PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 27, 2000)
$632,396,000
MLMI Resecuritization Pass-Through Certificates
Series 2000-WM1
------------------------
Merrill Lynch Mortgage Investors, Inc.
Depositor
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Initial
Certificate Pass-Through
Class Balance Rate
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A-1 $474,297,000 *
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A-2 $158,099,000 6.68%
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Only the two classes of certificates identified above are being offered by this
prospectus supplement and the accompanying prospectus.
The Certificates
The certificates represent interests in a trust consisting of a pool of
residential mortgage-backed securities. The pooled securities are listed in
Appendix I to this prospectus supplement and are described in the disclosure
documents described in such Appendix I and attached to this prospectus
supplement in CD-ROM format. Hard copies of such disclosure documents will be
available upon request to the underwriter.
Payments on the Certificates
All of the pooled securities included in the trust will make payments of
principal and interest on the 25th day of each month or, if such day is not a
business day, on the next business day. The trustee will make distributions on
the certificates two business days after such business day, beginning in
November 2000.
--------
* The pass-through rate for the Class A-1 Certificates will equal LIBOR (as
defined herein) plus 0.03%.
------------------------
Merrill Lynch & Co.
------------------------
Wachovia Securities, Inc. Utendahl Capital Partners, L.P.
October 31, 2000
<PAGE>
Limited Source of Payments
You will receive payments on the certificates only from payments received on the
pooled securities included in the trust or, upon a mandatory liquidation event
or early liquidation event, proceeds from the liquidation of the pooled
securities, as further described in this prospectus supplement. No entity has
any obligation to make payments on the certificates from its own funds. None of
the certificates, the pooled securities included in the trust or the underlying
mortgage loans is insured or guaranteed by any governmental agency or
instrumentality.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Delivery of the offered certificates will be made in book-entry form through the
facilities of The Depository Trust Company, Clearstream and the Euroclear System
on or about November 2, 2000.
Consider carefully the risk factors beginning on page S-11 in this prospectus
supplement and on page 3 in the prospectus.
The depositor incurred expenses of approximately $585,000 in connection with
issuing the certificates. The underwriter will sell the offered certificates
from time to time in negotiated transactions, at varying prices to be determined
at the time of sale.
The certificates represent obligations of the trust only and do not represent an
interest in or obligation of Merrill Lynch Mortgage Investors, Inc. or any of
its affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
<PAGE>
Important notice about information presented in this prospectus supplement
and the accompanying prospectus
We tell you about the certificates in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to the certificates; and
o this prospectus supplement which describes the specific terms of
the certificates.
If the description of the certificates in this prospectus supplement
differs from the description contained in the prospectus, you should rely on the
information in this prospectus supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions can be found.
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-34 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 103 in the
accompanying prospectus.
You should purchase the certificates only if you have read this prospectus
supplement, including the disclosure documents listed in Appendix I that are
attached to this prospectus supplement in CD-ROM format and form a part of this
prospectus supplement, and the accompanying prospectus.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
SUMMARY...........................................S-4 APPENDIX I.......................................I-1
RISK FACTORS.....................................S-11 APPENDIX II.....................................II-1
THE TRUST........................................S-14 APPENDIX III...................................III-1
DESCRIPTION OF THE POOLED
SECURITIES....................................S-14
DESCRIPTION OF THE CERTIFICATES..................S-15
General.......................................S-15
Book-Entry Registration and Definitive
Certificates................................S-16
Accrual of Interest...........................S-19
Principal Distributions.......................S-19
Available Funds...............................S-19
Priority of Distributions.....................S-20
Mandatory Liquidation.........................S-20
Early Liquidation Event.......................S-21
YIELD AND MATURITY
CONSIDERATIONS................................S-21
General.......................................S-21
General Structural Considerations Affecting
Yield.......................................S-22
Rate and Timing of Principal Payments.........S-23
Weighted Average Life Considerations..........S-24
Prepayment Speed Assumption and Modeling
Assumptions.................................S-24
Additional Information........................S-26
Final Scheduled Certificate Distribution
Dates.......................................S-26
POOLING AGREEMENT................................S-27
General.......................................S-27
The Trustee...................................S-27
Voting Rights.................................S-27
Reports to Certificateholders.................S-27
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........S-29
USE OF PROCEEDS..................................S-29
UNDERWRITING.....................................S-29
LEGAL MATTERS....................................S-30
RATINGS..........................................S-30
LEGAL INVESTMENT.................................S-30
ERISA CONSIDERATIONS.............................S-31
INDEX OF PRINCIPAL DEFINITIONS...................S-33
</TABLE>
S-3
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that may be
important to you. You should carefully read this entire prospectus supplement,
including the disclosure documents relating to the pooled securities that are
attached to this prospectus supplement in CD-ROM format, and the accompanying
prospectus before you decide to purchase a certificate. If capitalized terms are
not defined in this summary, they are defined in the prospectus.
Title of Series................... MLMI Resecuritization Pass-Through
Certificates, Series 2000-WM1.
The Certificates.................. The Class A-1, Class A-2, Class B and Class R
Certificates represent the entire ownership
interest in a trust fund comprised of the
pooled securities.
The certificates will be issued pursuant to a
pooling agreement between Merrill Lynch
Mortgage Investors, Inc., as depositor, and
Wells Fargo Bank Minnesota, National
Association, as trustee. The Class A-1 and
Class A-2 Certificates will be issued as
book-entry securities clearing through The
Depository Trust Company (in the United
States) or Clearstream or Euroclear (in
Europe). See "Description of the
Certificates--Book-Entry Registration and
Definitive Certificates" in this prospectus
supplement.
The Offered Certificates.......... The underwriter is offering to sell the Class
A-1 and Class A-2 Certificates. The Class B
and Class R Certificates are not being
offered for sale.
Depositor of the Pooled
Securities...................... 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.
The Pooled Securities............. On the Closing Date the depositor will enter
into a purchase and sale agreement (the
"Purchase and Sale Agreement") with
Washington Mutual Bank, a state chartered
savings bank organized under the laws of the
state of Washington ("Washington Mutual"),
dated as of the Cut-Off Date, which provides
for the purchase of the pooled securities in
exchange for cash and the Class B and the
Class R Certificates. Contemporaneously with
the execution of the Purchase and Sale
Agreement, the depositor will assign the
Purchase and Sale Agreement to the trustee,
in trust for the benefit of the holders of
the certificates. Immediately upon the
assignment of the Purchase and Sale Agreement
to the trustee, the trustee will, in
accordance with the terms of the pooling
agreement (a) (i) authenticate and deliver
the Class A-1 and A-2 Certificates to the
underwriter in exchange for the cash purchase
price thereof, (ii) authenticate the Class B
and Class R Certificates, and (iii) deliver
the cash proceeds of the sale of the Class
A-1 and Class A-2 Certificates together with
the Class B and Class R Certificates to
Washington Mutual; and (b) take delivery of
the pooled securities from Washington Mutual.
S-4
<PAGE>
The Class B and Class R Certificates are to
be retained by Washington Mutual.
The pooled securities to be included in the
trust fund are listed in Appendix I to this
prospectus supplement. As of the cut-off
date, the pooled securities had an aggregate
outstanding principal balance of
approximately $887,573,458. All of the pooled
securities are rated in the highest long term
investment rating category by one or more of
Standard & Poor's Rating Services, a division
of the McGraw-Hill Companies, Inc. ("S&P") ,
Moody's Investors Service, Inc. ("Moody's")
or Fitch, Inc.
The pooled securities represent 12 classes of
residential mortgage-backed securities
evidencing interests in 12 underlying trusts,
the assets of which are described in the
applicable disclosure document included in
the CD-ROM attached to this prospectus
supplement. No class of pooled securities
represents more than 10% of the total pooled
securities (based on the outstanding
principal balances thereof as of the Cut-Off
Date). No pooled securities from any issuer
represents more than 10% of the total pooled
securities (based on the outstanding
principal balances thereof as of the Cut-Off
Date). All of the pooled securities were (i)
publicly offered securities registered under
the Securities Act of 1933, as amended, (ii)
issued by entities unrelated to Washington
Mutual, the underwriter or the depositor and
(iii) acquired by Washington Mutual in the
secondary market.
The trustee will make distributions on the
certificates from payments received on the
pooled securities and from the proceeds
received upon disposition of the pooled
securities following the occurrence of a
Mandatory Liquidation Event or an Early
Liquidation Event.
Trustee and Paying Agent.......... Wells Fargo Bank Minnesota, National
Association.
Cut-off Date...................... October 25, 2000.
Closing Date...................... On or about November 2, 2000.
Certificate Distribution Date..... The certificate distribution date in each
month will be the second business day after
the Pooled Securities Distribution Date
occurring in such month, beginning in
November 2000. The "Pooled Securities
Distribution Date", which is the date in each
month on which distributions of interest and
principal are made on all of the pooled
securities, is the 25th day of each month or,
if such day is not a business day, the next
business day.
Record Date....................... For the Class A-1, Class A-2 and Class B
Certificates, the close of business on the
day immediately preceding the related
certificate distribution date.
S-5
<PAGE>
Final Scheduled Certificate
Distribution Dates.............. A-1 November 27, 2001
A-2 November 27, 2001
B November 27, 2001
Interest Accrual.................. Interest will accrue on the certificate
principal balance of each class of
certificates (other than the Class R
Certificate), at the applicable pass-through
rate described below during each Interest
Accrual Period.
Interest accrued on the Class A-1 and Class
A-2 Certificates during any Interest Accrual
Period will be distributable on the
certificate distribution date following such
Interest Accrual Period, in accordance with
the priority of payments described under
"Priority of Distributions" below. Interest
accrued on the Class B Certificates during
any Interest Accrual Period will be added to
the certificate principal balances of such
certificates on the related certificate
distribution date.
The pass-through rate for each Interest
Accrual Period for the Class A-1 Certificates
will equal the sum of LIBOR for such Interest
Accrual Period plus 0.03% per annum. During
the initial Interest Accrual Period, the
pass-through rate for the Class A-1
Certificates will be 6.65% per annum.
The pass-through rate for each Interest
Accrual Period for the Class A-2 Certificates
is 6.68% per annum and the pass-through rate
for each Interest Accrual Period for the
Class B Certificates is 6.5% per annum.
The "Interest Accrual Period" with respect to
the Class A-1 Certificates for any
certificate distribution date means the
period beginning on and including the
immediately preceding certificate
distribution date and ending on and including
the calendar day immediately preceding such
certificate distribution date; provided that
the initial Interest Accrual Period will be
the period from the date of initial issuance
of the certificates to but excluding November
29, 2000. Interest on the Class A-1
Certificates will be calculated on the basis
of the number of actual days elapsed during
such Interest Accrual Period over a 360-day
year.
The "Interest Accrual Period" with respect to
the Class A-2 and Class B Certificates for
any certificate distribution date means the
period beginning on the 27th day of the month
preceding the distribution date and ending on
and including the 26th day of the month in
which such distribution date occurs. Interest
on the Class A-2 and Class B Certificates
will be calculated on the basis of a 360 day
year consisting of twelve 30 day months.
The actual amount of interest distributed to
certificateholders on each certificate
distribution date is subject to the priority
of distributions discussed in this prospectus
supplement.
LIBOR Determination............... LIBOR for each Interest Accrual Period of the
Class A-1 Certificates will be determined by
the trustee on the second
S-6
<PAGE>
business day preceding the beginning of such
Interest Accrual Period. "LIBOR" will be
equal to the rate for deposits in United
States dollars for a one-month period which
appears in the Telerate Page 3750 as of 11:00
a.m., London time, on the date that LIBOR is
determined and if such rate does not appear
on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates
at which deposits in United States dollars
are offered by certain reference banks
selected by the trustee at approximately
11:00 a.m., London time, on that day to banks
in the London interbank market for a
one-month period. If fewer than two
quotations are provided as requested, the
rate for that day will be the arithmetic mean
of the rates quoted by major banks in New
York City, selected by the trustee, at
approximately 11:00 a.m., New York City time,
on that day for loans in United States
dollars to leading European banks for a
one-month period. If on any LIBOR
determination date, the trustee is unable to
determine one-month LIBOR, LIBOR for such
Interest Accrual Period shall be LIBOR as
determined on the previous LIBOR
determination date; provided, however, that
LIBOR for an Interest Accrual Period shall
not be based on LIBOR for the previous
Interest Accrual Period for three consecutive
Interest Accrual Periods. If LIBOR for an
Interest Accrual Period would be based on
LIBOR for the previous Interest Accrual
Period for the second consecutive Interest
Accrual Period, the trustee will select a
comparable alternative index (over which the
trustee has no control) used for determining
LIBOR that is calculated and published (or
otherwise made available) by an independent
third party.
"Telerate Page 3750" means the display page
currently so designated on the Dow Jones
Telerate Service (or such other page as may
replace the page on that service for the
purpose of displaying comparable rates or
prices) and "Reference Banks" means leading
banks selected by the trustee and engaged in
transactions in Eurodollar deposits in the
international Eurocurrency market.
