 24
February 2004..................... 75 60 47 38 30 23 18
February 2005..................... 69 52 40 30 23 17 12
February 2006..................... 64 46 33 24 17 12 9
February 2007..................... 59 40 28 19 13 9 6
February 2008..................... 54 35 23 15 10 7 4
February 2009..................... 49 31 19 12 8 5 3
February 2010..................... 44 27 16 10 6 3 2
February 2011..................... 40 23 13 8 4 2 1
February 2012..................... 36 20 11 6 3 2 1
February 2013..................... 32 17 9 5 2 1 0
February 2014..................... 27 14 7 4 2 1 0
February 2015..................... 25 12 6 3 1 0 0
February 2016..................... 22 11 5 2 1 0 0
February 2017..................... 20 9 4 1 0 0 0
February 2018..................... 18 8 3 1 0 0 0
February 2019..................... 16 7 2 1 0 0 0
February 2020..................... 14 5 2 0 0 0 0
February 2021..................... 12 4 1 0 0 0 0
February 2022..................... 10 3 1 0 0 0 0
February 2023..................... 8 2 0 0 0 0 0
February 2024..................... 7 2 0 0 0 0 0
February 2025..................... 5 1 0 0 0 0 0
February 2026..................... 3 0 0 0 0 0 0
February 2027..................... 2 0 0 0 0 0 0
February 2028..................... 0 0 0 0 0 0 0
February 2029..................... 0 0 0 0 0 0 0
February 2030..................... 0 0 0 0 0 0 0
Weighted Average Life (years)
to maturity(1)................. 10.23 7.15 5.33 4.15 3.35 2.76 2.31
Weighted Average Life (years)
to Optional Termination(1)...... 9.96 6.61 4.81 3.67 2.92 2.39 1.98
</TABLE>
- --------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such Class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such Class of
Certificates.
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<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A-2
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100
February 2001..................... 92 84 76 69 61 53 46
February 2002..................... 84 70 58 47 37 27 19
February 2003..................... 77 59 44 31 21 13 7
February 2004..................... 70 49 34 23 15 10 6
February 2005..................... 64 41 27 17 10 5 2
February 2006..................... 59 35 21 12 6 3 1
February 2007..................... 53 30 16 8 4 1 0
February 2008..................... 48 25 12 6 2 0 0
February 2009..................... 44 21 10 4 1 0 0
February 2010..................... 40 18 7 2 0 0 0
February 2011..................... 37 15 6 2 0 0 0
February 2012..................... 33 13 4 1 0 0 0
February 2013..................... 30 11 3 0 0 0 0
February 2014..................... 27 9 2 0 0 0 0
February 2015..................... 24 7 1 0 0 0 0
February 2016..................... 22 6 1 0 0 0 0
February 2017..................... 19 5 0 0 0 0 0
February 2018..................... 17 4 0 0 0 0 0
February 2019..................... 15 3 0 0 0 0 0
February 2020..................... 13 2 0 0 0 0 0
February 2021..................... 11 1 0 0 0 0 0
February 2022..................... 10 1 0 0 0 0 0
February 2023..................... 8 1 0 0 0 0 0
February 2024..................... 6 0 0 0 0 0 0
February 2025..................... 5 0 0 0 0 0 0
February 2026..................... 3 0 0 0 0 0 0
February 2027..................... 2 0 0 0 0 0 0
February 2028..................... 1 0 0 0 0 0 0
February 2029..................... 0 0 0 0 0 0 0
February 2030..................... 0 0 0 0 0 0 0
Weighted Average Life (years)
to maturity(1)................. 9.67 5.61 3.74 2.71 2.06 1.61 1.28
Weighted Average Life (years)
to Optional Termination(1)...... 9.41 5.37 3.62 2.64 2.01 1.58 1.25
</TABLE>
- --------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such Class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such Class of
Certificates.
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<TABLE>
<CAPTION>
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A-4
PREPAYMENT SCENARIO
Distribution Date Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100
February 2001..................... 94 89 85 80 75 70 66
February 2002..................... 88 80 71 63 56 49 42
February 2003..................... 83 71 60 50 41 34 27
February 2004..................... 77 63 50 40 32 25 20
February 2005..................... 72 55 42 32 24 18 13
February 2006..................... 67 49 36 26 18 13 9
February 2007..................... 62 43 30 21 14 9 6
February 2008..................... 57 38 25 17 11 7 4
February 2009..................... 52 33 21 13 8 4 2
February 2010..................... 48 29 18 10 6 3 1
February 2011..................... 44 26 15 8 4 2 0
February 2012..................... 40 22 12 6 3 1 0
February 2013..................... 36 19 10 5 2 0 0
February 2014..................... 26 13 7 3 1 0 0
February 2015..................... 23 11 5 2 0 0 0
February 2016..................... 21 10 4 1 0 0 0
February 2017..................... 19 9 3 1 0 0 0
February 2018..................... 18 7 3 0 0 0 0
February 2019..................... 16 6 2 0 0 0 0
February 2020..................... 14 5 1 0 0 0 0
February 2021..................... 13 4 1 0 0 0 0
February 2022..................... 11 3 1 0 0 0 0
February 2023..................... 9 3 0 0 0 0 0
February 2024..................... 8 2 0 0 0 0 0
February 2025..................... 6 1 0 0 0 0 0
February 2026..................... 5 1 0 0 0 0 0
February 2027..................... 3 0 0 0 0 0 0
February 2028..................... 1 0 0 0 0 0 0
February 2029..................... 0 0 0 0 0 0 0
February 2030..................... 0 0 0 0 0 0 0
Weighted Average Life (years)
to maturity(1)................. 10.65 7.45 5.53 4.30 3.46 2.86 2.39
Weighted Average Life (years)
to Optional Termination(1)...... 10.31 6.92 5.04 3.85 3.06 2.51 2.08
</TABLE>
- --------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the assumed net reduction, if any, in the principal amount on
each Distribution Date on such Class of Certificates by the number of years
from the date of issuance of the Certificates to the related Distribution
Date, (ii) summing the results, and (iii) dividing the sum by the aggregate
amount of the assumed net reductions in principal amount on such Class of
Certificates.
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USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust Fund.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund, exclusive
of the assets held in the Excess Reserve Fund Account, will comprise a
Subsidiary REMIC and a Master REMIC organized in a tiered "real estate mortgage
investment conduit" ("REMIC") structure. The Subsidiary REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the Master REMIC. The Subsidiary REMIC and the Master REMIC will designate a
single class of interests as the residual interest in that REMIC. The Class R
Certificates will represent ownership of the residual interests in each REMIC.
Elections will be made to treat the Subsidiary REMIC and the Master REMIC as a
REMIC for federal income tax purposes.
Each Class of Class A Certificates and the Class X Certificates will
represent beneficial ownership of regular interests issued by the Master REMIC.
In addition, the Class A Certificates will represent a beneficial interest in
the right to receive payments from the Excess Reserve Fund Account.
Upon the issuance of the Class A Certificates, Brown & Wood LLP ("Tax
Counsel"), will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Subsidiary
REMIC and the Master REMIC will qualify as a REMIC within the meaning of Section
860D of the Internal Revenue Code of 1986, as amended (the "Code"). In addition,
Tax Counsel will deliver an opinion concluding that the Excess Reserve Fund
Account is an "outside reserve fund" that is beneficially owned by the
Certificateholders of the Class X Certificates. Moreover, Tax Counsel will
deliver an opinion concluding that the rights of the Certificateholders of the
Class A-2 Certificates to receive payments from the Excess Reserve Fund Account
represent, for federal income tax purposes, contractual rights that are separate
from their regular interests within the meaning of Treasury regulations
ss.1.860G-2(i).
TAXATION OF REGULAR INTERESTS
The following discussion assumes that the right of the Class A-2
Certificates to receive payments from the Excess Reserve Fund Account will be
treated as an interest rate cap agreement rather than as a partnership for
federal income tax purposes. Prospective investors in the Class A-2 Certificates
should consult their tax advisors regarding their appropriate tax treatment. A
holder of a Class A Certificate will be treated for federal income tax purposes
as owning a regular interest in the Master REMIC. The Class A-2 Certificates
will also represent beneficial ownership of an interest in a limited recourse
interest rate cap contract (the "Cap Contract"). A Certificateholder of a Class
A-2 Certificate must allocate its purchase price for such Certificate between
its two components - the REMIC regular interest component and the Cap Contract
component (the value of which should be nominal). For information reporting
purposes, the Trustee will assume that, with respect to any Class A-2
Certificate, the Cap Contract component will have only nominal value relative to
the value of the regular interest component. The IRS could, however, argue that
the Cap Contract component has a greater than de minimis value, and if that
argument were to be sustained, the regular interest component could be viewed as
having been issued with original issue discount ("OID") (which could cause the
total amount of discount to exceed a statutorily defined de minimis amount). See
"Material Federal Income Tax Consequences - REMICs - Taxation of Owners of REMIC
Regular Certificates - Original Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of a Class A Certificate, the
Certificateholder must allocate the amount realized between the two components
of the Class A-2 Certificate based on the relative fair market values of those
components at the time of sale. Assuming that a Class A Certificate is held as a
"capital asset" within the meaning of section 1221 of the Code, with respect to
the Class A-2 Certificate 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 Class A-1 and
Class A-3 Certificates and the regular interest component of a Class A-2
Certificate will be treated as ordinary income, however, to the extent such gain
does not exceed the excess, if any,
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of (i) the amount that would have been includible in the
Certificateholder's gross income with respect to the regular interest component
had income thereon accrued at a rate equal to 110% of the applicable federal
rate as defined in section 1274(d) of the Code determined as of the date of
purchase of such Certificate over (ii) the amount actually included in such
Certificateholder's income.
Interest on a regular interest must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a regular
interest could be considered to have been issued with OID. See "Material Federal
Income Tax Consequences - REMICs - Taxation of Owners of REMIC Regular
Certificates - Original Issue Discount" in the Prospectus. The prepayment
assumption that will be used to in determining the accrual of any OID, market
discount, or bond premium, if any, will equal the rate described above under
"Yield, Prepayment and Maturity Considerations--Weighted Average Lives" for
Scenario IV. No representation is made that the Mortgage Loans will prepay at
such a rate or at any other rate. OID must be included in income as it accrues
on a constant yield method, regardless of whether the Certificateholder receives
currently the cash attributable to such OID.
STATUS OF THE CLASS A CERTIFICATES
The Class A-1 and Class A-3 Certificates and the regular interest component
of the Class A-2 Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code, and as "real estate assets" under Section
856(c)(5)(B) of the Code, generally, in the same proportion that the assets of
the Trust Fund, exclusive of the Excess Reserve Fund Account, would be so
treated. In addition, to the extent a regular interest represents real estate
assets under section 856(c)(5)(B) of the Code, the interest derived from that
component would be interest on obligations secured by interests in real property
for purposes of section 856(c)(3) of the Code. The Cap Contract component of
Class A-2 Certificate will not, however, qualify as an asset described in
Section 7701(a)(19)(C) of the Code or as a real estate asset under Section
856(c)(5)(B) of the Code.
THE EXCESS RESERVE FUND ACCOUNT
As indicated above, a portion of the purchase price paid by a
Certificateholder to acquire a Class A-2 Certificate will be attributable to the
Cap Contract component of such Certificate. The portion of the overall purchase
price attributable to the Cap Component must be amortized over the life of any
such 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. Certificateholders are urged to consult their tax advisors
concerning the methods that can be employed to amortize the portion of the
purchase price paid for the Cap Contract component of a Class A-2 Certificate.
Any payments made to a Class A-2 Certificateholder from the Excess Reserve
Fund Account will be treated as periodic payments on an interest rate cap
contract. To the extent the sum of such periodic payments for any year exceed
that year's amortized cost of the Cap Contract component, such excess is
ordinary income. If for any year the amount of that year's amortized cost
exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction.
NON-U.S. PERSONS
Interest paid to or accrued by a Certificateholder who is a non-U.S. Person
will be considered "portfolio interest", and will not be subject to U.S. 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 non-U.S.
Person and the non-U.S. Person (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or a "controlled foreign corporation"
with respect to which the Trust Fund is a "related person" within the meaning of
the Code and (ii) provides the Trust Fund or other person who is otherwise
required to withhold U.S. tax with respect to the Class A Certificates with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Class A Certificate is a
non-U.S. Person and providing the non-U.S. Person's name and address. If a Class
A Certificate is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the
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<PAGE>
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the non-U.S. Person
that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Class A Certificate by a non-U.S. Person will be exempt
from United States federal income and withholding tax, provided that (i) such
gain is not effectively connected with the conduct of a trade or business in the
United States by the non-U.S. Person and (ii) in the case of an individual, the
individual is not present in the United States for 183 days or more in the
taxable year.
For purposes of the foregoing discussion, the term "non-U.S. Person" means
any person other than (i) a citizen or resident of the United States; (ii) a
corporation (or entity treated as a corporation for tax purposes) created or
organized in the United States or under the laws of the United States or of any
state thereof, including, for this purpose, the District of Columbia; (iii) a
partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
its source; or (v) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons have authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated 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
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Class A Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Class A Certificates (and the
amount of interest withheld for federal income taxes, if any) for each calendar
year, except as to exempt holders
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<PAGE>
(generally, holders that are corporations, certain tax-exempt organizations
or nonresident aliens who provide certification as to their status as
nonresidents). As long as the only holder of record of a Class of Class A
Certificates is Cede & Co., as nominee of DTC, the IRS and Certificate Owners of
such Class will receive tax and other information, including the amount of
interest paid on such Certificates owned, from Participants and Financial
Intermediaries rather than from the Trustee. (The Trustee, however, will respond
to requests for necessary information to enable Participants, Financial
Intermediaries and certain other persons to complete their reports.) Each
non-exempt Certificate Owner will be required to provide, under penalty of
perjury, a certificate on IRS form W-9 containing his or her name, address,
correct federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a nonexempt Certificate Owner fail to
provide the required certification, the Participants or Financial Intermediaries
(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.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the related Certificates and the Pooling and Servicing
Agreement.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Class A Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Class A Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Class A Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, 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. A fiduciary which decides to
invest the assets of a Plan in the Class A Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor issued an individual exemption, Prohibited
Transaction Exemption 90-29 (the "Exemption"), on May 24, 1990 to the
Underwriter which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes and civil
penalties imposed on such prohibited transactions pursuant to Sections 4975(a)
and (b) of the Code and Section 502(i) of ERISA, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and
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holding of mortgage pass-through certificates underwritten by an Underwriter
(as hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this discussion, the term "Underwriter"
shall include (a) the Underwriter, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with the Underwriter and (c) any member of the underwriting syndicate or
selling group of which a person described in (a) or (b) is a manager or
co-manager with respect to the Offered Certificates.
The Exemption sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Offered
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Offered Certificates by employee benefit and other plans
subject to Section 406 of ERISA or Section 4975 of the Code (each, a "Plan"),
must be on terms that are at least as favorable to the Plan as they would be in
an arm's-length transaction with an unrelated party. Second, the rights and
interests evidenced by the Offered Certificates must not be subordinate to the
rights and interests evidenced by the other certificates of the same trust.
Third, the Offered Certificates at the time of acquisition by the Plan must be
rated in one of the three highest generic rating categories by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
("National Credit Ratings Agencies"). Fourth, the Trustee cannot be an affiliate
of any other member of the "Restricted Group," which consists of, in addition to
the Trustee, the Underwriter, the Depositor, the Servicer, each sub-servicer,
any insurer and any mortgagor with respect to the Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Offered Certificates. Fifth, the
sum of all payments made to and retained by the Underwriter must represent not
more than reasonable compensation for underwriting the Offered Certificates; the
sum of all payments made to and retained by the Depositor pursuant to the
assignment of the Mortgage Loans to the Trust Fund must represent not more than
the fair market value of such obligations; the sum of all payments made to and
retained by the Servicer and any sub-servicer must represent not more than
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. Seventh, (i) the investment pool consists
only of assets of the type enumerated in the Exemption and which have been
included in other investment pools; (ii) certificates evidencing interests in
such other investment pools have been rated in one of the three highest generic
rating categories by one of the National Credit Rating Agencies for at least one
year prior to a Plan's acquisition of certificates; and (iii) certificates
evidencing interests in such other investment pools have been purchased by
investors other than Plans for at least one year prior to a Plan's acquisition
of certificates. See "ERISA Considerations" in the Prospectus.
In addition, the Exemption will not apply to a Plan's investment in the
Offered Certificates if the plan fiduciary responsible for the decision to
invest in the Offered Certificates is a mortgagor or obligor with respect to the
Mortgage Loans or an affiliate of such a person, unless: (1) in the case of an
acquisition in connection with the initial issuance of any Certificates, at
least 50% of each Class of Certificates in which Plans have invested is acquired
by persons independent of the Restricted Group and at least 50% of the aggregate
interest in the Trust is acquired by persons independent of the Restricted
Group; (2) a Plan's investment in any Class of Certificates does not exceed 25%
of the outstanding Certificates of that Class at the time of acquisition; (3)
immediately after such acquisition, no more than 25% of the assets of any Plan
with respect to which the investing fiduciary has discretionary authority or
renders investment advice are invested in Certificates evidencing interest in
trusts sponsored or containing assets sold or serviced by the same entity; (4)
the fiduciary is a mortgagor or obligor with respect to 5% or less of the fair
market value of the Mortgage Loans; and (5) the Plan is not sponsored by any
member of the Restricted Group.
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates and that all conditions of the
Exemption other than those within the control of the investors will be met.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1,
described in the Prospectus, and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and
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diversification, an investment in the Class A Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
The Class A-1 and Class A-3 Certificates will NOT be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") because Loan Group 1 and Loan Group 3 have second
lien mortgage loans and mortgage loans that were originated by individuals and
not by financial institutions or mortgagees approved by the Secretary of Housing
and Urban Development. The Class A-2 Certificates will be "mortgage related
securities" for purposes of SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Class A-1 or Class A-3
Certificates or to purchase Class A-1 or Class A-3 Certificates representing
more than a specified percentage of the investor's assets. Investors should
consult their own legal advisors in determining whether and to what extent the
Class A Certificates constitute legal investments for such investors. See "Legal
Investment" in the Prospectus.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 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 December 31, 1998
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
affiliate of the Depositor (the "Underwriter"), the Depositor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, the Class A Certificates.
Distribution of the Class A Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The Underwriter may effect such transactions
by selling Class A Certificates to or through dealers and such dealers may
receive from the Underwriter, for which it acts as agent, compensation in the
form of underwriting discounts, concessions or commissions. The Underwriter and
any dealers that participate with the Underwriter in the distribution of such
Class A Certificates may be deemed to be underwriters, and any discounts,
commissions or concessions received by them, and any profits on resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act").
The Depositor has been advised by the Underwriter that it intends to make a
market in the Class A Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Class A Certificates will develop
or, if it does develop, that it will continue.
The Depositor and the Underwriter have agreed that the Underwriter will
reimburse the Seller for expenses incurred by the Seller in the amount of
$88,634.00.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
LEGAL MATTERS
Certain federal income tax consequences with respect to the Certificates
will be passed upon for the Trust Fund by Brown & Wood LLP, New York, New York.
Brown & Wood LLP, New York, New York, will act as
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counsel for the Depositor and the Underwriter. Thacher Proffitt & Wood will
act as counsel for the Seller and the Servicer.
RATINGS
It is a condition to the issuance of the Class A Certificates that the
Class A Certificates be rated "AAA" by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA" by Duff & Phelps Rating Co. ("DCR" and,
together with S&P and Moody's, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. In addition, DCR
considers the claims-paying ability of the Certificate Insurer to be comparable
to that of other companies for which DCR assigns a "AAA" claims-paying ability.
The ratings on the Class A Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans, the
payment of any Class A-2 Available Funds Cap Carryover Amount or the possibility
that a holder of a Class A Certificate might realize a lower than anticipated
yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a reduction
of one or more of the ratings assigned to the Class A Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Class A Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Class A Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Class A
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Class A Certificates by the Rating Agencies are subsequently lowered for
any reason, no person or entity is obligated to provide any additional support
or credit enhancement with respect to such Class A Certificates.
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INDEX OF PRINCIPAL DEFINITIONS
Accrual Period...............................................................80
Act.........................................................................102
Actuarial Mortgage Loans.....................................................22
Adjustment Date..............................................................40
Advance......................................................................69
Alternative Documentation....................................................63
Arrearage....................................................................22
arrearages...................................................................12
Assignment Program...........................................................60
Assumed Final Distribution Date..............................................73
Assumed Final Maturity Date..................................................89
Available Funds..............................................................80
Balloon Payment..............................................................29
Bankruptcy Code..............................................................21
Bankruptcy Plan Mortgage Loan................................................21
Beneficial Owner.............................................................74
Book-Entry Certificates......................................................73
Cap Contract.................................................................97
Certificate Index............................................................82
Certificate Insurer..........................................................73
Certificate Margin...........................................................82
Certificate Owners...........................................................73
Certificate Principal Balance................................................80
Certificateholder............................................................74
Certificates.................................................................73
Class A Certificates.........................................................73
Class A-1 Net WAC Cap........................................................82
Class A-2 Available Funds Cap................................................82
Class A-2 Available Funds Cap Carryover Amount...............................82
Class A-2 Formula Rate.......................................................82
Class A-3 Net WAC Cap........................................................82
Clearstream, Luxembourg.......................................................1
Clearstream, Luxembourg Participants.........................................75
Code.........................................................................97
Collection Account...........................................................68
Commission...................................................................62
Compensating Interest........................................................70
Constant Prepayment Rate.....................................................89
Contributions Tax............................................................99
Cooperative..................................................................76
CPR..........................................................................89
Cut-off Date.................................................................20
Cut-off Date Principal Balance...............................................20
DCR.....................................................................64, 103
Defective Mortgage Loans.....................................................68
Deficiency Amount............................................................86
Definitions..................................................................80
Definitive Certificate.......................................................74
Delayed First Adjustment Mortgage Loan.......................................40
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Delinquent...................................................................22
Determination Date...........................................................70
Distributable Excess Spread..................................................81
Distribution Account.........................................................68
Distribution Date............................................................73
DTC.........................................................................108
Due Date.....................................................................23
EFSG.........................................................................62
Eligible Account.............................................................68
Eligible Substitute Mortgage Loan............................................67
ERISA.......................................................................100
Euroclear....................................................................75
Euroclear Operator...........................................................76
Euroclear Participants.......................................................75
European Depositaries........................................................74
Excess Reserve Fund Account..................................................84
Exemption...................................................................100
FHA..........................................................................60
FHA Mortgage Loans...........................................................60
Final Distribution Date......................................................86
Financial Intermediary.......................................................74
Fitch........................................................................64
Forbearance Plan Mortgage Loan...............................................21
Full Documentation...........................................................62
Global Securities...........................................................108
Gross Margin.................................................................40
Group 3 Loan Balance.........................................................21
Group 3 Mortgage Loans.......................................................21
Guaranteed Principal Amount..................................................86
HLTV Reserve Account.........................................................84
HUD..........................................................................60
IML..........................................................................75
Index........................................................................40
Initial Periodic Rate Cap....................................................40
Insured Payment..............................................................86
Interest Distributable Amount................................................81
IRS..........................................................................99
LIBOR Business Day...........................................................83
LIBOR Determination Date.....................................................83
Limited Documentation........................................................63
Litton.......................................................................64
Loan Group...................................................................21
Loan Group 1.................................................................21
Loan Group 2.................................................................21
Loan Group 3.................................................................21
Loan Group Balance...........................................................21
Loan Rate....................................................................23
Maximum Cap..................................................................83
Maximum Loan Rate............................................................40
MGIC.........................................................................62
Minimum Loan Rate............................................................40
Modified Scheduled Payments..................................................21
Monthly Interest Distributable Amount........................................81
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Monthly Payment..............................................................22
Moody's.....................................................................103
Mortgage.....................................................................23
Mortgage Loan Purchase Agreement.............................................20
Mortgage Loan Schedule.......................................................66
Mortgage Loans...............................................................20
Mortgage Pool................................................................20
mortgage related securities.............................................11, 102
Mortgaged Property...........................................................23
National Credit Ratings Agencies............................................101
National Housing Act.........................................................60
Net income from foreclosure property.........................................99
No Documentation.............................................................63
no-bid.......................................................................61
Non-U.S. Person..............................................................99
OID..........................................................................97
One Year CMT.................................................................59
Optional Termination Date....................................................71
outside reserve fund.........................................................97
Overcollateralization Target Amount..........................................81
Pass-Through Rate............................................................82
Performing Mortgage Loan.....................................................21
Periodic Rate Cap............................................................40
Plan...................................................................100, 101
Policy.......................................................................73
Pooling and Servicing Agreement..............................................66
Preference Amount............................................................86
Prepayment Interest Shortfall................................................70
Prepayment Period............................................................81
Principal Balance............................................................20
Principal Distribution Amount................................................81
Prohibited Transactions Tax..................................................99
Purchase Price...............................................................67
Rating Agencies.............................................................103
Record Date..................................................................73
Reference Banks..............................................................83
Regular Scheduled Payments...................................................21
Related Documents............................................................66
Relevant Depositary..........................................................74
Relief Act...................................................................69
REMIC........................................................................97
REO Property.................................................................71
Re-Performance Test..........................................................22
Re-Performing Mortgage Loan..................................................22
Required Reserve Amount......................................................84
Reserve Interest Rate........................................................83
Residual Certificates........................................................73
Restricted Group............................................................101
Rules........................................................................74
S&P.........................................................................103
Seller.......................................................................20
Servicer.....................................................................64
Servicing Advance............................................................69
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Servicing Fee................................................................70
Servicing Fee Rate...........................................................70
Simple Interest Mortgage Loans...............................................22
Six Month LIBOR..............................................................59
SMMEA.......................................................................102
Special Servicing Fee........................................................70
Stated Income................................................................63
Streamlined Documentation....................................................63
Structuring Assumptions......................................................89
Sub-group 1A.................................................................21
Sub-group 1A Loan Balance....................................................21
Sub-group 1A Mortgage Loans..................................................21
Sub-group 1B.................................................................21
Sub-group 1B Loan Balance....................................................21
Sub-group 1B Mortgage Loans..................................................21
Sub-group 2A.................................................................21
Sub-group 2A Loan Balance....................................................21
Sub-group 2A Mortgage Loans..................................................21
Sub-group 2B.................................................................21
Sub-group 2B Loan Balance....................................................21
Sub-group 2B Mortgage Loans..................................................21
Sub-Performing Mortgage Loan.................................................21
Substitution Adjustment......................................................67
Systems......................................................................77
Tax Counsel..................................................................97
Telerate Page 3750...........................................................83
Termination Price............................................................71
Terms and Conditions.........................................................76
Total Amount Available.......................................................81
Transition Cost..............................................................81
Trust Fund...................................................................20
Trustee......................................................................69
Trustee Fee..................................................................70
U.S. Person.................................................................111
Underwriter.............................................................88, 101
United States Housing Act....................................................60
Unpaid Interest Shortfall Amount.............................................81
VA 60........................................................................60
VA Mortgage Loans............................................................60
Year 2000 problems...........................................................77
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg or Euroclear. The Global Securities will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no `lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
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Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be system and by the clearing system, in
accordance with its usual procedures, to the Clearstream, Luxembourg
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream, Luxembourg or Euroclear cash debt will be valued instead as of
the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream, Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. The payment will then be reflected in the account of the Clearstream,
Luxembourg Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream, Luxembourg Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the Clearstream,
Luxembourg Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred
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over that one-day period. If settlement is not completed on the intended
value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream,
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream, Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream,
Luxembourg Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
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The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
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<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
The securities of each series will not represent an obligation of or
interest in the depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any master servicer, any sub-servicer or any of their respective affiliates,
except to the limited extent described herein and in the related prospectus
supplement.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
THE SECURITIES
Merrill Lynch Mortgage Investors, Inc., as depositor, will sell the
securities, which may be in the form of asset backed certificates or asset
backed notes. Each issue of securities will have its own series designation and
will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
o Each series of securities will consist of one or more classes. Each class
of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal
payments on the assets in the related trust fund. In each case, the
specified portion may equal from 0% to 100%. A series may include one or
more classes of securities that are senior in right of payment to one or
more other classes. One or more classes of securities may be entitled to
receive distributions of principal, interest or both prior to one or more
other classes, or before or after certain specified events have occurred.