Principal Distributions........... On each certificate distribution date,
distributions in reduction of the certificate
principal balance of the certificates will be
made in accordance with the "Priority of
Distributions" specified below in this
Summary. The aggregate amount distributable
in reduction of the certificate principal
balances of the certificates on each
certificate distribution date will equal the
Principal Distribution Amount for such date,
subject to Available Funds being sufficient
therefor. The "Principal Distribution Amount"
for any certificate distribution date will
equal the amount of principal distributions
received on the pooled securities since the
preceding certificate distribution date.
Priority of Distributions......... On each certificate distribution date, the
trustee will apply amounts in the certificate
account established under the Pooling
Agreement (as defined herein) representing
Available Funds to make the following
payments in the following order of priority,
in each case to the extent of remaining
Available Funds:
S-7
<PAGE>
first, interest accrued on the Class A-1
and Class A-2 Certificates, during the
related Interest Accrual Period, pro rata,
plus any unpaid interest on the Class A-1
and Class A-2 Certificates for any prior
certificate distribution date;
second, principal of the Class A-2
Certificates until the class principal
balance thereof has been reduced to the
amount specified for such certificate
distribution date on Appendix III to this
prospectus supplement, but in any event
not in excess of the Principal
Distribution Amount for such certificate
distribution date;
third, principal of the Class A-1
Certificates, up to the Principal
Distribution Amount remaining after the
distribution made in the preceding clause
"second", until the class principal
balance of the Class A-1 Certificates has
been reduced to zero;
fourth, principal of the Class A-2
Certificates, up to the Principal
Distribution Amount remaining after the
distributions made in the preceding
clauses "second" and "third", until the
class principal balance of the Class A-2
Certificates has been reduced to zero; and
fifth, principal of the Class B
Certificates, up to the Principal
Distribution Amount remaining after the
distributions made in the preceding
clauses "second", "third" and "fourth",
until the class principal balance of the
Class B Certificates has been reduced to
zero.
Any Available Funds remaining after payment
of the amounts specified in clauses "first"
through "fifth" above will be paid to the
owner of the Class R Certificate.
Mark-to-Market.................... The trustee will calculate the individual and
aggregate market value of the pooled
securities on a daily basis. The trustee will
value the pooled securities by obtaining
quotes from the Merrill Lynch Pricing Service
or such other pricing service selected by the
trustee and approved by the rating agencies.
Mandatory Liquidation............. On November 20, 2001, the trustee will
conduct, or cause to be conducted through an
auction advisor, a market auction to sell all
of the pooled securities (a "Mandatory
Liquidation Event"). The proceeds from such
sale will be applied to the payment, pro
rata, of interest accrued on the Class A-1
and Class A-2 Certificates and to the
reduction, first, of the class principal
balance of the Class A-1 and Class A-2
Certificates, pro rata, and second, of the
class principal balance of the Class B
Certificates, in each case, until reduced to
zero. Any excess funds available after such
application will be distributed to the owner
of the Class R Certificate. See "Description
of the Certificates--Mandatory Liquidation"
in this prospectus supplement.
Early Liquidation Events.......... An "Early Liquidation Event" means any one of
the following events:
S-8
<PAGE>
(a) the market value of the pooled
securities shall, at any time, be less
than the greater of (i) 116% of the sum of
the class principal balances of the
outstanding Class A-1 and Class A-2
Certificates and (ii) the sum of the class
principal balances of the Class A-1 and
Class A-2 Certificates and 108.7% of the
class principal balance of the Class B
Certificates;
(b) LIBOR for any Interest Accrual Period
exceeds 8.91% per annum; and
(c) The trust or the trust fund shall be
required to register under the Investment
Company Act of 1940, as amended.
Upon the occurrence of an Early Liquidation
Event the trustee will sell through a market
auction, or cause to be sold through an
auction advisor, all of the pooled securities
in accordance with specified procedures. The
proceeds from such sale will be applied to
the payment, pro rata, of interest accrued on
the Class A-1 and Class A-2 Certificates and
to the reduction, first, of the class
principal balance of the Class A-1 and Class
A-2 Certificates, pro rata, and second, of
the class principal balance of the Class B
Certificates, in each case, until reduced to
zero. Any excess funds available after such
application will be distributed to the owner
of the Class R Certificate. See "Description
of the Certificates--Early Liquidation Event"
in this prospectus supplement.
Certain Federal Income Tax
Consequences................... The trustee will elect to treat the trust
fund as a real estate mortgage investment
conduit, or REMIC, for federal income tax
purposes. The offered certificates will
represent ownership of REMIC regular
interests. For federal income tax purposes,
the offered certificates will be treated as
ownership of debt. certificateholders must
include in income all interest on these
certificates in accordance with the accrual
method of accounting, regardless of the
certificateholders' usual methods of
accounting.
For further information regarding the federal
income tax consequences of investing in the
offered certificates, see "Material Federal
Income Tax Consequences" in this prospectus
supplement and in the prospectus.
Ratings........................... It is a condition to the issuance of the
offered certificates that the Class A-1
Certificates be rated in the highest
short-term investment rating category and
that the Class A-2 Certificates be rated in
the highest long-term investment rating
category by each of S&P's and Moody's.
S-9
<PAGE>
The ratings on the offered certificates
indicate the likelihood that you will receive
all funds to which you are entitled by the
terms of the certificates. The rating agency
that issues the rating reviews the nature and
credit quality of the trust assets, the
soundness of the structure which the
depositor has created to allow the payments
on the pooled securities to flow to the
holders of the certificates and the extent to
which the initial market value of the pooled
securities exceeds the aggregate certificate
principal balance of the offered
certificates, as well as the events that
constitute Early Liquidation Events. A rating
is not a recommendation to buy, sell or hold
securities and the rating agency can revise
or withdraw it at any time. A rating does not
address the frequency of prepayments on the
underlying mortgage loans or the effect of
such prepayments on your yield. See "Yield on
the Certificates" and "Ratings" in this
prospectus supplement and "Yield
Considerations" in the prospectus.
Legal Investment.................. You should consult with your lawyer to see if
you are permitted to buy the offered
certificates since the legal investment rules
vary depending on what kind of entity you are
and whether your investment decisions are
subject to government regulations. The
certificates will be "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 so
long as they are rated in one of the two
highest rating categories by at least one
rating agency. Both the Class A-1 and Class
A-2 Certificates will be eligible securities
for purchase by money market funds under
paragraph (a)(10) of Rule 2a-7 under the
Investment Company Act of 1940, as amended.
See "Legal Investment" in this prospectus
supplement and in the prospectus.
ERISA Considerations.............. The Class A-1 and Class A-2 Certificates are
generally eligible for purchase by an
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, so long as certain conditions
are met. Any fiduciary of such a plan
considering whether to purchase offered
certificates on behalf of a plan should
consult with its counsel regarding the
applicability of the provisions of ERISA and
the Code. See "ERISA Considerations" in this
prospectus supplement and in the prospectus.
S-10
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and in the prospectus, including the disclosure documents in the
attached CD-ROM, you should carefully consider the following risk factors before
deciding to purchase a certificate.
Reselling certificates may be difficult.
The underwriter may assist in resales of the certificates, but it is
under no obligation to do so. A secondary market for the certificates may not
develop. If a secondary market does develop, it may not continue or it may not
be sufficiently liquid to allow you to resell your certificates. 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
means that you may not be able to find another investor to buy your
certificates, which can have a severe adverse effect on the market value of your
certificates.
The ratings of the offered certificates reflect the likelihood that each class
of offered certificates will receive timely distributions of all interest and
ultimate distribution of all principal by the Final Scheduled Certificate
Distribution Date.
The ratings of the offered certificates by S&P and Moody's
(collectively, the "Rating Agencies") are based on their assessments of a
variety of factors, including the following:
o the expected payments of principal of and interest on the pooled
securities, which in turn depends on the extent to which (and the
speed with which) payments are made on the underlying mortgage
loans and the allocation of those payments to each class of the
pooled securities; and
o the extent to which the market value of the pooled securities is
likely to decline prior to the Final Scheduled Certificate
Distribution Date to an amount that is less than the greater of
(i) 116% of the sum of the class principal balances of the
outstanding Class A-1 and Class A-2 Certificates and (ii) the sum
of the class principal balances of the Class A-1 and Class A-2
Certificates and 108.7% of the class principal balance of the
outstanding Class B Certificates.
Uncertainty of payments on the underlying mortgage loans and the pooled
securities may affect the yield on your certificates.
The timing and amount of interest and principal distributions on each
class of certificates is not fixed and may be affected by any one or more of the
following factors:
o the characteristics of and the amount, rate and timing of
principal and interest payments on the pooled securities, which in
turn will be affected by the amount, rate and timing of principal
and interest payments, including prepayments, repurchases,
defaults and liquidations on the underlying mortgage loans and the
amount and timing of mortgagor defaults resulting in realized
losses;
o the allocation of such payments and losses among the various
classes of securities of each underlying series;
o the repurchase of one or more of the pooled securities by
Washington Mutual as a result of a representation contained in the
Purchase and Sale Agreement as to such pooled security or pooled
securities being materially breached;
S-11
<PAGE>
o the occurrence of any optional terminations of the underlying
trusts; and
o a decrease in the market value of the pooled securities may cause
an early termination of the trust, resulting in an adverse effect
on the weighted average life of your certificates or on the yield
on your certificates, as described in the next section below.
If the actual characteristics of the underlying mortgage loans or the
pooled securities differ from what you assumed, and if the pooled securities are
paid before the Final Scheduled Certificate Distribution Date, it may adversely
affect the weighted average lives and yields that you anticipate on your
investment. To the effect that yield is affected by the timing of payments on
the offered certificates it will also depend, in the case of an investment in
the Class A-2 Certificates, on whether you purchased your certificates at a
premium or at a discount. In addition, any repayment of principal on your
offered certificates exposes you to the risk that you may not be able to
reinvest the amount that you receive at a rate that is comparable to the
interest rate on your certificates, in the case of the Class A-2 Certificates,
or at a spread that is comparable to the spread on your certificates, in the
case of the Class A-1 Certificates.
A decrease in the market value of the pooled securities may cause an early
termination of the trust, resulting in an adverse effect on the weighted average
life of your certificates or on the yield on your certificates.
The weighted average lives that you anticipate on your investment may
be adversely affected if the market value of the pooled securities falls below
the greater of (i) 116% of the sum of the class principal balances of the
outstanding Class A-1 and Class A-2 Certificates and (ii) the sum of the class
principal balances of the Class A-1 and Class A-2 Certificates and 108.7% of the
class principal balance of the outstanding Class B Certificates prior to the
Final Scheduled Distribution Date. A Mandatory Termination Event will
automatically occur when the market value of the pooled securities reaches that
threshold, and your certificates will be redeemed. Such redemption could also
have an adverse effect on the yield to maturity of your certificates,
particularly in the case of the Class A-2 Certificates and depending on whether
you have purchased your certificates at a discount or a premium.
Interest shortfalls allocated to the pooled securities may reduce the amount of
interest distributable on your certificates.
Prepayments on the underlying mortgage loans, to the extent not covered
by compensating interest, may result in a shortfall in the funds available to
pay interest on the pooled securities. In addition, reductions in interest
collections on the underlying mortgage loans due to operation of the Soldiers'
and Sailors' Civil Relief Act of 1940 as well as interest on loans subject to
special hazard losses, fraud losses, debt service reductions, deficient
valuations and the like, not otherwise covered by any subordination that may be
available to the related pooled security, may result in a reduction in the
amount of interest payable on the pooled securities. These shortfalls may result
in a reduction in the amount of interest that is payable on your certificates if
the magnitude of the shortfall was greater than the amount covered by the
overcollateralization of the offered certificates.
Delays in payments on the pooled securities may cause delays in payments to you.
Only funds and information actually received by the trustee, as the
registered holder of the pooled securities, no later than the pooled security
distribution date, will be passed through to the certificateholders on the
related certificate distribution date. To the extent funds or information have
not been received by the applicable pooled security distribution date, funds
will not be passed through to the certificateholders until the certificate
distribution date following their receipt by the trustee, and no additional
interest will be paid thereon. The certificates are not entitled to receive
reinvestment income with respect to any pooled securities as to which there is a
payment delay or otherwise.
All of the pooled securities are held through the book-entry facilities
of DTC. Some delay in receipt of payments on these book-entry pooled securities
might be experienced since such payments first will be forwarded to Cede & Co.,
as nominee for DTC. DTC will then forward such payments to its participants,
including the trustee, which thereafter will credit them to certificateholders.
Any delay in receipt of distributions by certificateholders will have an adverse
effect on the yields to certificateholders.
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Concentrations of underlying trustees and servicers may affect the timing of
payments on your certificates.
A number of different underlying servicers service the underlying
mortgage loans and a number of different underlying trustees act as trustee for
the underlying trusts. The impact to you of any one underlying trustee or
underlying servicer defaulting on its obligations increases as the concentration
of the underlying trustee or underlying servicer increases.
Any transfers of servicing may result in higher delinquencies on the underlying
mortgage loans.
From time to time the underlying servicer for any of the underlying
mortgage loans may change. Any transfers of servicing may have the effect of
temporarily interrupting the servicing of the related underlying mortgage loans
which may result in higher delinquencies and higher realized losses.
Distributions on the pooled securities (including proceeds of liquidation) are
the sole source of payments on the certificates.