The related prospectus supplement will specify each of these features.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o one or more segregated pools of various types of mortgage loans and/or
closed-end and/or revolving home equity loans (or certain balances of
these loans), in each case secured by first and/or junior liens on
one- to five-family residential properties, or security interests in
shares issued by cooperative housing corporations, including mixed
residential and commercial structures;
o home improvement installment sales contracts or installment loan
agreements originated by a home improvement contractor and secured by
a mortgage on the related mortgaged property that is junior to other
liens on the mortgaged property; and
o mortgage pass-through certificates or mortgage-backed securities
evidencing interests in mortgage loans or secured thereby or certain
direct obligations of the United States, agencies thereof or agencies
created thereby.
Each trust fund may be subject to early termination in certain
circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities are made through Merrill Lynch, Pierce, Fenner &
Smith Incorporated and the other underwriters listed in the related prospectus
supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MERRILL LYNCH & CO.
The date of this Prospectus is January 27, 2000.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the following
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series. If the
prospectus supplement contains information about a particular series
that differs from the information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following information
with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home improvement contracts
and/or securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home improvement contracts and/or securities and information
concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our principal
executive offices is Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center-North Tower, 10th Floor, New York, New York 10281-1310,
Attention: Secretary, and our telephone number is (212) 449-0357. For other
means of acquiring additional information about us or a series of securities,
see "Incorporation of Certain Information by Reference" beginning on page 93 of
this prospectus.
2
<PAGE>
RISK FACTORS
You should consider the following information carefully, since it identifies
certain significant sources of risk associated with an investment in the
securities.
THERE IS A RISK THAT THE SECURITIES WILL HAVE LIMITED LIQUIDITY.
At the time a series of securities is issued, there will not be a secondary
market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated currently
expects to make a secondary market in the offered securities, but it is not
required to. We cannot assure you that a secondary market for the securities of
any series will develop or, if it does develop, that it will provide holders of
those securities with liquidity of investment or will continue while those
securities remain outstanding.
THERE IS A RISK ASSOCIATED WITH LIMITED ASSETS AND THAT THOSE ASSETS WILL NOT BE
SUFFICIENT TO PAY THE SECURITIES IN FULL.
o The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their affiliates.
o The only obligations with respect to the securities or the assets securing
them will be the obligations (if any) of any "warranting party" (as further
described in this prospectus) pursuant to certain limited representations
and warranties made with respect to the mortgage loans, the master
servicer's and any sub-servicer's servicing obligations under the related
agreements (including the limited obligation to make certain advances in
the event of delinquencies on the mortgage loans, but only to the extent
they deem such advances recoverable) and, if described in the related
prospectus supplement, certain limited obligations of the master servicer
in connection with an agreement to purchase or act as remarketing agent
with respect to a convertible adjustable-rate mortgage loan (as more fully
described in this prospectus) upon conversion to a fixed rate or a
different index.
o Since certain representations and warranties with respect to the mortgage
assets may have been made and/or assigned in connection with transfers of
the mortgage assets prior to the closing date, the rights of the trustee
and the securityholders with respect to such representations or warranties
will be limited to their rights as an assignee thereof.
o Unless otherwise specified in the related prospectus supplement, none of
the depositor, the master servicer or any affiliate thereof will have any
obligation with respect to representations or warranties made by any other
entity.
o Unless otherwise specified in the related prospectus supplement, neither
the securities nor the underlying assets will be guaranteed or insured by
any governmental agency or instrumentality, or by the depositor, the master
servicer, any sub-servicer or any of their affiliates.
o Proceeds of the assets included in the related trust fund for each series
of securities (including the assets and any form of credit enhancement)
will be the sole source of payments on the securities, and there will be no
recourse to the depositor or any other entity in the event that these
proceeds are insufficient or otherwise unavailable to make all payments
provided for under the securities.
o Unless otherwise specified in the related prospectus supplement, a series
of securities will not have any claim against or security interest in the
trust funds for any other series. If the related trust fund is insufficient
to make payments on these securities, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in
certain funds or accounts, including the collection account and any
accounts maintained as credit support, may be withdrawn under certain
conditions, as described in the related prospectus supplement. In the event
of such withdrawal, such amounts will not be available for future payment
of principal of or interest on the securities.
o If provided in the prospectus supplement for a series of securities
consisting of one or more classes of subordinate securities, on
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any distribution date in respect of which losses or shortfalls in
collections on the assets have been incurred, the amount of such losses or
shortfalls will be borne first by one or more classes of the subordinate
securities, and, thereafter, by the remaining classes of securities in the
priority and manner and subject to the limitations specified in that
prospectus supplement.
We refer you to "Description of the Trust Funds" for further information.
THERE IS A RISK THAT PREPAYMENTS ON THE ASSETS IN A TRUST FUND WILL ADVERSELY
AFFECT THE AVERAGE LIFE AND YIELDS OF THE RELATED SECURITIES.
o Prepayments (including those caused by defaults) on the assets in any trust
fund generally will result in a faster rate of principal payments on one or
more classes of the related securities than if payments on these assets
were made as scheduled. Thus, the prepayment experience on the assets may
affect the average life of each class of related securities. The rate of
principal payments on pools of mortgage loans varies between pools and from
time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. We can't assure you as to
the rate of prepayment on the assets in any trust fund or that the rate of
payments will conform to any model we describe here or in any prospectus
supplement. If prevailing interest rates fall significantly below the
applicable mortgage interest rates, principal prepayments are likely to be
higher than if prevailing rates remain at or above the rates borne by the
mortgage loans underlying or comprising the mortgage assets in any trust
fund. As a result, the actual maturity of any class of securities
evidencing an interest in a trust fund containing mortgage assets could
occur significantly earlier than expected.
o A series of securities may include one or more classes of securities with
priorities of payment and, as a result, yields on other classes of
securities, including classes of offered securities, of such series may be
more sensitive to prepayments on assets. A series of securities may include
one or more classes offered at a significant premium or discount. Yields on
these classes of securities will be sensitive, and in some cases extremely
sensitive, to prepayments on mortgage assets and, where the amount of
interest payable with respect to a class is disproportionately high, as
compared to the amount of principal, as with certain classes of stripped
interest securities, a holder might, in some prepayment scenarios, fail to
recoup its original investment. A series of securities may include one or
more classes of securities, including classes of offered securities, that
provide for distribution of principal thereof from amounts attributable to
interest accrued but not currently distributable on one or more classes of
accrual securities and, as a result, yields on such securities will be
sensitive to (a) the provisions of such accrual securities relating to the
timing of distributions of interest thereon and (b) if such accrual
securities accrue interest at a variable or adjustable pass-through rate or
interest rate, changes in such rate.
We refer you to "Yield Considerations" in the prospectus and, if applicable, in
the related prospectus supplement for further information.
THERE IS A RISK THAT DEFAULTS BY OBLIGORS OR DECLINES IN THE VALUES OF MORTGAGED
PROPERTIES WILL RESULT IN LOSSES TO INVESTORS.
o An investment in securities such as the securities which generally
represent interests in mortgage loans may be affected by, among other
things, a decline in real estate values and changes in the mortgagors'
financial condition. No assurance can be given that values of the mortgaged
properties have remained or will remain at their levels on the dates of
origination of the related mortgage loans. If the relevant residential real
estate market should experience an overall decline in property values such
that the outstanding balances of the related mortgage loans, and any
secondary financing on the mortgaged properties, become equal to or greater
than the value of the mortgaged properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry in that market. In
addition, in the case of mortgage loans that are subject to negative
amortization, due to the addition to principal balance of deferred
interest, the principal balances of such mortgage loans
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could be increased to an amount equal to or in excess of the value of the
underlying mortgaged properties, thereby increasing the likelihood of
default.
o To the extent that these losses are not covered by the applicable credit
support, if any, holders of securities of the series evidencing interests
in the related mortgage loans will bear all risk of loss resulting from
default by mortgagors and will have to look primarily to the value of the
mortgaged properties for recovery of the outstanding principal and unpaid
interest on the defaulted mortgage loans. Certain of the types of mortgage
loans may involve additional uncertainties not present in traditional types
of loans.
o For example, certain of the mortgage loans provide for escalating or
variable payments by the mortgagor under the mortgage loan, as to which the
mortgagor is generally qualified on the basis of the initial payment
amount. In some cases the mortgagor's income may not be sufficient to
enable them to continue to make their loan payments as such payments
increase and thus the likelihood of default will increase.
o In addition to the foregoing, certain geographic regions of the United
States from time to time will experience weaker regional economic
conditions and housing markets, and will thus experience higher rates of
loss and delinquency than the mortgage loans generally will experience. The
mortgage loans underlying certain series of securities may be concentrated
in these regions, and this concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without this concentration.
o Further, the rate of default on mortgage loans that are refinance or
limited documentation mortgage loans, and on mortgage loans with high
loan-to-value ratios, may be higher than for other types of mortgage loans.
Additionally, a decline in the value of the mortgaged properties will
increase the risk of loss particularly with respect to any related junior
mortgage loans.
We refer you to "--There is a risk that there will be reduced or no proceeds
available when junior lien mortgage loans are liquidated." in this prospectus
for further information.
o In addition, a prospectus supplement may specify that the loan-to-value
ratios for the mortgage loans in the related trust will exceed 100%. The
related mortgaged properties will thus be highly unlikely to provide
adequate security for these mortgage loans. To the extent specified in that
prospectus supplement, the assessment of the credit history of a borrower
and that borrower's capacity to make payments on the related mortgage loan
will have been the primary considerations in underwriting the mortgage
loans included in that trust. The evaluation of the adequacy of the
loan-to-value ratio, if so specified in the related prospectus supplement,
will have been given less consideration, and in certain cases no
consideration, in underwriting those mortgage loans.
THERE IS A RISK THAT THERE WILL BE REDUCED OR NO PROCEEDS AVAILABLE WHEN JUNIOR
LIEN MORTGAGE LOANS ARE LIQUIDATED.
o Certain mortgage loans may be secured by junior liens and the related first
and other senior liens, if any, may not be included in the mortgage pool.
o The primary risk to holders of mortgage loans secured by junior liens is
the possibility that adequate funds will not be received in connection with
a foreclosure of the related senior lien to satisfy fully both the senior
lien and the mortgage loan. If a holder of the senior lien forecloses on a
mortgaged property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any
other sums due and owing to the holder of the senior lien. The claims of
the holder of the senior lien will be satisfied in full out of proceeds of
the liquidation of the mortgage loan, if these proceeds are sufficient,
before the trust fund as holder of the junior lien
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receives any payments in respect of the mortgage loan.
o If the master servicer were to foreclose on any mortgage loan, it would do
so subject to any related senior lien. In order for the debt related to the
mortgage loan to be paid in full at such sale, a bidder at the foreclosure
sale of that mortgage loan would have to bid an amount sufficient to pay
off all sums due under the mortgage loan and the senior lien or purchase
the mortgaged property subject to the senior lien. In the event that such
proceeds from a foreclosure or similar sale of the related mortgaged
property were insufficient to satisfy both loans in the aggregate, the
trust fund, as the holder of the junior lien, and, accordingly, holders of
the certificates, would bear the risk of delay in distributions while a
deficiency judgment against the borrower was being obtained and the risk of
loss if the deficiency judgment were not realized upon. Moreover,
deficiency judgments may not be available in certain jurisdictions. In
addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to the senior mortgage.
We refer you to "Certain Legal Aspects of the Mortgage Loans -- Junior
Mortgages" in this prospectus for further information.
THERE IS A RISK THAT ANY APPLICABLE CREDIT SUPPORT WILL NOT COVER ALL LOSSES.
o The prospectus supplement for a series of certificates will describe any
credit support in the related trust fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of
credit support, or combinations of these. Any credit support will be
subject to the conditions and limitations described here and in the related
prospectus supplement. Moreover, this credit support may not cover all
potential losses or risks; for example, credit support may or may not cover
fraud or negligence by a mortgage loan or other parties.
o A series of securities may include one or more classes of subordinate
securities (which may include offered securities), if we provide for that
in the related prospectus supplement. Although subordination is designed to
reduce the risk to holders of senior securities of delinquent distributions
or ultimate losses, the amount of subordination will be limited and may
decline under certain circumstances. In addition, if principal payments on
one or more classes of securities of a series are made in a specified order
of priority, any limits with respect to the aggregate amount of claims
under any related credit support may be exhausted before the principal of
the lower priority classes of securities of this series has been repaid. As
a result, the impact of significant losses and shortfalls on the assets may
fall primarily upon those classes of securities having a lower priority of
payment. Moreover, if a form of credit support covers more than one series
of securities (we refer to this as a "covered trust"), holders of
securities evidencing an interest in a covered trust will be subject to the
risk that this credit support will be exhausted by the claims of other
covered trusts.
o The amount of any applicable credit support supporting one or more classes
of offered securities, including the subordination of one or more classes
of securities, will be determined on the basis of criteria established by
each rating agency rating such classes of securities based on an assumed
level of defaults, delinquencies, other losses or other factors. We can't
assure you, however, that the loss experience on the related assets will
not exceed these assumed levels.
o Regardless of the form of credit enhancement, the amount of coverage will
be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The master servicer
will generally be permitted to reduce, terminate or substitute all or a
portion of the credit enhancement for any series of securities, if the
applicable rating agency indicates that the then-current rating of those
securities will not be adversely affected.
o The rating agency rating a series of securities may lower their rating
following the initial issuance of the securities if the obligations of any
applicable credit support
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provider have been downgraded, or as a result of losses on the related
assets substantially in excess of the levels contemplated by that rating
agency when they performed their initial rating analysis. None of the
depositor, the master servicer or any of their affiliates will have any
obligation to replace or supplement any credit support or to take any other
action to maintain any rating of any series of securities.
We refer you to "--There are risks in relying on the limited nature of
ratings", "Description of the Securities" and "Description of Credit Support"
for further information.
THERE IS A RISK TO HOLDERS OF SUBORDINATE SECURITIES THAT LOSSES WILL HAVE A
GREATER IMPACT ON THEM.
o The rights of subordinate securityholders to receive distributions to which
they would otherwise be entitled with respect to the assets will be
subordinate to the rights of the master servicer (to the extent that the
master servicer is paid its servicing fee, including any unpaid servicing
fees with respect to one or more prior due periods, and is reimbursed for
certain unreimbursed advances and unreimbursed liquidation expenses) and
the senior securityholders to the extent described in the related
prospectus supplement. As a result of the foregoing, investors must be
prepared to bear the risk that they may be subject to delays in payment and
may not recover their initial investments in the subordinate securities.
We refer you to "Description of the Securities -- General" and "-- Allocation of
Losses and Shortfalls" in this prospectus for further information.
o The yields on the subordinate securities may be extremely sensitive to the
loss experience of the assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yields to maturity on
the subordinate securities may be lower than you anticipated.
THERE IS A RISK THAT OBLIGORS ON BALLOON LOANS WILL NOT BE ABLE TO MAKE BALLOON
PAYMENTS.
Some of the mortgage loans as of the cut-off date may not be fully
amortizing over their terms to maturity (we call these "balloon loans") and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or to
timely sell the related mortgaged property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale or
refinancing, the mortgagor's equity in the related mortgaged property, the
financial condition of the mortgagor, the value of the mortgaged property, tax
laws, prevailing general economic conditions and the availability of credit for
single family or multifamily real properties generally.
THERE IS A POSSIBILITY, IF THE RELATED PROSPECTUS SUPPLEMENT PROVIDES FOR IT,
THAT UPON AN OPTIONAL TERMINATION OF A TRUST FUND, THE PROCEEDS MAY BE LESS THAN
THE OUTSTANDING PRINCIPAL AMOUNT OF THE SECURITIES PLUS ACCRUED INTEREST.
o If specified in the related prospectus supplement, a series of securities
may be subject to optional early termination through the repurchase of the
assets in the related trust fund by the party specified therein, under the
circumstances and in the manner set forth therein. If provided in the
related prospectus supplement, upon the reduction of the security balance
of a specified class or classes of securities to a specified percentage or
amount, the party specified therein will solicit bids for the purchase of
all assets of the trust fund, or of a sufficient portion of such assets to
retire such class or classes or purchase such class or classes at a price
set forth in the related prospectus supplement, in each case, under the
circumstances and in the manner set forth therein.
o In either such case, if the related prospectus supplement provides for it,
the proceeds available for distribution to securityholders may be less than
the outstanding principal balance of their securities plus accrued
interest. If this happens, these
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securityholders could incur a loss on their investment.
THERE ARE RISKS RELATING TO CERTAIN FEDERAL INCOME TAX CONSIDERATIONS REGARDING
REMIC RESIDUAL CERTIFICATES.
o Holders of REMIC residual certificates must report on their federal income
tax returns as ordinary income their pro rata share of the taxable income
of the REMIC, regardless of the amount or timing of their receipt of cash
payments, as described in "Material Federal Income Tax Consequences --
REMICs." Under certain circumstances, holders of offered securities that
are REMIC residual certificates may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period. Individual holders of REMIC residual
certificates may be limited in their ability to deduct servicing fees and
other expenses of the REMIC.
o In addition, REMIC residual certificates are subject to certain
restrictions on transfer. Because of the special tax treatment of REMIC
residual certificates, the taxable income arising in a given year on a
REMIC residual certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pre-tax yield. Therefore, the
after-tax yield on the REMIC residual certificate may be significantly less
than that of a corporate bond or stripped instrument having similar cash
flow characteristics. Additionally, prospective purchasers of a REMIC
residual certificate should be aware that recently issued temporary
regulations provide restrictions on the ability to mark-to-market certain
"negative value" REMIC residual interests.
We refer you to "Material Federal Income Tax Consequences -- REMICs" in this
prospectus for further information.
THERE ARE RISKS IN RELYING ON THE LIMITED NATURE OF RATINGS.
Any rating assigned by a rating agency to a class of securities will
reflect that rating agency's assessment solely of the likelihood that holders of
securities of that class will receive payments to which those securityholders
are entitled under the related agreement. This rating will not be an assessment
of the likelihood that principal prepayments (including those caused by
defaults) on the related mortgage assets will be made, the degree to which the
rate of such prepayments might differ from that you originally anticipated or
the likelihood of early optional termination of the series of securities. This
rating will not address the possibility that prepayment at higher or lower rates
than you anticipated may cause you to experience a yield lower than you
anticipated or that an investor purchasing a security at a significant premium
might fail to recoup its initial investment under certain prepayment scenarios.
Each prospectus supplement will identify any payment to which holders of offered
securities of the related series are entitled that is not covered by the
applicable rating.
We refer you to "Rating" in this prospectus for further information.
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DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include:
(i) one- to five-family mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home Equity
Loans and Home Improvement Contracts,
(ii) pass-through certificates or other mortgage-backed securities (such as
debt obligations or participation interests or certificates) evidencing
interests in or secured by one or more Mortgage Loans or other similar
participations, certificates or securities ("MBS") or
(iii) direct obligations of the United States, agencies thereof or agencies
created thereby which are:
(a) interest-bearing securities,
(b) non-interest-bearing securities,
(c) originally interest-bearing securities from which coupons
representing the right to payment of interest have been removed, or
(d) interest-bearing securities from which the right to payment of
principal has been removed (the "Government Securities").
As used herein, "Mortgage Loans" refers to both whole Mortgage Loans (or
certain balances thereof) and Mortgage Loans underlying MBS. Mortgage Loans that
secure, or interests in which are evidenced by, MBS are herein sometimes
referred to as "Underlying Mortgage Loans." Mortgage Loans (or certain balances
thereof) that are not Underlying Mortgage Loans are sometimes referred to as
"Whole Loans." Any pass-through certificates or other asset-backed certificates
in which an MBS evidences an interest or which secure an MBS are sometimes
referred to herein also as MBS or as "Underlying MBS." Mortgage Loans and MBS
are sometimes referred to herein as "Mortgage Assets." The Mortgage Assets will
not be guaranteed or insured by Merrill Lynch Mortgage Investors, Inc. (the
"Depositor") or any of its affiliates or, unless otherwise provided in the
Prospectus Supplement, by any governmental agency or instrumentality or by any
other person. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "Asset Seller"), which may be an affiliate of the
Depositor and, with respect to Assets, which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by:
(i) a lien on a Mortgaged Property consisting of a one- to five-family
residential property (a "Single Family Property" and the related Mortgage Loan a
"Single Family Mortgage Loan") or
(ii) a security interest in shares issued by private cooperative housing
corporations ("Cooperatives"). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use.
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Mortgaged Properties will be located, unless otherwise specified in the
related Prospectus Supplement, in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any U.S. possession. To the extent
specified in the related Prospectus Supplement, the Mortgage Loans will be
secured by first and/or junior mortgages or deeds of trust or other similar
security instruments creating a first or junior lien on Mortgaged Property. The
Mortgaged Properties may include apartments owned by Cooperatives and leasehold
interests in properties, the title to which is held by third party lessors.
Unless otherwise specified in the Prospectus Supplement, the term of any such
leasehold shall exceed the term of the related mortgage note by at least five
years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties. No more than 20% of the Mortgage
Loans (by principal balance) in a Trust Fund will be, as of the related Cut-off
Date, 30 days or more past their most recent contractually scheduled payment
date.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan plus the principal balance of any senior mortgage loan to the
Value of the related Mortgaged Property. The "Value" of a Mortgaged Property,
other than with respect to Refinance Loans, is generally the lesser of:
(a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and
(b) the sales price for such property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
set forth in the related Prospectus Supplement, the Value of the Mortgaged
Property securing a Refinance Loan is the appraised value thereof determined in
an appraisal obtained at the time of origination of the Refinance Loan. The
Value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the value at origination and will
fluctuate from time to time based upon changes in economic conditions and the
real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
(i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date,
(ii) the type of property securing the Mortgage Loans,
(iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans,
(iv) the earliest and latest origination date and maturity date of the
Mortgage Loans,
(v) the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans,
(vi) the Mortgage Rates or range of Mortgage Rates and the weighted
average Mortgage Rate borne by the Mortgage Loans,
(vii) the state or states in which most of the Mortgaged Properties are
located,
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(viii) information with respect to the prepayment provisions, if any, of
the Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the
range of margins added to the index, and the maximum Mortgage Rate
or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and
(x) information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other
amortization provisions.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage Loans
include closed-end and/or revolving home equity loans or certain balances
thereof ("Home Equity Loans"), which may be secured by Mortgages that are
junior to other liens on the related Mortgaged Property and/or home
improvement installment sales contracts or installment loan agreements (the
"Home Improvement Contracts") originated by a home improvement contractor and
secured by a Mortgage on the related Mortgaged Property that is junior to
other liens on the Mortgaged Property. Except as otherwise described in the
related Prospectus Supplement, the home improvements purchased with the Home
Improvement Contracts will generally be replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels. The related Prospectus Supplement will
specify whether the Home Improvement Contracts are partially insured under
Title I of the National Housing Act and, if so, the limitations on such
insurance.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified
period of time, automatically become part of the Trust Fund for a series. As
a result, the aggregate balance of the revolving Home Equity Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal collections are applied to purchase such balances. Such
amounts will usually differ each day, as more specifically described in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, principal collections
received on the Mortgage Loans may be applied to purchase additional Mortgage
Loans which will become part of the Trust Fund for a series. Such additions
may be made to the extent that such additions could be made in connection
with a Trust Fund with respect to which a REMIC election has been made. The
related Prospectus Supplement will set forth the characteristics that such
additional Mortgage Loans will be required to meet. Such characteristics will
be specified in terms of the categories described in the second preceding
paragraph.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will:
(i) have individual principal balances at origination of not less than
$25,000,
(ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due dates
that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related Prospectus Supplement.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate, or
from a fixed to an adjustable Mortgage Rate, from time to time pursuant to an
election or as otherwise specified on the related Mortgage Note, in
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each case as described in the related Prospectus Supplement. Each Mortgage
Loan may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Mortgage Rate or to
reflect the occurrence of certain events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or require a balloon payment due
on its stated maturity date, in each case as described in the related
Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the
"MBS Servicer") of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under "Description
of Credit Support" may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor:
(i) the aggregate approximate initial and outstanding principal amount
or notional amount, as applicable, and type of the MBS to be
included in the Trust Fund,
(ii) the original and remaining term to stated maturity of the MBS, if
applicable,
(iii) whether such MBS is entitled only to interest payments, only to
principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for
determining such rates, if any,
(v) the applicable payment provisions for the MBS, including, but not
limited to, any priorities, payment schedules and subordination
features,
(vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of
credit or guarantees relating to the related Underlying Mortgage
Loans, the Underlying MBS or directly to such MBS,
(viii) the terms on which the related Underlying Mortgage Loans or
Underlying MBS for such MBS or the MBS may, or are required to, be
purchased prior to their maturity,
(ix) the terms on which Mortgage Loans or Underlying MBS may be
substituted for those originally underlying the MBS,
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(x) the servicing fees payable under the MBS Agreement,
(xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan Information
in Prospectus Supplements" above, and the type of information in
respect of the Underlying MBS described in this paragraph,
(xii) the characteristics of any cash flow agreements that are included
as part of the trust fund evidenced or secured by the MBS and
(xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the
Participants Trust Company.
Each MBS will be either:
(i) a security exempted from the registration requirements of the
Securities Act,
(ii) a security that has been previously registered under the
Securities Act or
(iii) a security that is eligible for sale under Rule 144(k) under the
Securities Act.