The certificates do not evidence an obligation of or an interest in the
depositor, the trustee, the underwriter or any of their affiliates and the
underlying mortgage loans, the pooled securities and the certificates are not
insured or guaranteed by these entities, any governmental agency or any private
insurer. Payments on the certificates will be made solely from distributions
received on the pooled securities and, in the case of an Early Liquidation Event
or a Mandatory Liquidation Event, proceeds of liquidation thereof. Consequently,
if distributions on the pooled securities are insufficient or otherwise
unavailable to make all payments required on the certificates and the market
value of the pooled securities is insufficient to pay in full all amounts owing
on your certificates in accordance with the priority of payments, you will have
no recourse to the depositor, the trustee, the underwriter or any of their
affiliates.
Interest rate mismatches between the pooled securities and the offered
certificates may reduce amounts available to pay you.
The Class A-1 Certificates accrue interest at a floating rate of
interest equal to LIBOR plus 0.03%, which may fluctuate unpredictably due to
market conditions. The Class A-2 Certificates bear interest at a fixed rate.
100% of the pooled securities accrue interest at a fixed rate.
The inclusion in the pool of fixed rate securities creates a risk of a
mismatch between the amounts accrued on the fixed rate pooled securities and the
interest accrual on the Class A-1 Certificates.
As a result of any such mismatch in the rates at which interest accrues
on the pooled securities and the rate at which interest accrues on any class of
the offered certificates the pooled securities may not generate sufficient
interest income to pay interest accrued on any class of certificates. In
particular, interest income on the pooled securities may not be sufficient to
pay interest accrued on the Class A-1 Certificates if interest rates rise or if
differences in timing and periodicity of interest accruals create an interest
accrual shortfall. However, the risk of such a shortfall is mitigated by the
fact that (i) the Final Scheduled Certificate Distribution Date is a relatively
short time (thirteen months) following the closing date, (ii) the level of
overcollateralizaton at which a Mandatory Liquidation Event is triggered has
been established to provide the offered certificate with some cushion against
the effect of such a mismatch and (iii) an Early Liquidation Event occurs if
LIBOR exceeds 8.91% per annum.
Asset Concentration.
Certain of the underlying pooled securities constitute a relatively
larger percentage of the aggregate principal balance of the pooled securities.
Because these securities constitute a significant portion of the pool underlying
the Class A-1 and Class A-2 Certificates, a significantly negative change in the
performance of any of these pooled securities could have a material adverse
effect on the investment experience of investors in the Class A-1 or Class A-2
Certificates. In addition, a significantly negative change in the performance of
any of such pooled securities could have a negative effect on the value of such
pooled security and could result in an Early Liquidation
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Event. Accordingly, investors are advised to evaluate the specific terms of each
such pooled security as described in the disclosure document relating to such
security in Appendix I.
THE TRUST
The primary assets of the trust will consist of the rights of the
trustee as the assignee of the Purchase and Sale Agreement and the pooled
securities listed on Appendix I. The pooled securities consist of 12 classes of
residential mortgage-backed securities with an aggregate principal balance of
approximately $887,573,458 as of the cut-off date (after giving effect to the
reduction in the principal balance of the pooled securities on that date).
On the Closing Date the depositor will enter into the Purchase and Sale
Agreement with Washington Mutual, which provides for the purchase of the pooled
securities in exchange for cash and the Class B and the Class R Certificates.
Contemporaneously with the execution of the Purchase and Sale Agreement, the
depositor will assign the Purchase and Sale Agreement to the trustee, in trust
for the benefit of the holders of the certificates. Immediately upon the
assignment of the Purchase and Sale Agreement to the trustee, the trustee will,
in accordance with the terms of the pooling agreement (a) (i) authenticate and
deliver the Class A-1 and A-2 Certificates to the underwriter in exchange for
the cash purchase price thereof, (ii) authenticate the Class B and Class R
Certificates, and (iii) deliver the cash proceeds of the sale of the Class A-1
and Class A-2 Certificates together with the Class B and Class R Certificates to
Washington Mutual; and (b) take delivery of the pooled securities from
Washington Mutual. The Class B and Class R Certificates are to be retained by
Washington Mutual. Each pooled security will be identified in a schedule
appearing as an exhibit to the pooling agreement for the certificates which will
specify with respect to each pooled security, among other things, the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-Off Date (after giving effect to the reduction in the
principal balance of the pooled securities, if any, on the Cut-Off Date), the
pooled security interest rate and the current rating.
In addition, another asset of the trust will consist of the rights of
the trustee as assignee of the conditional asset purchase agreement, pursuant to
which the trustee, on behalf of the trust, will agree to sell and Washington
Mutual or one or more permitted assignees will agree to purchase the pooled
securities on November 20, 2001 at a price equal to the aggregate principal
balance of the Class A-1 and Class A-2 Certificates on November 20, 2001 plus
accrued and unpaid interest thereon, subject to the Trustee's obligation to sell
the pooled securities in accordance with the Mandatory Liquidation Event
procedures if the proceeds from the use of such procedures will exceed the
purchase price payable under the conditional asset purchase agreement.
DESCRIPTION OF THE POOLED SECURITIES
The trustee will acquire all of the pooled securities for inclusion in
the trust from Washington Mutual, pursuant to the Purchase and Sale Agreement.
The depositor will assign its rights in the Purchase and Sale Agreement
to the trustee for the ultimate benefit of the certificateholders pursuant to
the pooling agreement dated as of November 2, 2000 between the depositor and the
trustee (the "Pooling Agreement"). See "Description of the
Agreements--Assignment of Assets; Repurchases" in the prospectus.
In the Purchase and Sale Agreement, Washington Mutual will represent
and warrant regarding the pooled securities that it has good title to the pooled
securities and that they are free and clear of all encumbrances, in each case
immediately prior to their transfer to the trust and to certain other matters
relating to Washington Mutual and the pooled securities. Otherwise, Washington
Mutual's assignment of the pooled securities to the trustee will be without
recourse and Washington Mutual's obligations relating to the pooled securities
will be limited to the representations and warranties referred to in the
previous sentence. If Washington Mutual breaches any of these representations
and warranties with respect to any pooled security, Washington Mutual will be
obligated to either cure such breach in all material respects or repurchase that
pooled security at an amount equal to the pooled security principal balance plus
accrued and unpaid interest thereon up to but not including the date of the
repurchase.
Payments with respect to the certificates will be made from
distributions received on the pooled securities which evidence interests in 12
underlying trusts, the assets of which consist primarily of the related
underlying
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mortgage loans. Additionally, upon the occurrence of an Early Liquidation Event
or a Mandatory Liquidation, payments on the Certificates will be paid from the
proceeds of the sale of the pooled securities. The characteristics of the
underlying mortgage loans are described in the related pooled security
disclosure documents attached to this prospectus supplement in CD-ROM format.
Monthly distributions of principal and interest on all of the pooled
securities are made on the 25th day of each month, or if any such day is not a
business day, the following business day. All monthly distributions on each
pooled security distribution date after the Cut-Off Date will be paid to the
trustee for distribution on the Certificates as described in this prospectus
supplement. See "Description of the Certificates--Accrual of Interest" and
"Priority of Distributions" in this prospectus supplement.
The table in Appendix I attached to this prospectus supplement sets
forth the principal balance of each of the pooled securities as of the Cut-Off
Date (after giving effect to the reduction in the principal balance of the
pooled securities, if any, on the Cut-Off Date). The pooled securities represent
12 classes of residential mortgage-backed securities from 12 issuances of
mortgage-backed securities. No class of pooled securities represents more than
10% of the pooled securities (based on the outstanding principal balances
thereof as of the Cut-Off Date). No pooled securities from any issuer represents
more than 10% of the pooled securities (based on the outstanding principal
balances thereof as of the Cut-Off Date). All of the pooled securities were (i)
publicly offered securities registered under the Securities Act of 1933, as
amended, (ii) issued by entities unrelated to Washington Mutual, the underwriter
or the depositor and (iii) acquired by Washington Mutual in the secondary
market. For a description of each pooled security, see the related pooled
security disclosure document attached to this prospectus supplement in CD-ROM
format. It should be understood, however, that neither Washington Mutual nor the
depositor prepared, is able to verify or can be responsible for the information
contained in the pooled security disclosure documents.
The underlying trustee for each underlying trust will furnish the
related securityholders, including the trustee, with monthly statements
containing information with respect to principal and interest distributions on
the related pooled securities and realized losses for the related underlying
trust and related underlying mortgage loans. Copies of such monthly statements
issued after the cut-off date will be available for inspection upon request to
the trustee.
DESCRIPTION OF THE CERTIFICATES
General
The certificates will consist of the Class A-1 and Class A-2
Certificates, which are being offered by this prospectus supplement and the
accompanying prospectus, and the Class B and Class R Certificates which will be
held by Washington Mutual and are not being offered for sale pursuant to this
prospectus supplement.
The trustee will issue the certificates pursuant to a Pooling Agreement
to be dated as of the Cut-Off Date between Merrill Lynch Mortgage Investors,
Inc., as depositor, and Wells Fargo Bank Minnesota, National Association, as
trustee. A form of the Pooling Agreement is filed as an exhibit to the
registration statement of which this prospectus supplement is a part. Reference
is made to the accompanying prospectus for important additional information
regarding the terms and conditions of the Pooling Agreement and the
certificates. It is a condition to the issuance of the offered certificates that
they receive the ratings specified under "Ratings" below.
The certificates will evidence all the beneficial ownership in a trust
established by the depositor into which the pooled securities will be deposited.
The class principal balance for any class of offered certificates will
equal the aggregate amount of distributions in reduction of certificate
principal balance to which the class is entitled, after giving effect to prior
distributions of principal to that class and any allocation of losses required
to be borne by that class.
The certificate principal balance for any certificate will be the
portion of the corresponding class principal balance represented by that
certificate. The aggregate initial certificate principal balance of the Class
A-1, Class A-2, Class B and Class R Certificates will be approximately equal to
the aggregate principal balance of the pooled
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securities as of the Cut-Off Date after giving effect to distributions thereon,
if any, on that date. The offered certificates will be issued in minimum
denominations equivalent to at least $25,000 initial certificate principal
balance each 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).
Book-Entry Registration and Definitive Certificates
The offered certificates will be issued, maintained and transferred on
the book-entry records of DTC and its Participants (as defined below). The
certificates will initially be represented by one or more global certificates
registered in the name of the nominee of DTC (together with any successor
clearing agency selected by the depositor, the "Clearing Agency"), except as
provided below. The depositor has been informed by DTC that DTC's nominee will
be Cede & Co. ("CEDE"). No Certificate Owner (as defined below) will be entitled
to receive a certificate representing such person's interest, except as set
forth below. Unless and until definitive certificates are issued under the
limited circumstances described below, all references to actions by
certificateholders with respect to the certificates refer to actions taken by
DTC upon instructions from its Participants, and all references to
distributions, notices, reports and statements to certificateholders with
respect to the certificates refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the offered certificates,
for distribution to Certificate Owners in accordance with DTC procedures.
Holders of certificates may hold their certificates through DTC (in the
United States) or Clearstream Banking, societe anonyme ("Clearstream"), or the
Euroclear System ("Euroclear") in Europe. Transfers within DTC, Clearstream or
Euroclear, as the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems.
Clearstream and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositories which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Clearstream
and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually, the "Depositary" and, collectively, the
"Depositaries"). Transfers between Participants will occur in accordance with
DTC rules. Transfers between Clearstream Participants and Euroclear Participants
(each as defined below) will occur in accordance with their respective rules and
operating procedures.
DTC advises that it is a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the UCC and a "clearing agency"
registered pursuant to the provisions of Section 17A of the 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 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").
Beneficial owners of the certificates ("Certificate Owners") or
prospective owners, as the case may be, that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in the certificates may do so only through Participants and
Indirect Participants. In addition, such Certificate Owners will receive all
distributions of principal and interest on the certificates from the trustee or
the applicable paying agent through DTC and its Participants. Under a book-entry
format, certificateholders may receive payments after the related certificate
distribution date because, while payments are required to be forwarded to CEDE,
as nominee for DTC on each such date, DTC will forward such payments to its
Participants which thereafter will be required to forward them to Indirect
Participants or Certificate Owners. The only "Certificateholder" (as such term
is used in the Pooling Agreement) will be CEDE, as nominee of DTC, and the
Certificate Owners will not be recognized by the trustee as "Certificateholders"
under the Pooling Agreement. Certificate Owners will be permitted to exercise
the rights of Certificate Owners under the Pooling Agreement only indirectly
through DTC and its Participants who in turn will exercise their rights though
DTC.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the certificates and is
required to receive and transmit distributions of principal of and interest on
the certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain other entities, the ability of a
Certificate Owner to pledge certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of
certificates, may be limited due to the lack of a physical certificate for the
certificates.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream Participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream Participant or Euroclear Participant to a Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the certificates, see "Global Clearance, Settlement and
Tax Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Appendix II to this prospectus supplement.
Clearstream advises that it is incorporated under the laws of
Luxembourg as a professional depositary. Clearstream holds securities for its
participants ("Clearstream Participants") and facilitates the clearance and
settlement of securities transactions by electronic book-entry transfers between
their accounts. Clearstream provides various services, including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream also deals with domestic
securities markets in several countries. As a professional depositary,
Clearstream is subject to regulation by the Luxembourg Monetary Institute.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Indirect access to Clearstream is available to other
institutions that clear through or maintain a custodial relationship with a
Clearstream Participant.