In the case of clause (iii), such security will be acquired in a secondary
market transaction not from the issuer thereof or an affiliate of such issuer.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available,
(i) the aggregate approximate initial and outstanding principal
amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund,
(ii) the original and remaining terms to stated maturity of the
Government Securities,
(iii) whether such Government Securities are entitled only to interest
payments, only to principal payments or to both,
(iv) the interest rates of the Government Securities or the formula to
determine such rates, if any,
(v) the applicable payment provisions for the Government Securities
and
(vi) to what extent, if any, the obligation evidenced thereby is backed
by the full faith and credit of the United States.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the "Subsequent Assets") from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such series on
date of such issuance.
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ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreement--Collection
Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
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PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans. The rate of principal payments on some or all of
the classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions or with lower Prepayment
Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the
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related Prospectus Supplement, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans comprising or underlying the Assets in
a particular Trust Fund will generally accelerate the rate at which principal is
paid on some or all of the classes of the Securities of the related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans comprising or underlying the Assets is paid to such class, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes prepayments, in whole or in part, and
liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans comprising or underlying the Assets
in a Trust Fund. If any Mortgage Loans comprising or underlying the Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates and maturities
of the Mortgage Loans comprising or underlying such Assets. See "Description of
the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
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Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Mortgage Loans having balloon payments may default at
maturity. In the case of defaults, recovery of proceeds may be delayed by, among
other things, bankruptcy of the mortgagor or adverse conditions in the market
where the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be permitted to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Securities, thereby
lengthening the period of time elapsed from the date of issuance of a Security
until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the mortgagor under each Mortgage Loan generally will be
qualified on the basis of the Mortgage Rate in effect at origination. The
repayment of any such Mortgage Loan may thus be dependent on the ability of the
mortgagor or obligor to make larger level monthly payments following the
adjustment of the Mortgage Rate. In addition, certain Mortgage Loans may be
subject to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which
the monthly payments made by the mortgagor during the early years of the
Mortgage Loan will be less than the scheduled monthly payments thereon (the
"Buydown Period"). The periodic increase in the amount paid by the mortgagor of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the mortgagor, who might not have
otherwise qualified for a mortgage, and may accordingly increase the risk of
default with respect to the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related class or
classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related class or classes of Securities,
the weighted average life of
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such Securities will be reduced and may adversely affect yield to holders
thereof, depending upon the price at which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted average
life of the Mortgage Loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Sub-Servicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, Sub-Servicers may encourage the
refinancing of Mortgage Loans, including defaulted Mortgage Loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale" clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and
"Description of the Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
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executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310. Its
telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an "Indenture"). Each
series of Securities will consist of one or more classes of Securities that may:
(i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
(ii) be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the
Securities;
(iii) be entitled to principal distributions, with disproportionately
low, nominal or no interest distributions (collectively, "Stripped
Principal Securities");
(iv) be entitled to interest distributions, with disproportionately
low, nominal or no principal distributions (collectively,
"Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon commencing
only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such
series (collectively, "Accrual Securities");
(vi) provide for payments of principal as described in the related
Prospectus Supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics
described in this paragraph including a Stripped Principal
Security component and a Stripped Interest Security component.
If so specified in the related Prospectus Supplement, a Trust Fund may
include additional Mortgage Loans (or certain balances thereof) that will be
transferred to the Trust from time to time and/or, in the case of revolving Home
Equity loans or certain balances thereof, any additional balances advanced to
the borrowers under the revolving Home Equity loans during certain periods. If
so specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a "Mortgage Loan Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus
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Supplement. See "Risk Factors--Book-Entry Registration" and "Description of
the Securities--Book-Entry Registration and Definitive Securities." Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See "Risk Factors--Limited
Liquidity" and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the "Available
Distribution Amount" for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless the
related Prospectus Supplement provides otherwise, a "Due Period" with
respect to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs,
or the day after the Cut-off Date in the case of the first Due Period,
and will end on the first day of the month of the related Distribution
Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest
thereon and related Prepayment Premiums, Liquidation Proceeds,
Insurance Proceeds and other unscheduled recoveries received
subsequent to the related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the related Prospectus Supplement or that are payable in respect of
certain expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
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(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
"Accrued Security Interest" will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal.
Unless otherwise provided in the related Prospectus Supplement, the Accrued
Security Interest on a series of Securities will be reduced in the event of
prepayment interest shortfalls, which are shortfalls in collections of interest
for a full accrual period resulting from prepayments prior to the due date in
such accrual period on the Mortgage Loans comprising or underlying the Assets in
the Trust Fund for such series. The particular manner in which such shortfalls
are to be allocated among some or all of the classes of Securities of that
series will be specified in the related Prospectus Supplement. The related
Prospectus Supplement will also describe the extent to which the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the case
of Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans comprising or underlying the Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Securities by reason of the allocation to such class of a portion of
any deferred interest on the Mortgage Loans comprising or underlying the Assets
in the related Trust Fund will result in a corresponding increase in the
Security
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Balance of such class. See "Risk Factors--Average Life of Securities;
Prepayments; Yields" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interests on the Securities"
and "--Distributions of Principal of the Securities" above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Collection Account that are not included in the
Available Distribution Amount for such Distribution Date, in an amount equal to
the aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Whole Loans in such Trust Fund during the related Due Period and were
delinquent on the related Determination Date, subject to the Master Servicer's
(or another entity's) good faith determination that such advances will be
reimbursable from Related Proceeds (as defined below). In the case of a series
of Securities that includes one or more classes of Subordinate Securities and if
so provided in the related Prospectus Supplement, the Master Servicer's (or
another entity's) advance obligation may be limited only to the portion of such
delinquencies necessary to make the required distributions on one or more
classes of Senior Securities and/or may be subject to the Master Servicer's (or
another entity's) good faith determination that such advances will be
reimbursable not only from Related Proceeds but also from collections on
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other Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Mortgage Loan,
"Related Proceeds") and, if so provided in the Prospectus Supplement, out of any
amounts otherwise distributable on one or more classes of Subordinate Securities
of such series; provided, however, that any such advance will be reimbursable
from any amounts in the Collection Account prior to any distributions being made
on the Securities to the extent that the Master Servicer (or such other entity)
shall determine in good faith that such advance (a "Nonrecoverable Advance") is
not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess funds
in the Collection Account, the Master Servicer is required to replace such funds
in the Collection Account on any future Distribution Date to the extent that
funds in the Collection Account on such Distribution Date are less than payments
required to be made to Securityholders on such date. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
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(vii) the number and aggregate principal balance of Whole Loans in
respect of which:
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, the portion of such liquidation proceeds payable or
reimbursable to the Master Servicer (or any other entity) in respect of
such Mortgage Loan, and the amount of any loss to Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period, the
loan number of the related Mortgage Loan and the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period:
(a) the book value,
(b) the principal balance of the related Mortgage Loan
immediately following such Distribution Date (calculated as
if such Mortgage Loan were still outstanding taking into
account certain limited modifications to the terms thereof
specified in the Agreement),
(c) the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof and
(d) if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period:
(a) the aggregate amount of sale proceeds,
(b) the portion of such sales proceeds payable or reimbursable
to the Master Servicer in respect of such REO Property or
the related Mortgage Loan and
(c) the amount of any loss to Securityholders in respect of the
related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
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(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the obligors of default
interest, late charges and assumption and modification fees collected
during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See "Description of the
Securities--Registration and Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
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If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ("Security Owners") will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
("Cede"), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only "Securityholder" (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement, Trust
Agreement or Indenture, as applicable, only indirectly through the Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
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settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Consequences" in this Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to the
related Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Security under the
Indenture, Trust Agreement or Pooling and Servicing Agreement, as applicable, on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and Euroclear
will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
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Transfers between DTC's participating organizations (the "Participants")
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue its
services, the Administrator would seek an alternative depository (if available)
or cause the issuance of Definitive Securities to the owners thereof or their
nominees in the manner described in the Prospectus under "Description of the
Securities--Book Entry Registration and Definitive Securities".
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are REMIC
Certificates, Grantor Trust Certificates or indebtedness for tax purposes will
be issued, and the related Trust Fund will be created, pursuant to a pooling and
servicing agreement (a "Pooling and Servicing Agreement") among the Depositor,
the Master Servicer and the Trustee. The Assets of such Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the context of the conveyance
and servicing
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of the related Assets, the Pooling and Servicing Agreement may be referred
to herein as the "Agreement". Notwithstanding the foregoing, if the Assets of
the Trust Fund for such a series consists only of Government Securities or MBS,
such Assets will be conveyed to the Trust Fund and administered pursuant to a
trust agreement between the Depositor and the Trustee (a "Trust Agreement"),
which may also be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and Notes.
Certificates that are partnership interests for tax purposes will be issued, and
the related Trust Fund will be created, pursuant to a Trust Agreement between
the Depositor and the Trustee. The Assets of the related Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with a
servicing agreement (a "Servicing Agreement") between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the "Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless
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otherwise provided in the related Prospectus Supplement, such schedule will
include detailed information (i) in respect of each Whole Loan included in the
related Trust Fund, including without limitation, the address of the related
Mortgaged Property and type of such property, the Mortgage Rate and, if
applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Value and
Loan-to-Value Ratio as of the date indicated and payment and prepayment
provisions, if applicable; and (ii) in respect of each MBS included in the
related Trust Fund, including without limitation, the MBS Issuer, MBS Servicer
and MBS Trustee, the pass-through or bond rate or formula for determining such
rate, the issue date and original and remaining term to maturity, if applicable,
the original and outstanding principal amount and payment provisions, if
applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans and Home Improvement Contracts will not be delivered to the Trustee (or a
custodian), but will be retained by the Master Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will not be recorded, unless otherwise provided in the related Prospectus
Supplement.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or
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documents required to transfer fully such Government Security or MBS, as
applicable, to the Trustee for the benefit of the Certificateholders. With
respect to each Government Security or MBS in uncertificated or book-entry form
or held through a "clearing corporation" within the meaning of the UCC, the
Depositor and the Trustee will cause such Government Security or MBS to be
registered directly or on the books of such clearing corporation or of one or
more securities intermediaries in the name of the Trustee for the benefit of the
Securityholders. Unless otherwise provided in the related Prospectus Supplement,
the related Agreement will require that either the Depositor or the Trustee
promptly cause any MBS and Government Securities in certificated form not
registered in the name of the Trustee to be re-registered, with the applicable
persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters:
(i) the accuracy of the information set forth for such Whole Loan on
the schedule of Assets appearing as an exhibit to the related
Agreement;
(ii) the existence of title insurance insuring the lien priority of
the Whole Loan;
(iii) the authority of the Warranting Party to sell the Whole Loan;
(iv) the payment status of the Whole Loan;
(v) in the case of a Whole Loan, the existence of customary
provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
(vi) the existence of hazard and extended perils insurance coverage on
the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement,
in the event of a breach of any such representation or warranty, the
Warranting Party will be obligated to reimburse the Trust Fund for losses
caused by any such breach or either cure such breach or repurchase or replace
the affected Whole Loan as described below. Since the representations and
warranties may not address events that may occur following the date as of
which they were made, the Warranting Party will have a reimbursement, cure,
repurchase or substitution obligation in connection with a breach of such a
representation and warranty only if the relevant event that causes such
breach occurs prior to such date. Such party would have no such obligations
if the relevant event that causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of
any representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the
interests therein of the Securityholders. If such Warranting Party cannot
cure such breach within a specified period following the date on which such
party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan from the Trustee within a specified
period from the date on which the Warranting Party was notified of such
breach, at the Purchase Price therefor. As to any Whole Loan, unless
otherwise specified in the related Prospectus Supplement, the "Purchase
Price" is equal to the sum of the unpaid principal balance thereof, plus
unpaid accrued interest thereon at the Mortgage Rate from the date as to
which interest was last paid to the due date in the Due Period in which the
relevant purchase is to occur, plus certain
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servicing expenses that are reimbursable to the Master Servicer. If so
provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase a Whole Loan as to which a breach has occurred, will
have the option, within a specified period after initial issuance of such
series of Certificates, to cause the removal of such Whole Loan from the
Trust Fund and substitute in its place one or more other Whole Loans in
accordance with the standards described in the related Prospectus Supplement.
If so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan as to which a breach has
occurred, will have the option to reimburse the Trust Fund or the
Securityholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement,
repurchase or substitution obligation will constitute the sole remedy
available to holders of Securities or the Trustee for a breach of
representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute
for a Whole Loan if a Warranting Party defaults on its obligation to do so,
and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as
of a specified date, with respect to such Government Securities or MBS,
covering the accuracy of the information set forth therefor on the schedule
of Assets appearing as an exhibit to the related Agreement and covering the
authority of the Warranting Party to sell such Assets. The related Prospectus
Supplement will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests
of the Certificateholders and which continues unremedied for the number of
days specified in the Agreement after the giving of written notice of such
breach to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either
(i) an account or accounts the deposits in which are insured by the
Federal Deposit Insurance Corporation ("FDIC") (to the limits
established by the FDIC) and, if so specified in the related
Prospectus Supplement, the uninsured deposits in which are
otherwise secured such that the Trustee have a claim with respect
to the funds in the Collection Account or a perfected first
priority security interest against any collateral securing such
funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Collection
Account is maintained or
(ii) otherwise maintained with a bank or trust company, and in a
manner, satisfactory to the Rating Agency or Agencies rating any
class of Securities of such series.
The collateral eligible to secure amounts in the Collection Account is limited
to United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Collection
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Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable,
provided that such institution meets the standards imposed by the Rating
Agency or Agencies. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Collection Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage
loans belonging to the Master Servicer or serviced or master serviced by it
on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained
in respect of each Mortgaged Property securing a Whole Loan in the Trust
Fund (to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the normal
servicing procedures of a Master Servicer or the related Sub-Servicer,
subject to the terms and conditions of the related Mortgage and Mortgage
Note) (collectively, "Insurance Proceeds") and all other amounts received
and retained in connection with the liquidation of defaulted Mortgage Loans
in the Trust Fund, by foreclosure or otherwise ("Liquidation Proceeds"),
together with the net proceeds on a monthly basis with respect to any
Mortgaged Properties acquired for the benefit of Securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of
Assets; Repurchases" and "Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Whole Loans," and all proceeds of any Asset
purchased as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans in the Trust Fund
as described under "Description of the Agreements --Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or prepayment
premiums on the Mortgage Assets;
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(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless otherwise
specified in the related Prospectus Supplement or the related Agreement, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Master Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Whole Loans with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Whole Loans;
(iii) to reimburse a Master Servicer for unpaid servicing fees earned
and certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement to be
made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Whole Loans and properties, and net
income collected on the particular properties, with respect to which such
fees were earned or such expenses were incurred or out of amounts drawn
under any form of Credit Support with respect to such Whole Loans and
properties;
(iv) to reimburse a Master Servicer for any advances described in
clause (ii) above and any servicing expenses described in clause (iii)
above which, in the Master Servicer's good faith judgment, will not be
recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the related Agreement and
described in the related Prospectus Supplement, just from that portion of
amounts collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Securities, if any, remain outstanding, and
otherwise any outstanding class of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described in
clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding a Master Servicer and the
Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
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(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer
as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the Trust Fund or its assets or transactions, as and
to the extent described under "Material Federal Income Tax
Consequences--REMICS--Prohibited Transactions Tax and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Whole Loan or a property acquired in respect thereof in
connection with the liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "Assignment of Assets; Repurchase" and
"Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it
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would follow with respect to mortgage loans that are comparable to the
Whole Loans and held for its own account, provided such procedures are
consistent with:
(i) the terms of the related Agreement and any related hazard insurance
policy or instrument of Credit Support, if any, included in the
related Trust Fund described herein or under "Description of Credit
Support,"
(ii) applicable law and
(iii) the general servicing standard specified in the related Prospectus
Supplement or, if no such standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See "Description of Credit Support."
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the Servicing Standard so long as the
modification, waiver or amendment will not affect the amount or timing of any
scheduled payments of principal or interest on the Whole Loan or, in its
judgment, materially impair the security for the Whole Loan or reduce the
likelihood of timely payment of amounts due thereon. The Master Servicer also
may agree to any modification, waiver or amendment that would so affect or
impair the payments on, or the security for, a Whole Loan if, unless otherwise
provided in the related Prospectus Supplement, in its judgment, a material
default on the Whole Loan has occurred or a payment default is imminent, and in
its judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Whole Loan on a present value
basis than would liquidation. The Master Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Whole Loan.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such Master
Servicer will remain obligated under the related Agreement. Each sub-servicing
agreement between a Master Servicer and a Sub-Servicer (a "Sub-Servicing
Agreement") must be consistent with the terms of the related Agreement and must
provide that, if for any reason the Master Servicer for the related series of
Securities is no longer acting in such capacity, the Trustee or any successor
Master Servicer may assume the Master Servicer's rights and obligations under
such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under an
Agreement. See "Retained Interest; Servicing Compensation and Payment of
Expenses."
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REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan which is in default, initiate
corrective action in cooperation with the mortgagor or obligor if cure is
likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may grant
to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan described in the preceding paragraph
and not otherwise purchased by any person having a right of first refusal with
respect thereto, if and when the Master Servicer determines, consistent with the
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation through foreclosure, repossession or
similar proceedings. The related Agreement will provide that any such offering
be made in a commercially reasonable manner for a specified period and that the
Master Servicer accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Securityholder) that
constitutes a fair price for such defaulted Whole Loan. In the absence of any
bid determined in accordance with the related Agreement to be fair, the Master
Servicer shall proceed with respect to such defaulted Mortgage Loan as described
below. Any bid in an amount at least equal to the Purchase Price described under
"Representations and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the Servicing Standard and a default on such Whole Loan has
occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within three years of acquisition,
unless the Internal Revenue Service grants an extension of time to sell such
property, or unless the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund subsequent to
three years after its acquisition will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to solicit bids for any Mortgaged Property so
acquired in such a manner as will be reasonably likely to realize a fair price
for such property and accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under
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the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds recovered
on any defaulted Whole Loan, prior to the distribution of such Liquidation
Proceeds to Securityholders, amounts representing its normal servicing
compensation on the Whole Loan, unreimbursed servicing expenses incurred with
respect to the Whole Loan and any unreimbursed advances of delinquent payments
made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
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The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset
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represents a specified portion of the interest payable thereon. The Retained
Interest will be deducted from mortgagor payments as received and will not
be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Securities will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans and, to the
extent so provided in the related Prospectus Supplement, interest thereon at the
rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans in the
related Trust Fund during such period prior to their respective due dates
therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans will provide
that on or before a specified date in each year, beginning with the first such
date at least six months after the related Cut-off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
on the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Attestation Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for the Federal Home Loan
Mortgage Corporation ("FHLMC") or such other audit or attestation program used
by the Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other audit or attestation program requires it to
report. In rendering its statement such firm may rely, as to matters relating to
the direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC or such other audit or attestation program used by
such Sub-Servicer (rendered within one year of such statement) of firms of
independent public accountants with respect to the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Securityholders without charge upon written request to the Master
Servicer at the address set forth in the related Prospectus Supplement.
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CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans under each Agreement will be named in the related Prospectus Supplement.
The entity serving as Master Servicer (or as such servicer) may be an affiliate
of the Depositor and may have other normal business relationships with the
Depositor or the Depositor's affiliates. Reference herein to the Master Servicer
shall be deemed to be to the servicer of substantially all of the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that any Master Servicer, the Depositor and any
director, officer, employee or agent of a Master Servicer or the Depositor will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities; provided, however,
that such indemnification will not extend to any loss, liability or expense:
(i) specifically imposed by such Agreement or otherwise incidental to
the performance of obligations and duties thereunder, including,
in the case of a Master Servicer, the prosecution of an
enforcement action in respect of any specific Whole Loan or Whole
Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to such Agreement);
(ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement;
(iii) incurred by reason of misfeasance, bad faith or gross negligence
in the performance of obligations or duties thereunder, or by
reason of reckless disregard of such obligations or duties;
(iv) incurred in connection with any violation of any state or federal
securities law; or
(v) imposed by any taxing authority if such loss, liability or expense
is not specifically reimbursable pursuant to the terms of the
related Agreement.
In addition, each Agreement will provide that neither any Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
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expenses, costs and liabilities of the Securityholders, and the Master Servicer
or the Depositor, as the case may be, will be entitled to be reimbursed therefor
and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any person succeeding to the
business of the Master Servicer or the Depositor, will be the successor of the
Master Servicer or the Depositor, as the case may be, under the related
Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement, Events of
Default under the related Agreement will include:
(i) any failure by the Master Servicer to distribute or cause to be
distributed to Securityholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a grace
period, if any;
(ii) any failure by the Master Servicer duly to observe or perform in
any material respect any of its other covenants or obligations
under the Agreement which continues unremedied for thirty days (or
such other period specified in the related Prospectus Supplement)
after written notice of such failure has been given to the Master
Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of
Securities evidencing not less than 25% of the Voting Rights;
(iii) any breach of a representation or warranty made by the Master
Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in the
related Prospectus Supplement) after written notice of such breach
has been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than 25%
of the Voting Rights; and
(iv) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions
by or on behalf of the Master Servicer indicating its insolvency
or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans, or if the related
Prospectus Supplement so
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specifies, then the Trustee will not be obligated to make such advances)
and will be entitled to similar compensation arrangements. Unless otherwise
specified in the related Prospectus Supplement, in the event that the Trustee is
unwilling or unable so to act, it may or, at the written request of the holders
of Securities entitled to at least 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, it shall appoint, or
petition a court of competent jurisdiction for the appointment of, a loan
servicing institution acceptable to the Rating Agency with a net worth at the
time of such appointment of at least $15,000,000 (or such other amount specified
in the related Prospectus Supplement) to act as successor to the Master Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under "Events of Default" may be waived only by all of
the Securityholders. Upon any such waiver of an Event of Default, such Event of
Default shall cease to exist and shall be deemed to have been remedied for every
purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for sixty days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of Securities covered by the Agreement:
(i) to cure any ambiguity or correct any mistake,
(ii) to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein or with the
related Prospectus Supplement,
(iii) to make any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent
with the provisions thereof, or
(iv) to comply with any requirements imposed by the Code; provided
that, in the case of clause (iii), such amendment will not (as
evidenced by an opinion of counsel to such effect or a letter from
the applicable Rating Agency that such amendment will not result
in a reduction or withdrawal of its rating of the related
Security) adversely affect in any material respect the interests
of any holder of Securities covered by the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each Agreement
may also be amended by the Depositor, the Master Servicer, if any, and the
Trustee, with the consent of the holders of Securities affected thereby
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, for any purpose; provided, however,
that unless otherwise specified in the related Prospectus Supplement, no such
amendment may:
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(i) reduce in any manner the amount of or delay the timing of,
payments received or advanced on Mortgage Loans which are required
to be distributed on any Security without the consent of the
holder of such Security or
(ii) reduce the consent percentages described in this paragraph without
the consent of the holders of all Securities covered by such
Agreement then outstanding.
However, with respect to any series of Securities as to which a REMIC election
is to be made, the Trustee will not consent to any amendment of the Agreement
unless it shall first have received an opinion of counsel to the effect that
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause the related Trust Fund to fail to qualify as a REMIC at any time
that the related Securities are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's:
(i) enforcing its rights and remedies and protecting the interests, of
the Securityholders during the continuance of an Event of Default,
(ii) defending or prosecuting any legal action in respect of the
related Agreement or series of Securities,
(iii) being the mortgagee of record with respect to the Mortgage Loans
in a Trust Fund and the owner of record with respect to any
Mortgaged Property acquired in respect thereof for the benefit of
Securityholders, or
(iv) acting or refraining from acting in good faith at the direction of
the holders of the related series of Securities entitled to not
less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the
Voting Rights for such series; provided, however, that such
indemnification will not extend to any loss, liability or expense
that constitutes a specific liability of the Trustee pursuant to
the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence
on the part of the Trustee in the performance of its obligations
and duties thereunder, or by reason of its reckless
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disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Holders of the Securities of any series entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series may at any time remove the Trustee without cause
and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include:
(i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of
any principal of or interest on any Note of such series;
(ii) failure to perform any other covenant of the Depositor or the
Trust Fund in the Indenture which continues for a period of sixty
(60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance
with the procedures described in the related Prospectus
Supplement;
(iii) any representation or warranty made by the Depositor or the Trust
Fund in the Indenture or in any certificate or other writing
delivered pursuant thereto or in connection therewith with respect
to or affecting such series having been incorrect in a material
respect as of the time made, and such breach is not cured within
sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance
with the procedures described in the related Prospectus
Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or
(v) any other Event of Default provided with respect to Notes of that
series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain
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circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the Notes of such series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless:
(a) the holders of 100% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate outstanding
amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of such series at the date of such sale or
(c) the Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes
as such payments would have become due if such Notes had not been
declared due and payable, and the Indenture Trustee obtains the
consent of the holders of 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Notes of such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders would be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with respect
to a series of Notes (except with respect to certain continuing rights specified
in the Indenture) upon the delivery to the Indenture Trustee for cancellation of
all the Notes of such series or, with certain limitations, upon deposit with the
Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such series.
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In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series of
Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities the Credit Support will not provide protection against all risks
of loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of:
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(a) the nature and amount of coverage under such Credit Support,
(b) any conditions to payment thereunder not otherwise described
herein,
(c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and
(d) the material provisions relating to such Credit Support.
Additionally, the related Prospectus Supplement will set forth
certain information with respect to the obligor under any
instrument of Credit Support, including
(i) a brief description of its principal business activities,
(ii) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed to
do business,
(iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its
business and
(iv) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
Prospectus Supplement.
See "Risk Factors--Credit Support Limitations--Risk That Credit Support Will Not
Cover All Losses."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Assets prior to
distributions on Subordinate Securities evidencing interests in a different
group of Assets within the Trust Fund. The Prospectus Supplement for a series
that includes a cross-support provision will describe the manner and conditions
for applying such provisions.
INSURANCE OR GUARANTEES
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans in the related Trust Fund will be covered for various default risks
by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the "L/C Bank").
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the
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aggregate principal balance of the Assets on the related Cut-off Date or of
the initial aggregate Security Balance of one or more classes of Securities. If
so specified in the related Prospectus Supplement, the letter of credit may
permit draws in the event of only certain types of losses and shortfalls. The
amount available under the letter of credit will, in all cases, be reduced to
the extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related Prospectus Supplement. The obligations of the L/C
Bank under the letter of credit for each series of Securities will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
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FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states,
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published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration) plus the expenses incurred in enforcing
the obligation. In other states, the mortgagor or the junior lienholder is not
provided a period to reinstate the loan, but has only the right to pay off the
entire debt to prevent the foreclosure sale. Generally, the procedure for public
sale, the parties entitled to notice, the method of giving notice and the
applicable time periods are governed by state law and vary among the states.