Euroclear advises that it was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services
including lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (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, and 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
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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 with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. 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.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
DTC has advised the depositor that it will take any action permitted to
be taken by a Certificateholder under the Agreement only at the direction of one
or more Participants to whose account with DTC the certificates are credited.
Clearstream or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to its Depositary's ability
to effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some certificates which
conflict with actions taken with respect to other certificates.
Certificates initially issued as book-entry certificates will be issued
as definitive certificates only if (i) DTC or the depositor advises the trustee
in writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the certificates and
the trustee is unable to locate a qualified successor or (ii) the depositor, at
its option, elects to terminate the book-entry system through DTC or (iii) if
holders of certificates evidencing not less than 51% of the Voting Rights advise
the trustee in writing that the continuation of a book-entry system through DTC
(or a successor thereto) to the exclusion of any physical certificates being
issued to Certificate Owners is no longer in the best interests of Certificate
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of definitive certificates for the certificates. Upon
surrender by DTC of the certificate or certificates representing such
certificates and instructions for registration, the trustee will issue
certificates in the form of definitive certificates under the Pooling Agreement
and the holders of definitive certificates will deal directly with the trustee
with respect to transfers, notices and distributions. In the event that
definitive certificates are issued or DTC ceases to be the clearing agency for
the certificates, the Pooling Agreement will provide that the applicable
Certificate Owners will be notified of that event.
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Accrual of Interest
Interest will accrue on the certificate principal balance of each class
of certificates (other than the Class R Certificate), at the applicable
pass-through rate described below during each Interest Accrual Period.
Interest accrued on the Class A-1 and Class A-2 Certificates during any
Interest Accrual Period will be distributable on the certificate distribution
date following such Interest Accrual Period, in accordance with the priority of
payments described under "Priority of Distributions" below. Interest accrued on
the Class B Certificates during any Interest Accrual Period will be added to the
certificate principal balances of such certificates on the related certificate
distribution date.
The pass-through rate for each Interest Accrual Period for the Class
A-1 Certificates will equal the sum of LIBOR for such Interest Accrual Period
plus 0.03% per annum. During the initial Interest Accrual Period, the
pass-through rate for the Class A-1 Certificates will be 6.65% per annum.
The pass-through rate for each Interest Accrual Period for the Class
A-2 Certificates is 6.68% and the pass-through rate for each Interest Accrual
Period for the Class B Certificates is 6.5% per annum.
The "Interest Accrual Period" with respect to the Class A-1
Certificates for any certificate distribution date means the period beginning on
and including the immediately preceding certificate distribution date and ending
on and including the calendar day immediately preceding such certificate
distribution date; provided that the initial Interest Accrual Period will be the
period from the date of initial issuance of the certificates to but excluding
November 29, 2000. Interest on the Class A-1 Certificates will be calculated on
the basis of the number of actual days elapsed during such Interest Accrual
Period over a 360-day year.
The "Interest Accrual Period" with respect to the Class A-2 and Class B
Certificates for any certificate distribution date means the period beginning on
the 27th day of the month preceding the distribution date and ending on and
including the 26th day of the month in which such distribution date occurs.
Interest on the Class A-2 and Class B Certificates will be calculated on the
basis of a 360 day year consisting of twelve 30 day months.
The actual amount of interest distributed to certificateholders on each
certificate distribution date is subject to the priority of distributions
discussed in this prospectus supplement.
Any portion of accrued interest on the Class A-1 and A-2 Certificates
remaining unpaid on any certificate distribution date will be paid on the
following certificate distribution date. No additional interest will accrue on
unpaid interest amounts.
Principal Distributions
On each certificate distribution date, the aggregate amount of
distributions in respect of principal of the certificates on each certificate
distribution date will equal the Principal Distribution Amount for such date,
assuming Available Funds are sufficient therefor. Distributions in respect of
reductions of the certificate principal balance of the certificates will be made
in accordance with the "Priority of Distributions" specified below.
Available Funds
On each certificate distribution date, the Available Funds held by the
trustee will be distributed by or on behalf of the trustee to the
certificateholders, as specified in this prospectus supplement.
The "Available Funds" for any certificate distribution date, as more
fully described in the Pooling Agreement, will equal the aggregate amount on
deposit in the certificate account (excluding any investment income thereon,
trustee fees, expense reimbursements and indemnity payments payable from the
trust fund in accordance with the Pooling Agreement and excluding any amounts
deposited in the certificate account in error) for which both the pooled
security distribution and the related pooled security distribution date
information have been received by the trustee as of the immediately preceding
pooled security distribution date.
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Interest earned on amounts on deposit in the certificate account are
excluded from Available Funds and will be paid to the holder of the Class R
Certificate on each certificate distribution date.
Priority of Distributions
On the certificate distribution date in each month, so long as no
Mandatory Liquidation Event or Early Liquidation Event has occurred, the trustee
will apply amounts in the certificate account established under the Pooling
Agreement representing Available Funds to make the following payments in the
following order of priority, in each case to the extent of remaining Available
Funds:
first, interest accrued on the Class A-1 and Class A-2 Certificates, during
the related Interest Accrual Period, pro rata, plus any unpaid interest on
the Class A-1 and Class A-2 Certificates for any prior certificate
distribution date;
second, principal of the Class A-2 Certificates until the class principal
balance thereof has been reduced to the amount specified for such
certificate distribution date on Appendix III to this prospectus
supplement, but in any event not in excess of the Principal Distribution
Amount for such certificate distribution date;
third, principal of the Class A-1 Certificates, up to the Principal
Distribution Amount remaining after the distribution made in the preceding
clause "second", until the class principal balance of the Class A-1
Certificates has been reduced to zero;
fourth, principal of the Class A-2 Certificates, up to the Principal
Distribution Amount remaining after the distributions made in the preceding
clauses "second" and "third", until the class principal balance of the
Class A-2 Certificates has been reduced to zero; and
fifth, principal of the Class B Certificates, up to the Principal
Distribution Amount remaining after the distributions made in the preceding
clauses "second", "third" and "fourth", until the class principal balance
of the Class B Certificates has been reduced to zero.
Any Available Funds remaining after payment of the amounts specified in clauses
"first" through "fifth" above will be paid to the owner of the Class R
Certificate.
Mandatory Liquidation
On November 20, 2001, the trustee will sell all of the pooled
securities by utilizing the following procedures:
o the elective purchaser (the "Elective Purchaser") under the
elective purchase agreement, dated as of the Closing Date,
between Washington Mutual and the Depositor (and its
assignees), will initially have the right to purchase the
pooled securities at a price equal to 96.35% of the then
current outstanding face amount thereof;
o if the Elective Purchaser does not so purchase the pooled
securities, the trustee, in a market auction or through an
auction advisor, will solicit bids from no fewer than three
competitive bidders (one of which may be the depositor) who
are dealers in such type of pooled securities;
o the trustee will have the right, but not the obligation to
accept the highest bid; and
o notwithstanding the foregoing, the owner of the Class R
Certificate will have the right, but not the obligation, to
purchase the pooled securities at a price equal to 1/32 of one
percent above the highest bid received by the trustee.
The proceeds of the sale will be applied to the payment, pro rata, of
interest accrued on the Class A-1 and Class A-2 Certificates and to the
reduction, first, of the class principal balance of the Class A-1 and Class A-2
Certificates, pro rata, and second, of the class principal balance of the Class
B Certificates, in each case, until
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<PAGE>
reduced to zero. All amounts remaining after the making of such payments to the
holders of the Class A-1, Class A-2 and Class B Certificates will be paid to the
holder of the Class R Certificate.
Early Liquidation Event
An "Early Liquidation Event" means any one of the following events:
(a) the market value of the pooled securities shall, at any time,
be less than the greater of (i) 116% of the sum of the class
principal balances of the outstanding Class A-1 and Class A-2
Certificates and (ii) the sum of the class principal balances
of the Class A-1 and Class A-2 Certificates and 108.7% of the
class principal balance of the outstanding Class B
Certificates;
(b) LIBOR for any Interest Accrual Period exceeds 8.91% per annum;
and
(c) the trust or the trust fund shall be required to register
under the Investment Company Act of 1940 (as amended).
Upon the occurrence of an Early Liquidation Event the trustee will sell all of
the pooled securities in accordance with the following procedures:
o the trustee, in a market auction or through an auction
advisor, will solicit bids from no fewer than three
competitive bidders (one of which may be the depositor) who
are dealers in such type of pooled securities;
o the trustee will have the right, but not the obligation, to
accept the highest bid; and
o notwithstanding the foregoing, the owner of the Class R
Certificate will have the right, but not the obligation, to
purchase the pooled securities at a price equal to 1/32 of one
percent above the highest bid received by the trustee.
The proceeds from the sale will be applied to the payment, pro rata, of
interest accrued on the Class A-1 and Class A-2 Certificates and to the
reduction, first, the class principal balance of the Class A-1 and Class A-2,
pro rata, and second, of the class principal balance of the Class B
Certificates, in each case, until reduced to zero. All amounts remaining after
the making of such payments to the holders of the Class A-1, Class A-2 and Class
B Certificates will be paid to the holder of the Class R Certificate.
YIELD AND MATURITY CONSIDERATIONS
General
The yield to maturity and weighted average life of each class of
offered certificates will depend upon, among other things,
o the price at which the certificates are purchased;
o the applicable rate of LIBOR from time to time (in the case of
the Class A-1 Certificates);
o the actual characteristics of the pooled securities and the
underlying mortgage loans;
o the rate and timing of principal and interest payments
(including principal prepayments) on the underlying mortgage
loans and of distributions of principal on each class of
pooled securities;
o the extent to which principal payments on any mortgage loan
are allocated to reduce the certificate principal balance of
any of the pooled securities;
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o the proceeds realized from the liquidation of the portfolio of
pooled securities on November 20, 2001; and
o the occurrence of an Early Liquidation Event.
General Structural Considerations Affecting Yield
On November 20, 2001, the trustee will sell through a market auction,
or cause to be sold through an auction advisor, all of the pooled securities.
However, the offered certificates could be retired prior to such date in the
event that an Early Liquidation Event occurs.
Prior to the occurrence of an Early Liquidation Event or a Mandatory
Liquidation Event, the weighted average life of the offered certificates will be
affected by the speed with which principal payments are made on the pooled
securities. This in turn will be affected by (i) the rate at which borrowers
repay principal of the underlying mortgage loans and (ii) the extent to which
the cash-flow structures of the series of mortgage pass-through securities that
comprise the pooled securities allocate those payments of principal to principal
of the pooled securities. You can read a description of the cash flow structure
of each series of mortgage pass-through securities of which each class of pooled
securities is a part in the prospectuses and prospectus supplements that were
prepared in connection with the primary offering of those securities. We have
attached a copy of each such offering document to this prospectus supplement in
CD-ROM format.
All of the pooled securities are registered under the Securities Act of
1933, as amended, and were issued by issuers that are unrelated to Washington
Mutual, the underwriter or the depositor and were acquired by Washington Mutual
in the secondary market.
The available principal distribution amount on each certificate
distribution date will be allocated first to the Class A-2 Certificates until
the Class A-2 Certificates have received all of their scheduled principal
distributions for such certificate distribution date and the balance of the
principal distribution amount will be distributed on such certificate
distribution date to pay principal of the Class A-1 Certificates. We expect that
this feature will cause faster than expected principal distributions owing to
prepayments on the underlying mortgage loans to be borne largely by the Class
A-1 Certificates.
Large variations in the rate at which principal is distributed on the
pooled securities could have an adverse impact on the weighted average life of
the offered certificates For example, if the principal distributions on the
pooled securities occur at a faster rate than you expect, the weighted average
life of the offered certificates may be shorter than expected because the Class
A-1 Certificates would be fully retired earlier than anticipated and following
the reduction of the principal balance of the Class A-1 Certificates to zero the
Class A-2 Certificates may receive principal in excess of the amounts
anticipated based on the planned amortization schedule for the Class A-2
Certificates and their weighted average life would be correspondingly shortened.
Conversely, if the rate of principal distributions is slower than expected,
there may not be sufficient principal available to fully satisfy the planned
amortization schedule of the Class A-2 Certificates, which may result in the
Class A-1 and Class A-2 Certificates having a slightly longer weighted average
life than you expected.
The reduction in weighted average life of a class of offered
certificates could have an adverse impact on the yield on your offered
certificates. However, because the Class A-1 Certificates are floating rate
securities, their yield is less sensitive to changes in weighted average life
than are the yields on fixed rate securities that are purchased at a premium or
a discount.
If you purchased your offered certificates at a discount and the
weighted average life of your offered certificates is shorter than expected,
your yield will be greater than it would have been if the certificates had paid
as you expected them to. Conversely, if you purchased your offered certificates
at a discount and the weighted average life of your offered certificates is
longer than expected, your yield will be less than it would have been if the
certificates had paid as you expected them to.
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<PAGE>
On the other hand, if you purchased your offered certificates at a
premium and their weighted average life is shorter than you expected your yield
will be less than your expected yield because your certificates will not receive
sufficient cash flow to amortize the premium fully. Conversely, if you purchased
your offered certificates at a premium and their weighted average life is longer
than you expected it to be, your yield will be correspondingly greater than it
would have been if the weighted average life had not been so long because the
cash flow on your certificates will be more than what is necessary to amortize
the premium.