Foreclosure of a deed to secure debt is also generally accomplished by a
non-judicial sale similar to that required by a deed of trust, except that the
lender or its agent, rather than a trustee, is typically empowered to perform
the sale in accordance with the terms of the deed to secure debt and applicable
law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
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The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building was so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor
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through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses
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contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of Thrift
Supervision, which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be
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usurious and the mortgagor's counsel has rendered an opinion that such choice of
law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the
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Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Securities applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Securities.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any state thereof or the District of Columbia
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), an estate whose income is subject to U.S.
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision of the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. Persons
as well.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will be
treated as a grantor trust, then Brown & Wood LLP will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
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Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the applicable amount and (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
A Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Master Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the Master Servicer, whichever
is earlier. If the servicing fees paid to the Master Servicer are deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Master Servicer (or any
person to whom the Master Servicer assigned for value all or a portion of the
servicing fees) in a portion of the interest payments on the Mortgage Assets.
The Mortgage Assets would then be subject to the "coupon stripping" rules of the
Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent "loans . . . secured by an interest in real property which is . .
. . residential property" within the meaning of Code Section
7701(a)(19)(C)(v), to the extent that the Mortgage Assets represented by
that Grantor Trust Certificate are of a type described in such Code
section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the Mortgage Assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . . which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of Government
Securities which constitute "stripped bonds" or "stripped coupons" as those
terms are defined in section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having OID based on the purchase price
and the stated redemption price at maturity of each Security. As such, Grantor
Trust Certificateholders would be required to include in income their pro rata
share of the OID on each Government Security recognized in any given year on an
economic accrual basis even if the Grantor Trust Certificateholder is a cash
method taxpayer. Accordingly, the sum of the income includible to the Grantor
Trust Certificateholder in any taxable year may exceed amounts actually received
during such year.
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Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Certificates. Absent further guidance from
the IRS, the Trustee intends to account for amortizable bond premium in the
manner described above. Prospective Certificateholders should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market
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discount is equal to the excess of the portion of the principal amount of such
Mortgage Asset allocable to such holder's undivided interest over such holder's
tax basis in such interest. Market discount with respect to a Grantor Trust
Certificate will be considered to be zero if the amount allocable to the Grantor
Trust Certificate is less than 0.25% of the Grantor Trust Certificate's stated
redemption price at maturity multiplied by the weighted average maturity
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under Code Sections 1276
through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at the
beginning of the accrual period.
For Grantor Trust Certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of:
(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the Grantor Trust Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
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made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. STRIPPED BONDS AND STRIPPED COUPONS
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the "Stripped
Bond Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See "--Non-REMIC Certificates" and "Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either:
(i) the amount of OID with respect to the Mortgage Assets is treated as
zero under the OID de minimis rule when the Certificate was stripped
or
(ii) no more than 100 basis points (including any amount of servicing fees
in excess of reasonable servicing fees) is stripped off of the Trust
Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
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It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the underlying Mortgage Assets and interest on such Mortgage Assets qualify
for such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] . . . which [are]
principally secured, directly or indirectly, by an interest in real property"
within the meaning of Code Section 860G(a)(3).
2. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN
ARM LOANS
The OID rules of Code Sections 1271 through 1275 will be applicable to a
Certificateholder's interest in those Mortgage Assets as to which the conditions
for the application of those sections are met. Rules regarding periodic
inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage Assets.
OID on each Grantor Trust Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest, in
advance of receipt of the cash attributable to such income. The amount of OID
required to be included in an owner's income in any taxable year with respect to
a Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the
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date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the Master Servicer intends to calculate and report OID
under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor Trust
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by:
(i) adding
(a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
respective component under the Prepayment Assumption) of all
remaining payments to be received under the Prepayment Assumption
on the respective component and
(b) any payments included in the state redemption price at maturity
received during such accrual period, and
(iii) subtracting from that total the "adjusted issue price" of the
respective component at the beginning of such accrual period.
The adjusted issue price of a Grantor Trust Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a Grantor
Trust Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under any
reasonable method.
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OID generally must be reported as ordinary gross income as it accrues under
a constant interest method that takes into account the compounding of interest
as it accrues rather than when received. However, the amount of OID includible
in the income of a holder of an obligation is reduced when the obligation is
acquired after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued OID, less prior payments of
principal. Accordingly, if such Mortgage Assets acquired by a Certificateholder
are purchased at a price equal to the then unpaid principal amount of such
Mortgage Asset, no OID attributable to the difference between the issue price
and the original principal amount of such Mortgage Asset (i.e. points) will be
includible by such holder. Other OID on the Mortgage Assets (e.g., that arising
from a "teaser" rate) would still need to be accrued.
3. GRANTOR TRUST CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(generally more than one year). Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations.
Prospective investors should consult their own tax advisors concerning the
treatment of capital gains.
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust Certificateholder holding on behalf of an owner that is not a U.S. Person
will be subject to federal income tax, collected by withholding, at a rate of
30% or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust
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Certificate evidences ownership in Mortgage Assets issued after July 18, 1984,
by natural persons if such Grantor Trust Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Grantor Trust Certificateholder under penalties of perjury, certifying that such
Grantor Trust Certificateholder is not a U.S. Person and providing the name and
address of such Grantor Trust Certificateholder). Additional restrictions apply
to Mortgage Assets of where the mortgagor is not a natural person in order to
qualify for the exemption from withholding.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described below under "Taxation of Owners of REMIC
Residual Certificates," the Code provides that a Trust Fund will not be treated
as a REMIC for such year and thereafter. In that event, such entity may be
taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) such Certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any
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of the foregoing Code sections, the Certificates will be qualifying assets only
to the extent that the REMIC's assets are qualifying assets. In addition,
payments on Mortgage Assets held pending distribution on the REMIC Certificates
will be considered to be real estate assets for purposes of Code Section 856(c).
The Small Business Job Protection Act of 1996, as part of the repeal of the bad
debt reserve method for thrift institutions, repealed the application of Code
Section 593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in "--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates" above. REMIC Certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(4)(A), and REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
"single family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code; (ii) "loans secured by
an interest in real property" under Section 7701(a)(19)(C) of the Code; and
(iii) whether the income on such Certificates is interest described in Section
856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a REMIC Regular Certificate and its
"issue price." Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
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Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
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The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not applicable to instruments governed by Code Section
1272(a)(6), they represent the only guidance regarding the current views of the
IRS with respect to contingent payment instruments. In the alternative, the IRS
could assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under "--Taxation of Owners of REMIC Regular Certificates--Premium" would
apply. It is unclear when a loss may be claimed for any unrecovered basis for a
Super-Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates--Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the "daily portions," as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period ("an accrual period") that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by:
(i) adding
(a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and
(b) any payments included in the stated redemption price at maturity
received during such accrual period, and
(ii) subtracting from that total the adjusted issue price of the REMIC
Regular Certificates at the beginning of such accrual period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
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adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest made
at the end of or during that accrual period. The OID accrued during an accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the accrual period. The calculation of OID
under the method described above will cause the accrual of OID to either
increase or decrease (but never below zero) in a given accrual period to reflect
the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that would
have been includible in the gross income of an original REMIC Regular
Certificateholder (who purchased the REMIC Regular Certificate at its
issue price), less
(b) any prior payments included in the stated redemption price at
maturity,
and the denominator of which is the sum of the daily portions for that REMIC
Regular Certificate for all days beginning on the date after the purchase date
and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally,
(i) such interest is unconditionally payable at least annually,
(ii) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
(iii) interest is based on a "qualified floating rate," an "objective
rate," a combination of a single fixed rate and one or more "qualified
floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
such REMIC Regular Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
"--Original Issue Discount and Premium" by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
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Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election and thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of
(i) the REMIC Regular Certificate's stated principal amount or, in the
case of a REMIC Regular Certificate with OID, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such
REMIC Regular Certificate from an original holder) over
(ii) the price for such REMIC Regular Certificate paid by the purchaser.
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
amounts included in such certificate's stated redemption price at maturity. In
particular, under Section 1276 of the Code such a holder generally will be
required to allocate each such distribution first to accrued market discount not
previously included in income, and to recognize ordinary income to that extent.
A Certificateholder may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of:
(i) the total remaining market discount and
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(ii) a fraction, the numerator of which is the OID accruing during the
period and the denominator of which is the total remaining OID at the
beginning of the period.
For REMIC Regular Certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of:
(a) the total remaining market discount and
(b) a fraction, the numerator of which is the amount of stated interest
paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning
of the period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the REMIC Regular Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Certificate purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On December 30,
1997, the IRS issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code section
1272(a)(6). Absent further guidance from the IRS the Trust intends to account
for amortizable bond premium in the manner described above. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
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Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in "--REMIC Regular Certificates--Treatment of Realized
Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "--Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations. Prospective investors should consult their own tax advisors
concerning the treatment of capital gains.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a statement
of the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued
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interest that would be paid if the interest paid on the Distribution Date were
interest accrued from Distribution Date to Distribution Date. If a portion of
the initial purchase price of a REMIC Regular Certificate is allocable to
interest that has accrued prior to the issue date ("pre-issuance accrued
interest") and the REMIC Regular Certificate provides for a payment of stated
interest on the first payment date (and the first payment date is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the REMIC Regular Certificates' issue price may be
computed by subtracting from the issue price the amount of pre-issuance accrued
interest, rather than as an amount payable on the REMIC Regular Certificate.
However, it is unclear under this method how the OID Regulations treat interest
on Payment Lag Certificates. Therefore, in the case of a Payment Lag
Certificate, the Trust Fund intends to include accrued interest in the issue
price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a "single-class REMIC," a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Taxation of Owners of REMIC Residual
Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
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REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual Certificates.
The REMIC will not be subject to federal income tax except with respect to
income from prohibited transactions and certain other transactions. See
"--Prohibited Transactions and Other Taxes" below. Instead, each original holder
of a REMIC Residual Certificate will report on its federal income tax return, as
ordinary income, its share of the taxable income of the REMIC for each day
during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described
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above. The Legislative History indicates that certain adjustments may be
appropriate to reduce (or increase) the income of a subsequent holder of a REMIC
Residual Certificate that purchased such REMIC Residual Certificate at a price
greater than (or less than) the adjusted basis such REMIC Residual Certificate
would have in the hands of an original REMIC Residual Certificateholder. See
"--Sale or Exchange of REMIC Residual Certificates" below. It is not clear,
however, whether such adjustments will in fact be permitted or required and, if
so, how they would be made. The REMIC Regulations do not provide for any such
adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Assets and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and OID on the REMIC Regular Certificates and, except as described
above under "--Taxation of Owners of REMIC Regular Certificates--Non-Interest
Expenses of the REMIC," other expenses. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that:
(i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
(ii) all bad loans will be deductible as business bad debts, and
(iii) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply.
The REMIC's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets, plus any cancellation of indebtedness income upon allocation
of realized losses to the REMIC Regular Certificates. Note that the timing of
cancellation of indebtedness income recognized by REMIC Residual
Certificateholders resulting from defaults and delinquencies on Mortgage Assets
may differ from the time of the actual loss on the Mortgage Asset. The REMIC's
deductions include interest and original issue discount expense on the REMIC
Regular Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC and realized losses on the Mortgage Loans. The requirement
that REMIC Residual Certificateholders report their pro rata share of taxable
income or net loss of the REMIC will continue until there are no Certificates of
any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not
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include cash received by the REMIC that represents a recovery of the REMIC's
basis in its assets, and, as described above, the issue price of the REMIC
Residual Certificates will be added to the issue price of the REMIC Regular
Certificates in determining the REMIC's initial basis in its assets. See "--Sale
or Exchange of REMIC Residual Certificates" below. For a discussion of possible
adjustments to income of a subsequent holder of a REMIC Residual Certificate to
reflect any difference between the actual cost of such REMIC Residual
Certificate to such holder and the adjusted basis such REMIC Residual
Certificate would have in the hands of an original REMIC Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the REMIC
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. A Residual Certificate acquired after January 3, 1995
cannot be marked to market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a "single class REMIC," however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as "unrelated business taxable income" within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other
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organization that is subject to tax only on its unrelated business taxable
income (see "--Tax-Exempt Investors" below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non-U.S. Persons" below. An
exception to the excess inclusion rules that applied to thrifts holding certain
residuals was repealed by the Small Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the "daily accruals" (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC Residual Certificate,
increased by the amount of daily accruals for all prior quarters, and decreased
(but not below zero) by the aggregate amount of payments made on the REMIC
Residual Certificate before the beginning of such quarter. The "federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
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C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the "Contributions Tax"). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Asset Seller,
as the case may be, out of its own funds or (ii) the Asset Seller's obligation
to repurchase a Mortgage Loan, such tax will be borne by the Asset Seller. In
the event that such Master Servicer, Trustee or Asset Seller, as the case may
be, fails to pay or is not required to pay any such tax as provided above, such
tax will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying
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the inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS--NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons"
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as "portfolio interest," subject to the conditions
described in "--Taxation of Owners of REMIC Regular Certificates" above, but
only to the extent that the underlying mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the REMIC Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
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and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under the Taxpayer Relief
Act of 1997, large partnerships (generally with 250 or more partners) will be
taxable on excess inclusion income as if all partners were disqualified
organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a "U.S. Person," as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United Sates trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor
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reasonably expect that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that such amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the REMIC Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The provisions in the REMIC
Regulations regarding transfers of REMIC Residual Certificates that have tax
avoidance potential to foreign persons are effective for all transfers after
June 30, 1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., 1/4% of their principal amount multiplied by the number of
full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it
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becomes fixed and unconditionally payable. A purchaser who buys a Note for more
or less than its principal amount will generally be subject, respectively, to
the premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if the
Note were held for more than one year. Long-term capital gains of non-corporate
taxpayers are subject to reduced maximum rates while short-term capital gains
are taxable at ordinary rates. The use of capital losses is subject to
limitations. Prospective investors should consult their own tax advisors
concerning the treatment of capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Asset Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund would likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree, and
the Certificateholders will agree by their purchase of Certificates, to treat
the Trust Fund as a partnership for purposes of federal and state income tax,
franchise tax and any other tax measured in whole or in part by income, with the
assets of the partnership being the assets held by the Trust Fund, the partners
of the partnership being the Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, the Trust Fund and the Master
Servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income
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payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Company. Based on the economic arrangement of the parties, this
approach for allocating Trust Fund income should be permissible under applicable
treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis
and Certificateholders may become liable for taxes on Trust Fund income even if
they have not received cash from the Trust Fund to pay such taxes. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. Pursuant to formal Treasury regulations issued May 8, 1997
under section 708 of the Code, if such a termination occurs, the Trust Fund (the
"old partnership") would be deemed to contribute its assets to a new partnership
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale
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or other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or
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before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust Fund with the information described above may be
subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued new regulations (the "New Regulations") which make certain modifications
to the withholding, backup withholding and information reporting rules described
above. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
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TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates will
be treated as indebtedness for federal income tax purposes, then based on the
application of existing law to the facts as set forth in the Trust Agreement and
other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ("Tax Counsel"), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related Trust
Agreement their intent that, for applicable tax purposes, the Certificates will
be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as "unconditionally payable" under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership
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(including a publicly traded partnership treated as a corporation), or an
association taxable as a corporation. Since Tax Counsel will advise that the
Certificates will be treated as indebtedness in the hands of the
Certificateholders for U.S. federal income tax purposes and that the entity
constituted by the Trust will not be a publicly traded partnership treated as a
corporation or an association taxable as a corporation, the Depositor will not
attempt to comply with U.S. federal income tax reporting requirements applicable
to partnerships or corporations as such requirements would apply if the
Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
portion of an entity) that is a "taxable mortgage pool" will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that all
of the provisions of the Trust Agreement, as in effect on the date of issuance,
will be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under Section
7701(i) of the Code because only one class of indebtedness secured by the
Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Trust Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United sates and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
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If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not to subject to backup withholding. Should a non-exempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
G. NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
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Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include:
(i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide
for interest at a fixed rate, a qualifying variable rate, or a
qualifying interest-only ("IO") type rate,
(iii) foreclosure property,
(iv) certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required
to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
(vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or
by any person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if:
(i) it is designated as a regular interest,
(ii) it has a stated maturity no greater than thirty years,
(iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount,
(v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
(vi) if it pays interest, such interest is payable at either
(a) a fixed rate with respect to the principal amount of the regular
interest or
(b) a permissible variable rate with respect to such principal
amount.
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Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates --Variable Rate REMIC Regulation
Certificate.
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Material Federal Income Tax Consequences--FASIT
Securities--Tax Treatment of FASIT Regular Securities --Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" "--Original Issue Discount and Premium" and "--Market
Discount" and "--Premium" above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and Delinquencies of the
underlying Assets, the holder of such Security should be allowed to deduct the
loss sustained (or alternatively be able to report a lesser amount of income).
See "Material Federal Income Tax Consequences --REMICs--Taxation of Owners of
REMIC Regular Certificates", "--Effects of Default and Delinquencies" and
"--Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution
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taxed as a "domestic building and loan association" will represent qualifying
assets for purposes of the qualification requirements set forth in Code Section
7701(a)(19) to the same extent that REMIC Securities would be so considered. See
"Material Federal Income Tax Consequences--REMICs." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular Federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "Material Federal Income Tax Consequences--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
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Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
impose certain restrictions on employee benefit plans, individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which those plans, accounts or arrangements are invested
(collectively, "Plans"), and on persons who are parties in interest or
disqualified persons ("parties in interest") with respect to such Plans. Certain
employee benefit plans, such as governmental plans and church plans (if no
election has been made under Section 410(d) of the Code), are not subject to the
restrictions of ERISA and Section 4975 of the Code, and assets of such plans may
be invested in the Securities without regard to the considerations described
below, subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties in
interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other
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entities in which a Plan makes an "equity investment" will be deemed for
purposes of ERISA to be assets of the Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Assets and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master Servicer,
the Trustee, any insurer of the Assets and other persons, in providing services
with respect to the assets of the Trust Fund, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory, regulatory or
administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own at
least 25% of the value of any class of equity interest. "Benefit plan investors"
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
An exception applies if the interest described is treated as indebtedness
under applicable local law and has no substantial equity features. Generally, a
profits interest in a partnership, an undivided ownership interest in property
and a beneficial ownership interest in a trust are deemed to be "equity
interest" under the final regulation. If Notes of a particular Series were
deemed to be indebtedness under applicable local law without any substantial
equity features, an investing Plan's assets would include such Notes, but not,
by reason of such purchase, the underlying assets of the Trust Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets forth
the following general conditions which must be satisfied before a transaction
involving the acquisition, sale and holding of the Certificates or a transaction
in connection with the servicing, operation and management of the Trust may be
eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from any of Duff & Phelps Credit Rating Co., Fitch IBCA,
Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
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(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (including the Trustee, the
"Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Asset Seller pursuant to the sale
of the Assets to the Trust Fund represents not more than the fair market
value of such Assets; the sum of all payments made to and retained by the
Master Servicer represent not more than reasonable compensation for the
Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ("PTCE 83-1") for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not applicable to
manufactured housing contract pool investment trusts or multifamily mortgage
pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust & Savings Bank (decided December 13, 1993). In John Hancock, the Supreme
Court ruled that assets held in an insurance company's general account may be
deemed to be "plan assets" for ERISA purposes under certain circumstances.
Prospective purchasers should determine whether the decision affects their
ability to make purchases of the Securities. In particular, such an insurance
company should consider the exemptive relief granted by Labor for transactions
involving insurance company general accounts in Prohibited Transactions
Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized
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investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Alaska, Arkansas, Colorado, Connecticut,
Delaware, Florida, Georgia, Illinois, Kansas, Maryland, Michigan, Missouri,
Nebraska, New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah,
Virginia and West Virginia enacted legislation before the October 4, 1991 cutoff
established by SMMEA for such enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
mortgage related securities, in most cases by requiring the affected investors
to rely solely upon existing state law, and not SMMEA. Investors affected by
such legislation will be authorized to invest in SMMEA Certificates only to the
extent provided in such legislation. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist federal credit unions in making investment
decisions for mortgage related securities, and the NCUA's regulation "Investment
and Deposit Activities" (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement") setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject
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<PAGE>
to insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch or
any other Underwriter in connection with offers and sales related to market
making transactions.
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The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including certain
federal income tax consequences, will be passed upon for the Depositor by Brown
& Wood LLP, New York, New York. Certain matters with respect to Delaware law
will be passed upon for the Depositor by Richards, Layton & Finger, P.A.,
Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes of Offered Securities, the Depositor will provide or
cause to be provided without charge a copy of any of the documents and/or
reports incorporated herein by reference, in each case to the extent the
documents or reports relate to such Classes of Offered Securities, other than
the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, telephone number (212) 449-0357. The Depositor
has determined that its financial statements are not material to the offering of
any Offered Securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
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Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, securityholders might suffer a lower than anticipated yield, and,
in addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
1986 Act.....................................................................................................64, 68
Accrual Securities...............................................................................................19
Accrued Security Interest........................................................................................21
adjusted issue price.............................................................................................79
Agreement........................................................................................................29
Amortizable Bond Premium Regulations.........................................................................61, 73
an accrual period................................................................................................70
Applicable Amount................................................................................................78
ARM Loans....................................................................................................11, 64
Asset Seller......................................................................................................9
Assets............................................................................................................9
balloon loans.....................................................................................................7
Book-Entry Securities............................................................................................19
Buydown Mortgage Loans...........................................................................................17
Buydown Period...................................................................................................17
Cash Flow Agreement..............................................................................................14
Cede.............................................................................................................26
CEDEL............................................................................................................26
CEDEL Participants...............................................................................................26
Closing Date.....................................................................................................69
Code.........................................................................................................59, 95
Collection Account...............................................................................................32
Cooperative..................................................................................................27, 51
Cooperative Loans................................................................................................51
Cooperatives......................................................................................................9
covered trust.....................................................................................................6
Covered Trust....................................................................................................47
CPR..............................................................................................................16
Credit Support...................................................................................................14
Crime Control Act................................................................................................59
Deferred Interest................................................................................................66
Definitive Securities........................................................................................19, 28
Depositaries.....................................................................................................27
Depositor.........................................................................................................9
Determination Date...............................................................................................20
disqualified organization........................................................................................81
DTC..............................................................................................................26
Due Period.......................................................................................................20
Eligible Corporations............................................................................................93
ERISA............................................................................................................95
Euroclear........................................................................................................27
Euroclear Operator...............................................................................................27
Euroclear Participants...........................................................................................27
excess servicing.................................................................................................63
Exemption........................................................................................................96
FDIC.........................................................................................................32, 98
FHLMC............................................................................................................40
foreign person...................................................................................................84
Government Securities.............................................................................................9
Home Equity Loans................................................................................................11
Home Improvement Contracts.......................................................................................11
Indenture....................................................................................................19, 29
Indenture Trustee................................................................................................29
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Indirect Participants............................................................................................26
Insurance Proceeds...............................................................................................33
IO ..............................................................................................................92
L/C Bank.........................................................................................................48
Labor............................................................................................................95
Legislative History..............................................................................................65
Loan-to-Value Ratio..............................................................................................10
Master REMIC.....................................................................................................68
MBS...............................................................................................................9
MBS Agreement....................................................................................................12
MBS Issuer.......................................................................................................12
MBS Servicer.....................................................................................................12
MBS Trustee......................................................................................................12
Merrill Lynch....................................................................................................99
Model Law........................................................................................................98
Mortgage Assets...................................................................................................9
Mortgage Loan Group..............................................................................................19
Mortgage Loans....................................................................................................9
Mortgage Notes...................................................................................................10
Mortgage Rate....................................................................................................11
Mortgages........................................................................................................10
NCUA.............................................................................................................98
new partnership..................................................................................................86
New Regulations......................................................................................67, 76, 88, 91
Nonrecoverable Advance...........................................................................................23
OID..............................................................................................................61
OID Regulations..................................................................................................61
old partnership..................................................................................................86
Originator.......................................................................................................10
OTS..............................................................................................................98
Participants.................................................................................................26, 28
parties in interest..............................................................................................95
pass-through entity..............................................................................................82
Pass-Through Rate................................................................................................21
Payment Lag Certificates.........................................................................................74
Permitted Investments............................................................................................32
phantom income...................................................................................................76
Plans............................................................................................................95
Policy Statement.................................................................................................98
Pooling and Servicing Agreement..................................................................................28
Pre-Funded Amount................................................................................................13
pre-issuance accrued interest....................................................................................75
Prepayment Assumption............................................................................................65
Prohibited Transactions Tax......................................................................................80
PTCE 83-1........................................................................................................97
Record Date......................................................................................................20
Refinance Loans..................................................................................................10
Related Proceeds.................................................................................................23
Relief Act.......................................................................................................58
REMIC Certificates...............................................................................................67
REMIC Regular Certificateholders.................................................................................68
REMIC Regulations................................................................................................59
REMIC Residual Certificateholder.................................................................................76
REMIC Residual Certificates......................................................................................67
Restricted Group.................................................................................................97
Retained Interest................................................................................................39
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
RICO.............................................................................................................58
Security Balance.................................................................................................22
Security Owners..................................................................................................26
Senior Securities................................................................................................19
Servicing Agreement..............................................................................................29
Servicing Standard...............................................................................................36
Short-Term Note..................................................................................................84
Single Family Mortgage Loan.......................................................................................9
Single Family Property............................................................................................9
SMMEA............................................................................................................97
SMMEA Securities.................................................................................................97
SPA..............................................................................................................16
Stripped ARM Obligations.........................................................................................66
Stripped Bond Certificates.......................................................................................63
Stripped Coupon Certificates.....................................................................................63
Stripped Interest Securities.....................................................................................19
Stripped Principal Securities....................................................................................19
Subordinate Securities...........................................................................................19
Subsequent Assets................................................................................................13
Sub-Servicer.....................................................................................................36
Sub-Servicing Agreement..........................................................................................36
Subsidiary REMIC.................................................................................................68
Super-Premium Certificates.......................................................................................70
Tax Counsel......................................................................................................89
Terms and Conditions.............................................................................................27
Title V..........................................................................................................57
Title VIII.......................................................................................................58
Trust Agreement..................................................................................................29
U.S. Person......................................................................................................59
UCC..............................................................................................................26
Underlying MBS................................................................................................9, 12
Underlying Mortgage Loans.........................................................................................9
Value............................................................................................................10
Voting Rights....................................................................................................42
Warranting Party.................................................................................................31
Whole Loans.......................................................................................................9
</TABLE>
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[LOGO]
$176,390,000
(APPROXIMATE)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
CREDIT-BASED ASSET SERVICING AND
SECURITIZATION LLC
SELLER
LITTON LOAN SERVICING LP
SERVICER
C-BASS MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-CB1
---------------
PROSPECTUS SUPPLEMENT
---------------
MERRILL LYNCH & CO.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
We have not authorized anyone to provide you with different information.
We are not offering the C-BASS Mortgage Loan Asset-Backed Certificates,
Series 2000-CB1 in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the C-BASS Mortgage Loan Asset-Backed Certificates, Series
2000-CB1 and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the C-BASS Mortgage Loan Asset-Backed
Certificates, Series 2000-CB1 will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this
prospectus supplement.
February 28, 2000