In addition to the effect that changes in the weighted average life can
have on the yield of a security, a faster than expected rate of distributions on
the offered certificates could subject you to reinvestment risk. You should
expect that prepayment on the mortgage loans (and thus principal distributions
on the pooled securities and correspondingly on the offered certificates) will
increase during periods when prevailing interest rates have declined so that you
may not be able to reinvest such principal in new comparable investments with
similar yields.
The yield on the Class A-1 Certificates will also be sensitive to
changes in LIBOR, which can fluctuate unpredictably based on world economic and
political trends and developments that are beyond our control.
Rate and Timing of Principal Payments
General. Although fixed income securities generally increase in value
during periods of falling interest rates, mortgage backed securities are
generally vulnerable during periods of falling interest rates to the risk that
the obligors on the underlying mortgage obligations will prepay their mortgage
loans, thus shortening the effective life of the mortgage backed securities and
adversely affecting the yield on your certificates.
Rate and Timing of Principal Payments on Pooled Securities. Subject to
the next paragraph, the weighted average life of the certificates (and the yield
to maturity of Class A-2 Certificates purchased at a premium or a discount) are
directly related to the rate of principal payments on the related pooled
securities and the degree to which those payments are in turn distributed on the
certificates. The rate of principal payments on the pooled securities is
directly related to the rate of principal payments on the underlying mortgage
loans (including voluntary and involuntary prepayments) and the extent to which
principal prepayments on underlying mortgage loans are allocated to the pooled
securities. Thus, the rate of principal payments on the certificates entitled to
receive principal generally is related to the rate of principal payments on the
underlying mortgage loans, which may be in the form of scheduled payments or
principal prepayments. See "Risk Factors" in this prospectus supplement and
"Prepayment and Yield Considerations" in the prospectus. Mortgagors generally
may prepay the underlying mortgage loans at any time without penalty. The rate
at which prepayments occur on the underlying mortgage loans will be affected by
a variety of factors, including without limitation the level of prevailing
mortgage market interest rates and economic, demographic, tax, social, legal and
other factors.
A higher-than-anticipated rate of principal prepayments on the
underlying mortgage loans would reduce the aggregate principal balance of the
underlying mortgage loans more quickly than expected and could result in a
faster than anticipated rate of principal distributions on the pooled securities
and the offered certificates. However, as long as the Class A-1 Certificates are
outstanding the Class A-2 Certificates (which are planned amortization
certificates) are protected from the risk that principal prepayments on any
payment date will cause the Class A-2 Certificates to amortize more rapidly than
the scheduled amortization for that payment date or suffer a consequent
reduction in the amount of interest payable on the Class A-2 Certificates.
Nevertheless, there can be no assurance that you will be able to reinvest
amounts received with respect to the certificates at a rate that is comparable
to the applicable interest rate. You should fully consider all of the risks
associated with principal payments on the underlying mortgage loans.
Delay in Payment of Distributions. Because monthly distributions will
not be made on the offered certificates until a date that is scheduled to be at
least two business days after the Pooled Securities Distribution Date, the
effective yield to holders of the offered will be lower than the yield that
would otherwise be produced by the applicable interest rates and purchase prices
(assuming that such prices did not account for the delay).
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<PAGE>
Weighted Average Life Considerations
The weighted average life of an offered certificate refers to the
average amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such offered certificate is distributed to the
investor. The weighted average life of the Class A-1 Certificates (and of the
Class A-2 Certificates after the principal balance of the Class A-1 Certificates
has been reduced to zero) is particularly sensitive to prepayments on the
underlying mortgage loans that are passed through on the pooled securities. The
effect of these prepayments is discussed in greater detail below under
"Prepayment Speed Assumption and Modeling Assumptions".
The weighted average life of your certificates will be effected by the
expected liquidation of the portfolio on November 20, 2001 in connection with
the occurrence of a Mandatory Liquidation Event. However, the weighted average
life of each class of offered certificates is also sensitive to the occurrence
of (a) an Early Liquidation Event, which will be triggered if, among other
things, the market value of the pooled securities shall, at any time, be less
than the greater of (i) 116% of the sum of the class principal balances of the
outstanding Class A-1 and Class A-2 Certificates and (ii) the sum of the class
principal balances of the Class A-1 and Class A-2 Certificates and 108.7% of the
class principal balance of the outstanding Class B Certificates and (b) the
repurchase by Washington Mutual of Pooled Securities for which a material breach
of representation has occurred under the Purchase and Sale Agreement. We
describe the mechanism for mandatory termination and redemption in "Pooling
Agreement" below in this prospectus supplement. The market value of fixed income
securities generally moves conversely to changes in interest rates, so that the
risk of a termination of the trust becomes greater as the risk of prepayments
recedes.
If the pooled securities are liquidated and the offered certificates
are repurchased because the market value of the pooled securities has fallen
below the applicable threshold, the average life of each class of offered
certificates could be shortened. In addition, such a repurchase could reduce the
expected yield of the Class A-2 Certificates, if they were purchased at a
premium, and would expose the holders of offered certificates of all classes to
reinvestment risk. Although the Class A-2 Certificates are structured as a
planned amortization class, this feature would not protect the Class A-2
Certificates from an early termination of the trust, which would be expected to
occur either in an interest rate environment in which borrowers on underlying
mortgage loans could be expected to have relatively little incentive to prepay
their mortgage loans or where an Early Liquidation Event shall have occurred.
Prepayment Speed Assumptions and Modeling Assumptions
The following discussion relates only to the possible effect of
prepayments on mortgage loans on the weighted average life of the offered
certificates. Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement (the "Prepayment Speed Assumption" or "PSA") assumes that mortgages
will prepay at an annual rate of 0.2% in the first month after origination, that
the prepayment rate increases at an annual rate of 0.2% per month up to the 30th
month after origination and that the prepayment rate is constant at 6% per annum
in the 30th and later months (this assumption is called "100% PSA"). For
example, at 100% PSA, mortgage loans with a loan age of three months (i.e.,
mortgage loans in their fourth month after origination) are assumed to prepay at
an equal rate of 0.8%. "0% PSA" " assumes no prepayments; "50% PSA" " assumes
prepayment rates equal to one-half times 100% PSA; "200% PSA" " assumes
prepayment rates equal to two times 100% PSA; and so forth. PSA is not a
description of historical prepayment experiences or a prediction of the
underlying mortgage loans' rate of prepayment.
PSA does not purport to be either an historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
underlying mortgage loans related to the pooled securities, and there is no
assurance that the underlying mortgage loans will prepay at any given percentage
of PSA. The actual rate of principal prepayments on the underlying mortgage
loans may be influenced by a variety of economic, geographic, social and other
factors. In general, if prevailing interest rates fall significantly below the
interest rates on the underlying mortgage loans, the underlying mortgage loans
are likely to be subject to higher prepayment rates than if prevailing rates
remain at or above the interest rates on the underlying mortgage loans.
Conversely, if interest rates rise above the interest rates on the underlying
mortgage loans, the rate of prepayment would be expected to decrease but there
may be an enhanced risk that the market value of the pooled securities will fall
to a level that necessitates a liquidation of the pool. A comparatively low
interest rate environment may result in a higher-than-expected rate of
prepayments on the underlying mortgage loans and an earlier-than-expected
retirement of certificates.
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<PAGE>
The depositor makes no representation as to the specific factors that
will affect the prepayment of the underlying mortgage loans or the relative
importance of such factors. Factors not identified by the depositor or discussed
in this prospectus supplement may significantly affect the prepayment rate of
the underlying mortgage loans. In particular, the depositor makes no
representation as to the percentage of the principal amount of the underlying
mortgage loans that will be paid as of any date or as to the overall rate of
prepayment.
The tables set forth below have been prepared assuming, among other
things, the following modeling assumptions (collectively, the "Modeling
Assumptions"):
o scheduled payments on all underlying mortgage loans are
received on the first day of each month beginning in November,
2000;
o any prepayments in full on the underlying mortgage loans are
received on the last day of each month, beginning on October
30, 2000, and include a full month's interest thereon;
o there are no defaults or delinquencies on the underlying
mortgage loans;
o there is no termination of the underlying trusts;
o there is no termination of the trust until the Mandatory
Liquidation Event in November 2001;
o there are no partial prepayments on the underlying mortgage
loans and prepayments are computed after giving effect to
scheduled payments received on the following day;
o the underlying mortgage loans prepay at the indicated constant
percentages of PSA;
o LIBOR remains constant at 6.62% per annum;
o the date of issuance for the certificates is November 2, 2000
and the certificates are entitled to distributions on the
pooled securities beginning in November 2000;
o cash distributions are received by the certificateholders on
the 27th day of each month;
o the scheduled monthly payments for each underlying mortgage
loan are computed based upon its unpaid principal balance,
mortgage interest rate and amortized remaining term, such that
each underlying mortgage loan will fully amortize on its
maturity date;
o the initial aggregate principal balance of the pooled
securities is equal to the aggregate principal balance of the
pooled securities as of the Cut-Off Date; and
o the pooled securities receive principal and interest
distributions in accordance with their payment terms, as
described in the related underlying disclosure documents.
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding class principal balances and the
weighted average lives shown in the tables below. Such variations may occur even
if the average prepayment experience of all the underlying mortgage loans equals
the indicated percentage of the Prepayment Speed Assumption. There is no
assurance, however, that prepayment of the underlying mortgage loans will
conform to any given percentage of the Prepayment Speed Assumption. The
depositor makes no representation that the actual rates of prepayments on the
underlying mortgage loans will in any way correspond to any of the assumptions
made in this prospectus supplement.
Based on the foregoing assumptions, the table below indicates the
weighted average lives of the certificates.
Prepayments
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
0 PSA 100 PSA 150 PSA 250 PSA 400 PSA
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Wtd. Avg. 1.07 1.02 0.98 0.90 0.79
Life
--------------------------------------------------------------------------------------------------------
Class A-2 Wtd. Avg. 1.02 0.99 0.99 0.99 0.99
Life
--------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
There are no historical prepayment data available for the underlying
mortgage pool, and comparable data are not available because the underlying
mortgage loans do not constitute a representative sample of mortgage loans
generally. In addition, historical data available with respect to mortgage loans
underlying mortgage pass-through certificates issued by GNMA, FNMA and FHLMC may
not be comparable to prepayments expected to be experienced by the underlying
mortgage pool because the underlying mortgage loans may have characteristics
which differ from the mortgage loans underlying certificates issued by GNMA,
FNMA and FHLMC.
The depositor makes no representation that the underlying mortgage
loans will prepay in the manner or at any of the rates assumed above. You must
make your own decision as to the appropriate prepayment assumptions to be used
in deciding whether or not to purchase any of the offered certificates. Since
the rate of principal payments (including principal prepayments) with respect
to, and repurchases of, the underlying mortgage loans will significantly affect
the yields to maturity on the certificates, we urge you to consult your
investment advisors as to both the anticipated rate of future principal payments
(including principal prepayments) on the underlying mortgage loans and the
suitability of the certificates to their investment objectives.
Additional Information
The depositor intends to file with the Securities and Exchange
Commission certain additional yields tables and other computational materials
with respect to one or more classes of the certificates on a Current Report on
Form 8-K. The underwriter prepared such tables and materials at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
materials are preliminary in nature, and the information contained therein is
subject to, and superseded by, the information in this prospectus supplement.
There is no assurance that prepayments of the underlying mortgage loans
will conform to any of the levels of the Prepayment Speed Assumption indicated
in the tables above, or to any other level, or that the actual weighted average
life of any class of the offered certificates will conform to any of the
weighted average lives set forth in the tables above. Furthermore, the
information contained in the tables with respect to the weighted average lives
is not necessarily indicative of the weighted average lives that might be
calculated or projected under different or varying prepayment or Index level
assumptions. The characteristics of the underlying mortgage loans will differ
from those assumed in preparing the tables above. In addition, it is unlikely
that any underlying mortgage loans will prepay at any constant percentage until
maturity or that all of the underlying mortgage loans will prepay at the same
rate. The timing of changes in the rate of prepayments may significantly affect
the actual yield to maturity on your certificates, even if the average rate of
principal prepayments is consistent with your expectations.
Final Scheduled Certificate Distribution Dates
The final scheduled certificate distribution date of each class of
offered certificates is November 27, 2001.
Because the rate of distributions in reduction of the class certificate
balance of each class of offered certificates will depend on (1) the rate of
payment (including prepayments) of the related underlying mortgage loans, (2)
the extent to which those payments are allocated to the pooled securities and
(3) the market value of the pooled securities, the class certificate balance of
any such class could be reduced to zero significantly earlier than its final
scheduled certificate distribution date.
The rate of principal payments on the underlying mortgage loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the underlying mortgage loans. The
allocation of principal payments to the pooled securities will depend on their
particular characteristics.
The market value of the pooled securities will depend on prevailing
interest rates from time to time, supply of similar securities in the primary
and secondary markets and other macroeconomic developments.
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<PAGE>
POOLING AGREEMENT
General
The certificates will be issued pursuant to the Pooling Agreement. The
trust fund created under the Pooling Agreement will consist of all of the
depositor's right, title and interest in the pooled securities together with all
payments on the pooled securities received after the Cut-Off Date. You should
also review the accompanying prospectus for important information, in addition
to that set forth in this prospectus supplement, regarding the trust, the terms
and conditions of the Pooling Agreement and the certificates. The certificates
will be transferable and exchangeable at the corporate trust offices of the
trustee, located for such purposes at Wells Fargo Center, Sixth and Marquette,
Minneapolis, Minnesota 55479-0113, ATTN: Corporate Trust Services--Merrill
Lynch, 2000-WM1 and for all other purposes, at 11000 Broken Lark Parkway,
Columbia, Maryland 21044-3562, ATTN: Corporate Trust Services--Merrill Lynch,
2000-WM1. The depositor will provide to a prospective or actual
certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling Agreement. Requests should be addressed to the Secretary, Merrill
Lynch Mortgage Investors, Inc. at: 250 Vesey Street, World Financial
Center--North Tower, 10th Floor, New York, New York 10281-1310.
The Trustee
Wells Fargo Bank Minnesota, National Association will act as trustee
for the certificates pursuant to the Pooling Agreement. The trustee's offices
for notices under the Pooling Agreement are located at its Corporate trust
offices, and its telephone number is 301-815-6600. The Pooling Agreement will
provide that the trustee and any director, officer, employee or agent of the
trustee will be indemnified by the trust and will be held harmless against any
loss, liability or expense (not including expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the Pooling Agreement) incurred
by the trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Pooling Agreement, other
than any loss, liability or expense (i) that constitutes a specific liability of
the trustee under the Pooling Agreement or (ii) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the trustee's duties
under the Pooling Agreement or as a result of a breach, or by reason of reckless
disregard, of the trustee's obligations and duties under the Pooling Agreement.
Voting Rights
Certain actions specified in the prospectus that may be taken by
holders of certificates evidencing a specified percentage of all undivided
interests in the trust fund may be taken by holders of certificates entitled in
the aggregate to such percentage of voting rights. The percentage of the voting
rights allocated among holders of the certificates (other than the Class R and
Class B Certificates) will be allocated among all holders in proportion to the
outstanding principal balance of their certificates.
Reports to Certificateholders
On each certificate distribution date, to the extent the trustee
receives the monthly statement for the pooled securities by 12:00 p.m. (New York
time) on the business day immediately preceding such certificate distribution
date, the trustee will prepare, and will make available, a statement to each
certificateholder stating:
(i) the Available Funds for that date;
(ii) the amount of interest being distributed on each class of
certificates for that date and in the case of the Class A-1
Certificates, the applicable interest rate for the Interest
Accrual Period ending on the day before that date and the
applicable interest rate for the Interest Account Period
beginning on such date;
(iii) the amount of principal being distributed on each class of
certificates for that date;
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(iv) the class principal balances for each class of certificates
before and after applying payments on the day before that date
and the applicable interest rate for the Interest Accrual
Period beginning on such date;
(v) the aggregate principal balance of the pooled securities
immediately following the second preceding pooled security
distribution date; and
(vi) the aggregate principal balance of the pooled securities
immediately following the preceding pooled security
distribution date.
In the case of the information furnished pursuant to clauses (ii) and
(iii) above, the amounts shall also be expressed as a dollar amount per $1,000
certificate principal amount.
The Trustee will make available each month, to any interested party,
the statement to certificateholders (and any additional files containing the
same information in alternative format) via the Trustee's Website and its
fax-on-demand service. The Trustee's Website will initially be located at
www.ctslink.com. The Trustee's fax-on-demand service may be accessed by calling
(301) 815-6610. In addition, pursuant to the Pooling Agreement, the Trustee will
make available, as a convenience for interested parties (and not in furtherance
of the distribution of the accompanying prospectus or the prospectus supplement
under the securities laws), the Pooling Agreement, the accompanying prospectus
and the prospectus supplement via the Trustee's Website. For assistance with the
above-referenced services, interested parties may call (301) 815-6600. The
Trustee will make no representations or warranties as to the accuracy or
completeness of such documents and will assume no responsibility therefor.
In connection with providing access to the Trustee's Website, the
Trustee may require registration and the acceptance of a disclaimer. The Trustee
shall not be liable for the dissemination of information in accordance with the
Pooling Agreement.
The trustee will, on the first business day of each week, prepare and
forward to each Rating Agency, and make available to each certificate holder who
so requests, a report stating, for the preceding week:
(i) The name and amount of the securities included in the pooled
securities at the close of business on the last business day
of such preceding week;
(ii) the market value of the pooled securities at the close of
business on the last business day of such preceding week (as
determined by Merrill Lynch Pricing Service or such other
pricing service that has been approved by the Rating
Agencies);
(iii) the ratio of the market value of the pooled securities (as
determined pursuant to (ii) above) to sum of the class
principal balances of the outstanding Class A-1 and Class A-2
Certificates; and
(iv) the ratio of the market value of the pooled securities (as
determined pursuant to (ii) above) to the sum of the class
principal balances of the outstanding Class A-1 and Class A-2
Certificates and 108.7% of the class principal balance of the
outstanding Class B Certificates.
In addition, the trustee promptly will furnish, upon request, to each
certificateholder, at the expense of such certificateholder, copies of any
notices, statements, reports or other information, including, without
limitation, the pooled security distribution date statements received by the
trustee in its capacity as the holder of the pooled securities.
On or before March 31 of each calendar year, commencing in 2001, the
trustee will prepare and make available to each person who at any time during
the prior calendar year was a certificateholder of record a statement containing
the information required to be contained in the regular monthly report to
certificateholders, as set forth in clauses (ii) and (iii) above aggregated for
such prior calendar year or the applicable portion thereof during which that
person was a certificateholder. Such obligation of the trustee will be satisfied
to the extent that substantially
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<PAGE>
comparable information is provided by the trustee pursuant to any requirements
of the Code, and regulations thereunder as from time to time are in force.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
trust fund as a REMIC. The Class A-1 and Class A-2 Certificates (the "Regular
Certificates") will be treated as debt instruments issued by the REMIC for
federal income tax purposes. Income on the Regular Certificates must be reported
under an accrual method of accounting. Under the accrual method of accounting,
interest income may be required to be included in a holder's gross income in
advance of the holder's actual receipt of that interest income.
The Class A-1 and Class A-2 Certificates, depending on their respective
issue prices (as described in the prospectus under "Material Federal Income Tax
Consequences"), may be treated as having been issued with original issue
discount ("OID") for federal income tax purposes. For purposes of determining
the amount and rate of accrual of OID and market discount, the trust intends to
assume that there will be prepayments on the underlying mortgage loans at a rate
equal to 150% PSA. No representation is made as to whether the underlying
mortgage loans will prepay at the foregoing rate or any other rate. See "Yield
and Maturity Considerations--Prepayment Speed Assumption and Modeling
Assumptions" " in this prospectus supplement and "Material Federal Income Tax
Consequences" in the prospectus. Computing accruals of OID in the manner
described in the prospectus may, depending on the actual rate of prepayments
during the accrual period, result in the accrual of negative amounts of OID on
the certificates issued with OID in an accrual period. Holders will be entitled
to offset negative accruals of OID only against future OID accrual on the
certificates.
If the holders of any Regular Certificates are treated as holding those
certificates at a premium, they should consult their tax advisors regarding the
election to amortize bond premium and the method to be employed. See "Material
Federal Income Tax Consequences" in the prospectus.
As is described more fully under "Material Federal Income Tax
Consequences" in the prospectus, the Regular Certificates will represent
qualifying assets under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"), and net interest income
attributable to the offered certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the trust are assets
described in those sections. The Regular Certificates will represent qualifying
assets under Section 860G(a)(3) of the Code.
The Treasury Department has issued new regulations which make certain
modifications to the withholding and backup withholding rules. The new
regulations generally are effective for payments made after December 31, 2000.
You should consult your tax advisors regarding such regulations.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the offered certificates will be applied by the depositor to the purchase price
of the pooled securities and expenses connected with pooling the pooled
securities and issuing the certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the certificates being offered by this prospectus
supplement and the accompanying prospectus (the "Underwriting Agreement"), the
depositor has agreed to sell to the underwriter, and the underwriter has agreed
to purchase, the offered certificates.
In the Underwriting Agreement, the underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all of the certificates
offered hereby, if any are purchased.
The distribution of the certificates by the underwriter will be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. The
S-29
<PAGE>
underwriter and any dealers that participate with the underwriter in the
distribution of the certificates may be deemed to be underwriters, and any
discounts, concessions or commissions received by them, and any profit on the
resale of the certificates positioned by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The depositor is an affiliate of the underwriter.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon
for the depositor and the underwriter by Shearman & Sterling, New York, New
York.
RATINGS
It is a condition to the issuance of the offered certificates that the
Class A-1 Certificates be rated in the highest short-term investment rating
category and that the Class A-2 Certificates be rated in the highest long-term
investment rating category by each of S&P and Moody's.
The ratings on the offered certificates indicate the likelihood that
you will receive all funds to which you are entitled by the terms of the
certificates. The rating agency that issues the rating reviews the nature and
credit quality of the trust assets, the soundness of the structure which the
depositor has created to allow the payments on the pooled securities to flow to
the holders of the certificates and the extent to which the initial market value
of the pooled securities exceeds the aggregate certificate principal balance of
the offered certificates, as well as the events that constitute Early
Liquidation Events. A rating does not address the frequency of prepayments on
the underlying mortgage loans or the effect of such prepayments on your yield.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the certificates are subsequently lowered for any reason,
no person or entity is obligated to provide any additional credit support or
credit enhancement with respect to the certificates.
The depositor has not requested that any rating agency rate the
certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the certificates, or, if it does,
what rating would be assigned by any such other rating agency. A rating on the
certificates by another rating agency, if assigned at all, may be lower than the
ratings assigned to the certificates as stated above.
LEGAL INVESTMENT
The offered certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in one of the two highest rating categories by at
least one nationally recognized statistical rating organization, and, as such,
are legal investments for certain entities to the extent provided in SMMEA.
SMMEA provided the states could override its provisions on legal investment and
restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA.
Both the Class A-1 and Class A-2 Certificates will be eligible
securities for purchase by money market funds made under paragraph (a)(10) of
Rule 2a-7 under the Investment Company Act of 1940, as amended.
The depositor makes no representation as to the proper characterization
of the certificates for legal investment or other purposes, or as to the ability
of particular investors to purchase the certificates under applicable
S-30
<PAGE>
legal investment restrictions. The uncertainties may adversely affect the
liquidity of the certificates. Accordingly, all institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and the extent to which the
certificates constitute a legal investment under SMMEA or are subject to
investment, capital or other restrictions. See "Legal Investment" in the
prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement (including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or section 4975 of
the Code should carefully review with its legal advisors whether the purchase or
holding of offered certificates could give rise to a transaction that is
prohibited or is not otherwise permitted under ERISA or Section 4975 of the
Code.
The U.S. Department of Labor has 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 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" includes (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 S&P, Moody's or
Fitch, Inc. Fourth, the trustee cannot be an affiliate of any other member of
the "Restricted Group", which consists of the trustee, any Underwriter, the
depositor, any insurer and any mortgagor with respect to the underlying mortgage
loans constituting more than 5% of the aggregate unamortized principal balance
of the assets of the trust 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 pooled securities 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 any servicer must
represent not more than reasonable compensation for such person's services under
the Pooling 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 must consist only of assets of the type enumerated in the
Exemption which have been included in other investment pools; (ii) certificates
evidencing interests in such other investment pools must have been rated in one
of the three highest generic rating categories by one of the 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 must 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
more than 5% of the fair market value of the obligations constituting the
underlying 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 offered
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<PAGE>
certificates, at least 50% of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group and at least
50% of the aggregate interest in the trust is acquired by persons independent of
the Restricted Group; (2) the Plan's investment in any class of certificates
does not exceed 25% of the outstanding certificates of that class at the time of
acquisition; (3) immediately after such acquisition, no more than 25% of the
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; and (4) the Plan is not sponsored by any member
of the Restricted Group.
Before purchasing an offered certificate, a fiduciary of a Plan should
itself confirm that such certificates constitute "certificates" for purposes of
the Exemption and that the specific and general conditions of the Exemption and
the other requirements set forth in the Exemption would be satisfied. Any Plan
fiduciary considering whether to purchase an offered certificate on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
S-32
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
0% PSA....................................................................24
100% PSA..................................................................24
200% PSA..................................................................24
50% PSA...................................................................24
Available Funds...........................................................19
CEDE......................................................................16
Certificate Owners........................................................16
Certificateholder.........................................................16
Certificateholders........................................................16
Class Interest Rate....................................................6, 19
Clearing Agency...........................................................16
Clearstream...............................................................16
Clearstream Participants..................................................17
Code......................................................................29
Cooperative...............................................................17
Depositaries..............................................................16
Depositary................................................................16
Description of the Certificates--Early Liquidation Event...................8
Description of the Certificates--Mandatory Liquidation.....................8
Early Liquidation Event................................................8, 21
Elective Purchaser........................................................20
ERISA.....................................................................31
Euroclear.................................................................16
Euroclear Operator........................................................17
Euroclear Participants....................................................17
Exemption.................................................................31
Global Securities..........................................................1
Index of Principal Definitions.............................................2
Indirect Participants.....................................................16
Interest Accrual Period................................................6, 19
LIBOR......................................................................7
Mandatory Liquidation Event................................................8
Material Federal Income Tax Consequences..................................29
Modeling Assumptions......................................................25
Moody's...................................................................30
Mooody's...................................................................4
OID.......................................................................29
Participants..............................................................16
Plan......................................................................31
Pooled Securities Distribution Date.....................................1, 5
Pooling Agreement.........................................................14
Prepayment Speed Assumption...............................................24
Prepayment Speed Assumption and Modeling Assumptions......................24
Principal Distribution Amount..............................................7
PSA.......................................................................24
Purchase and Sale Agreement................................................4
Rating Agencies...........................................................30
Reference Banks............................................................7
Regular Certificates......................................................29
Restricted Group..........................................................31
Risk Factors..............................................................23
S&P....................................................................4, 30
SMMEA.....................................................................30
Telerate Page 3750.........................................................7
S-33
<PAGE>
Terms and Conditions......................................................18
Underwriter...............................................................31
Underwriting Agreement....................................................29
Washington Mutual..........................................................4
Yield and Maturity Considerations--Prepayment Speed Assumption
and Modeling Assumptions................................................29
S-34
<PAGE>
APPENDIX I
POOLED SECURITIES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
CUSIP Security Bond Factor Factor Date Coupon Holding Orig Holding Curr Trustee
Face Face
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 00077BDU4 AMAC985 A4 0.692904714 10/25/2000 6.00% $92,921,000.00 64,385,398.89 Chase Bank of NY
------------------------------------------------------------------------------------------------------------------------------------
2 055240KP9 BAMS986 A2 0.79758887 10/25/2000 6.25% $82,000,000.00 65,402,287.35 Bank of New York
------------------------------------------------------------------------------------------------------------------------------------
3 060506AC6 BAMS991 A3 0.856377682 10/25/2000 6.50% $100,000,000.00 85,637,768.16 Bank of New York
------------------------------------------------------------------------------------------------------------------------------------
4 060506BL5 BAMS992 A2 0.883183567 10/25/2000 6.50% $100,000,000.00 88,318,356.66 Bank of New York
------------------------------------------------------------------------------------------------------------------------------------
5 060506CU4 BAMS994 A2 0.893081839 10/25/2000 6.50% $87,471,000.00 78,118,761.54 Bank of New York
------------------------------------------------------------------------------------------------------------------------------------
6 16162TGL4 CMT99S4 A1 0.880364941 10/25/2000 6.50% $100,499,900.00 88,476,588.53 Citibank N.A.
------------------------------------------------------------------------------------------------------------------------------------
7 12669A3Z5 CWHL991 A1 0.857038188 10/25/2000 6.50% $100,000,000.00 85,703,818.80 Bank of New York
------------------------------------------------------------------------------------------------------------------------------------
8 66937RHM4 NSCOR9833 A16 0.952593827 10/25/2000 6.25% $31,994,000.03 30,477,286.93 U.S. Trust Co. of NY
------------------------------------------------------------------------------------------------------------------------------------
First Union National
9 66937RNG0 NSCOR994 A1 0.841703795 10/25/2000 6.50% $98,685,362.00 83,063,843.71 Bank
------------------------------------------------------------------------------------------------------------------------------------
First National Bank
10 76110YBR2 RES99S4 A1 0.86335334 10/25/2000 6.50% $100,000,000.00 86,335,334.00 of Chicago
------------------------------------------------------------------------------------------------------------------------------------
First National Bank
11 76110YDQ2 RES99S7 A7 0.885693946 10/25/2000 6.50% $100,000,000.00 88,569,394.60 of Chicago
------------------------------------------------------------------------------------------------------------------------------------
12 79548KH43 SBM7992 A1-5 0.865152765 10/25/2000 6.50% $49,800,000.00 43,084,607.70 Chase Manhattan Bank
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
I-1
<PAGE>
APPENDIX II
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered MLMI
Resecuritization Pass-Through Certificates, Series 2000-WM1 (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Clearstream or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream 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 or Euroclear and
Participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as 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
Initial Settlement for the Securities will be in immediately available
funds.
Investors electing to hold their Securities through DTC (other than
through accounts at Euroclear or Clearstream) will follow the settlement
practices applicable to U.S. corporate debt obligations. The securities custody
accounts of investors will be credited with their holdings against payment in
same-day funds on the settlement date.
Investors electing to hold their Securities through Euroclear or
Clearstream accounts will follow the settlement procedures applicable to
conventional Eurobonds in registered form. Securities will be credited to the
securities custody accounts of Euroclear and Clearstream holders on the business
day following the settlement date against payment for value on the settlement
date.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important
to establish at the time of the trading of any Securities 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
Participants (other than Morgan Guaranty Trust Company of New York ("Morgan")
and Citibank, N.A. ("Citibank") as depositories for Euroclear and Clearstream
respectively) will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
II-1
<PAGE>
Trading Between Euroclear Participants and/or Clearstream Participants.
Secondary market trading between Euroclear Participants and/or Clearstream
Participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading Between DTC Seller and Euroclear or Clearstream Purchaser. When
Securities are to be transferred from the account of a Participant (other than
Morgan and Citibank as depositories for Euroclear and Clearstream, respectively)
to the account of a Euroclear Participant or a Clearstream Participant, the
purchaser must send instructions to Clearstream before 12:30 p.m. on the
settlement date 12:30. Euroclear or Clearstream, as the case may be, will
instruct Morgan or Citibank respectively, to receive the Securities against
payment. Payment will then be made by Morgan or Citibank as the case may be, to
the Participant's account against delivery of the Securities. After settlement
has been completed, the Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Euroclear Participants' or Clearstream Participants' accounts. Credit for
the Securities will appear on the next day (European time) and cash debit will
be back-valued to, and the interest on the certificates will accrue from the
value date (which would be the preceding day when settlement occurs in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Euroclear or Clearstream cash debit will be valued instead as
of the actual settlement date.
Euroclear Participants and Clearstream 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 pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Clearstream. Under
this approach, they may take on credit exposure to Euroclear or Clearstream
until the Securities are credited to their accounts one-day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, participants can elect not pre-position funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure,
Euroclear Participants or Clearstream Participants purchasing Securities would
incur overdraft charges for one day, assuming they cleared the overdraft when
the Securities were credited to their accounts. However, interest on the
Securities would accrue from the value date. Therefore, in many cases, the
investment income on 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 participant's/customer's particular cost of
funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Securities to Morgan
or Citibank for the benefit of Euroclear participants or Clearstream
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the Participant, a cross-market transaction will
settle no differently from a trade between two Participants.
Trading Between Euroclear or Clearstream Seller and DTC Purchaser. Due
to time zone differences in their favor, Euroclear Participants and Clearstream
Participants may employ their customary procedures for transactions in which
Securities are to be transferred by the respective clearing system, through
Morgan or Citibank, to another Participant. The seller must send instructions to
Clearstream before 12:30 p.m. on the settlement date. In these cases, Euroclear
or Clearstream will instruct Morgan or Citibank, as appropriate, to credit the
Securities to the Participant's account against payment. The payment will then
be reflected in the account of the Euroclear Participant or Clearstream
Participant the following business day, and receipt of the cash proceeds in the
Euroclear Participant's or Clearstream Participant's account will be back-valued
to the value date (which would be the preceding day, when settlement occurs in
New York). If the Euroclear Participant or Clearstream Participant has a line of
credit with its respective clearing system and elects to draw on such line of
credit in anticipation of receipt of the sale proceeds in its account, the
back-valuation may substantially reduce or offset any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Euroclear
Participant's or Clearstream Participant's account would instead be valued as of
the actual settlement date.
II-2
<PAGE>
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the 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, under currently applicable laws, (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
Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year. The term "U.S. Person"
means (i) a citizen or resident of the United States, (ii) a corporation or
partnership organized in or under the laws of the United States, any State
thereof or the District of Columbia, (iii) an estate the income of which is
includible in gross income for United States tax purposes, regardless of its
source or (iv) any trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one or
more United States persons have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities. Further, the U.S. Treasury Department has recently finalized new
regulations that will revise some aspects of the current system for withholding
on amounts paid to foreign persons. Under these regulations, interest or OID
paid to a nonresident alien would continue to be exempt from U.S. withholding
taxes (including backup withholding) provided that the holder complies with the
new certification procedures. The new procedures take effect on January 1, 2001.
II-3
<PAGE>
APPENDIX III
CLASS A-2 PLANNED BALANCE
Per Date Balance
--- ---- -------
0 10/27/00 158,099,000.00
1 11/27/00 155,934,354.85
2 12/27/00 153,703,308.45
3 1/27/01 151,880,665.87
4 2/27/01 150,009,625.46
5 3/27/01 148,089,663.08
6 4/27/01 146,118,664.80
7 5/27/01 144,102,167.54
8 6/27/01 142,040,994.32
9 7/27/01 139,961,959.67
10 8/27/01 137,868,155.13
11 9/27/01 135,779,222.54
12 10/27/01 133,700,900.30
13 11/27/01 --
III-1
<PAGE>
MLMI Resecuritization Pass-Through Certificates
Series 2000-WM1
Merrill Lynch Mortgage Investors, Inc.
Depositor
$474,297,000 Class A-1 Certificates
$158,099,000 Class A-2 Certificates
--------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------------------------------------------
Merrill Lynch & Co.
You should rely on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted.
Until the expiration of 90 days after the date of this prospectus
supplement, all dealers selling the offered certificates, whether or not
participating in this distribution, will deliver a prospectus supplement and the
prospectus to which it relates. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus supplement and prospectus when
acting as underwriter and with respect to their unsold allotments or
subscriptions.
October 31, 2000
<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.
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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 101 of this prospectus.
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RISK FACTORS
You should consider the following information carefully, since it identifies
certain significant sources of risk associated with an investment in the
securities.
There is a risk that the securities will have limited liquidity.
At the time a series of securities is issued, there will not be a
secondary market for them. Merrill Lynch, Pierce, Fenner & Smith Incorporated
currently expects to make a secondary market in the offered securities, but it
is not required to. We cannot assure you that a secondary market for the
securities of any series will develop or, if it does develop, that it will
provide holders of those securities with liquidity of investment or will
continue while those securities remain outstanding.
There is a risk associated with limited assets and that those assets will not be
sufficient to pay the securities in full.
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 securityholders could incur a
loss on their investment.
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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
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(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.
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,
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(vi) the Mortgage Rates or range of Mortgage Rates and the weighted
average Mortgage Rate borne by the Mortgage Loans,
(vii) the state or states in which most of the Mortgaged Properties
are located,
(viii) information with respect to the prepayment provisions, if any,
of the Mortgage Loans,
(ix) with respect to Mortgage Loans with adjustable Mortgage Rates
("ARM Loans"), the index, the frequency of the adjustment
dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and
(x) information regarding the payment characteristics of the
Mortgage Loans, including without limitation balloon payment
and other amortization provisions.
If specific information respecting the Mortgage Loans is not known to
the Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report which will be
available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission within fifteen days after such initial
issuance.
The related Prospectus Supplement may specify whether the Mortgage
Loans include 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
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(iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus
Supplement.
Each Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over its
term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate, or
from a fixed to an adjustable Mortgage Rate, from time to time pursuant to an
election or as otherwise specified on the related Mortgage Note, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may provide
for scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of certain
events or that adjust on the basis of other methodologies, and may provide for
negative amortization or accelerated amortization, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the
"MBS Servicer") of the underlying Mortgage Loans (or Underlying MBS) will have
entered into the MBS Agreement with a trustee or a custodian under the MBS
Agreement (the "MBS Trustee"), if any, or with the original purchaser of the
interest in the underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be
made on MBS on the dates specified in the related Prospectus Supplement. The MBS
may be issued in one or more classes with characteristics similar to the classes
of Securities described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other
forms of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Mortgage Loans or
Underlying MBS evidenced by or securing such MBS and other factors and generally
will have been established for the MBS on the basis of requirements of either
any Rating Agency that may have assigned a rating to the MBS or the initial
purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available to the Depositor:
(i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS
to be included in the Trust Fund,
(ii) the original and remaining term to stated maturity of the MBS,
if applicable,
(iii) whether such MBS is entitled only to interest payments, only to
principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for
determining such rates, if any,
(v) the applicable payment provisions for the MBS, including, but
not limited to, any priorities, payment schedules and
subordination features,
(vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
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(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of
credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS,
(viii) the terms on which the related Underlying Mortgage Loans or
Underlying MBS for such MBS or the MBS may, or are required to,
be purchased prior to their maturity,
(ix) the terms on which Mortgage Loans or Underlying MBS may be
substituted for those originally underlying the MBS,
(x) the servicing fees payable under the MBS Agreement,
(xi) the type of information in respect of the Underlying Mortgage
Loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements" above, and the type of
information in respect of the Underlying MBS described in this
paragraph,
(xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the
MBS and
(xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the
Participants Trust Company.
Each MBS will be either:
(i) a security exempted from the registration requirements of the
Securities Act,
(ii) a security that has been previously registered under the
Securities Act or
(iii) a security that is eligible for sale under Rule 144(k) under
the Securities Act.
In the case of 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.
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Pre-Funding Account
To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of Securities
will be obligated to purchase (subject to the satisfaction of certain conditions
described in the applicable Agreement), additional Assets (the "Subsequent
Assets") from time to time (as frequently as daily) within the number of months
specified in the related Prospectus Supplement after the issuance of such series
of Securities having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the "Pre-Funded Amount") for such
series on date of such issuance.
Accounts
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreement--Collection
Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any such
coverage with respect to the Securities of any series, "Credit Support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative instruments
or other agreements consistent with the foregoing. The principal terms of any
such agreement (any such agreement, a "Cash Flow Agreement"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to the termination thereof, will be described
in the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will
be applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
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YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by
the Securityholder, the Pass-Through Rate or interest rate of the Security, the
receipt and timing of receipt of distributions on the Security and the weighted
average life of the Assets in the related Trust Fund (which may be affected by
prepayments, defaults, liquidations or repurchases). See "Risk Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of interest
will be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period, the distribution of such interest
will be made on a day which may be several days, weeks or months following the
period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the
Security Balance of a class of Accrual Securities) on a Distribution Date will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than the day before a
Distribution Date for the related series, the yield realized by the holders of
such Securities may be lower than the yield that would result if the Interest
Accrual Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate
of principal payments on the Assets (including principal prepayments on Mortgage
Loans resulting from both voluntary prepayments by the borrowers and involuntary
liquidations). The rate at which principal prepayments occur on the Mortgage
Loans will be affected by a variety of factors, including, without limitation,
the terms of the Mortgage Loans, the level of prevailing interest rates, the
availability of mortgage credit and economic, demographic, geographic, tax,
legal and other factors. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund, such Mortgage Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Mortgage Loans. In this regard, it
should be noted that certain Assets may consist of Mortgage Loans with different
Mortgage Rates and the stated pass-through or pay-through interest rate of
certain MBS may be a number of percentage points higher or lower than certain of
the Underlying Mortgage Loans. The rate of principal payments on some or all of
the classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions or with lower Prepayment
Premiums.
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
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to maturity will be lower than that so calculated. Conversely, if the purchaser
of a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets, the actual yield to maturity will be lower
than that so calculated. In either case, if so provided in the Prospectus
Supplement for a series of Securities, the effect on yield on one or more
classes of the Securities of such series of prepayments of the Assets in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
Unless otherwise specified in the related Prospectus Supplement, when
a full prepayment is made on a Mortgage Loan, the obligor is charged interest on
the principal amount of the Mortgage Loan so prepaid for the number of days in
the month actually elapsed up to the date of the prepayment. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Securities entitled to payments of interest because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, a partial prepayment of principal is applied so
as to reduce the outstanding principal balance of the related Mortgage Loan as
of the Due Date in the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the classes of the Securities
of the related series.
If so provided in the Prospectus Supplement for a series of
Securities, one or more classes of Securities may have a final scheduled
Distribution Date, which is the date on or prior to which the Security Balance
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Assets is paid to
such class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Mortgage Loans comprising or
underlying the Assets in a Trust Fund. If any Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund have actual terms to maturity
less than those assumed in 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."
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Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model,
each as described below. CPR represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
Mortgage Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities
may contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Securities of such series and the percentage of
the initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the related Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Mortgage Loans having balloon payments may
default at maturity. In the case of defaults, recovery of proceeds may be
delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the servicer may, to the extent and under
the circumstances set forth in the related Prospectus Supplement, be permitted
to modify Mortgage Loans that are in default or as to which a payment default is
imminent. Any defaulted balloon payment or modification that extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of the
Securities, thereby lengthening the period of time elapsed from the date of
issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor or obligor to make larger level monthly payments
following the 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
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the related margin over such index at which interest accrues), the amount of
interest accruing on the principal balance of such Mortgage Loans may exceed the
amount of the minimum scheduled monthly payment thereon. As a result, a portion
of the accrued interest on negatively amortizing Mortgage Loans may be added to
the principal balance thereof and will bear interest at the applicable Mortgage
Rate. The addition of any such deferred interest to the principal balance of any
related class or classes of Securities will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will be
applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of such Securities will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgage Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the Mortgage Loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of Mortgage Loans
that are repaid in accordance with their terms will affect the weighted average
life of the Mortgage Loans comprising or underlying the Assets and that of the
related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the same
property. In the event of such a refinancing, the new loan would not be included
in the related Trust Fund and, therefore, such refinancing would have the same
effect as a prepayment in full of the related Mortgage Loan. A Sub-Servicer or
the Master Servicer may, from time to time, implement programs designed to
encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. In addition, Sub-Servicers may encourage the
refinancing of Mortgage Loans, including defaulted Mortgage Loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of such
Mortgage Loans.
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-
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sale provision which would adversely affect or jeopardize coverage under any
applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected in
the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the related
Trust Fund and will be issued and secured pursuant to an indenture (an
"Indenture"). Each series of Securities will consist of one or more classes of
Securities that may:
(i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates;
(ii) be senior (collectively, "Senior Securities") or subordinate
(collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on
the Securities;
(iii) be entitled to principal distributions, with disproportionately
low, nominal or no interest distributions (collectively,
"Stripped Principal Securities");
(iv) be entitled to interest distributions, with disproportionately
low, nominal or no principal distributions (collectively,
"Stripped Interest Securities");
(v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of
Securities of such series (collectively, "Accrual Securities");
(vi) provide for payments of principal as described in the related
Prospectus Supplement, from all or only a portion of the Assets
in such Trust Fund, to the extent of available funds, in each
case as described in the related Prospectus Supplement; and/or
(vii) provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics
described in this paragraph including a Stripped Principal
Security component and a Stripped Interest Security component.
If so specified in the related Prospectus Supplement, a Trust Fund
may include 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.
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Each class of Offered Securities of a series will be issued in
minimum denominations corresponding to the Security Balances or, in case of
Stripped Interest Securities, notional amounts or percentage interests specified
in the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus Supplement. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a like aggregate Security Balance,
notional amount or percentage interest but of different authorized
denominations. See "Risk Factors--Limited Liquidity" and "--Limited Assets."
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series and
such Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of the
following amounts:
(i) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period
(unless the related Prospectus Supplement provides
otherwise, a "Due Period" with respect to any Distribution
Date will commence on the second day of the month in which
the immediately preceding Distribution Date occurs, or the
day after 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
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specified in the related Prospectus Supplement or that are
payable in respect of certain expenses of the related
Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection
Account, including any net amounts paid under any Cash Flow
Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to
such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity
as specified in the related Prospectus Supplement with respect
to interest shortfalls resulting from prepayments during the
related Prepayment Period; and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected
under, from or in respect of any Credit Support with respect to
such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class
will be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Securities that are not entitled to any distributions of interest) based on the
Accrued Security Interest for such class and such Distribution Date, subject to
the sufficiency of the portion of the Available Distribution Amount allocable to
such class on such Distribution Date. Prior to the time interest is
distributable on any class of Accrual Securities, the amount of Accrued Security
Interest otherwise distributable on such class will be added to the Security
Balance thereof on each Distribution Date. With respect to each class of
Securities and each Distribution Date (other than certain classes of Stripped
Interest Securities), "Accrued Security Interest" 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
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in the related Prospectus Supplement. The related Prospectus Supplement will
also describe the extent to which the amount of Accrued Certificate Interest
that is otherwise distributable on (or, in the case of Accrual Securities, that
may otherwise be added to the Security Balance of) a class of Offered Securities
may be reduced as a result of any other contingencies, including delinquencies,
losses and deferred interest on or in respect of the Mortgage Loans comprising
or underlying the Assets in the related Trust Fund. Unless otherwise provided in
the related Prospectus Supplement, any reduction in the amount of Accrued
Security Interest otherwise distributable on a class of Securities by reason of
the allocation to such class of a portion of any deferred interest on the
Mortgage Loans comprising or underlying the Assets in the related Trust Fund
will result in a corresponding increase in the Security Balance of such class.
See "Risk Factors--Average Life of Securities; Prepayments; Yields" and "Yield
Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
Components
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference in
such sections to Security Balance and Pass-Through Rate or interest rate refer
to the principal balance, if any, of any such component and the Pass-Through
Rate or interest rate, if any, on any such component, respectively.
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
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Due Period and were delinquent on the related Determination Date, subject to the
Master Servicer's (or another entity's) good faith determination that such
advances will be reimbursable from Related Proceeds (as defined below). In the
case of a series of Securities that includes one or more classes of Subordinate
Securities and if so provided in the related Prospectus Supplement, the Master
Servicer's (or another entity's) advance obligation may be limited only to the
portion of such delinquencies necessary to make the required distributions on
one or more classes of Senior Securities and/or may be subject to the Master
Servicer's (or another entity's) good faith determination that such advances
will be reimbursable not only from Related Proceeds but also from collections on
other Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the class or classes of
Certificates entitled thereto, rather than to guarantee or insure against
losses. Unless otherwise provided in the related Prospectus Supplement, advances
of the Master Servicer's (or another entity's) funds will be reimbursable only
out of related recoveries on the Mortgage Loans (including amounts received
under any form of Credit Support) respecting which such advances were made (as
to any Mortgage Loan, "Related Proceeds") and, if so provided in the Prospectus
Supplement, out of any amounts otherwise distributable on one or more classes of
Subordinate Securities of such series; provided, however, that any such advance
will be reimbursable from any amounts in the Collection Account prior to any
distributions being made on the Securities to the extent that the Master
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Master Servicer
from excess funds in the Collection Account, the Master Servicer is required to
replace such funds in the Collection Account on any future Distribution Date to
the extent that funds in the Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the Master
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer (or another entity) will be entitled to receive
interest at the rate specified therein on its outstanding advances and will be
entitled to pay itself such interest periodically from general collections on
the Assets prior to any payment to Securityholders or as otherwise provided in
the related Agreement and described in such Prospectus Supplement.
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
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as any such Master Servicer or the Trustee deems necessary or
desirable, or that a Securityholder reasonably requests, to
enable Securityholders to prepare their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close
of business on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which:
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan liquidated during the related
Due Period, 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;
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(xiii) the aggregate amount of principal prepayments made during
the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the
close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on
each class of Securities at the close of business on such
Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through
Rate or interest rate, the Pass-Through Rate or interest
rate applicable to such Distribution Date, and, if
available, the immediately succeeding Distribution Date, as
calculated in accordance with the method specified in the
related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through
Rate or interest rate, for statements to be distributed in
any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such
Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance
with the method specified in the related Prospectus
Supplement;
(xix) as to any series which includes Credit Support, the amount
of coverage of each instrument of Credit Support included
therein as of the close of business on such Distribution
Date; and
(xx) the aggregate amount of payments by the obligors of 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
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related Prospectus Supplement. Written notice of termination of the Agreement
will be given to each Securityholder, and the final distribution will be made
only upon presentation and surrender of the Securities at the location to be
specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede & Co., as nominee for DTC ("Cede"), on each such date, DTC will forward
such payments to its Participants which thereafter will be required to forward
them to Indirect Participants or Security Owners. Unless otherwise provided in
the related Prospectus Supplement, the only "Securityholder" (as such term is
used in the Agreement) will be Cede, as nominee of DTC, and the Security Owners
will not be recognized by the Trustee as Securityholders under the Agreement.
Security Owners will be permitted to exercise the rights of Securityholders
under the related Agreement, Trust Agreement or Indenture, as applicable, only
indirectly through the Participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the 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.
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DTC has advised the Depositor that it will take any action permitted
to be taken by a Securityholder under an Agreement only at the direction of one
or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax 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.
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Cede, as nominee for DTC, will hold the Securities. CEDEL and
Euroclear will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
Transfers between DTC's participating organizations (the
"Participants") will occur in accordance with DTC rules. Transfers between CEDEL
Participants and Euroclear Participants will occur in the ordinary way in
accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue
its services, the Administrator would seek an alternative depository (if
available) or cause the issuance of Definitive Securities to the owners thereof
or their nominees in the manner described in the Prospectus under "Description
of the Securities--Book Entry Registration and Definitive Securities".
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees ("Definitive
Securities"), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Security Owners identified in
such instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
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DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance and servicing of the related Assets, the Pooling and Servicing
Agreement may be referred to herein as the "Agreement". Notwithstanding the
foregoing, if the Assets of the Trust Fund for such a series consists only of
Government Securities or MBS, such Assets will be conveyed to the Trust Fund and
administered pursuant to a trust agreement between the Depositor and the Trustee
(a "Trust Agreement"), which may also be referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related Trust
Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a "Servicing Agreement") between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing may be referred to herein as the "Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to
the indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the Trust
Fund and administered in accordance with the terms of the Trust Agreement, which
in such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any
series of Securities will be named in the related Prospectus Supplement. In any
series of Securities for which there are multiple Master Servicers, there may
also be multiple Mortgage Loan Groups, each corresponding to a particular Master
Servicer; and, if the related Prospectus Supplement so specifies, the servicing
obligations of each such Master Servicer will be limited to the Whole Loans in
such corresponding Mortgage Loan Group. In lieu of appointing a Master Servicer,
a servicer may be appointed pursuant to the Agreement for any Trust Fund. Such
servicer will service all or a significant number of Whole Loans directly
without a Sub-Servicer. Unless otherwise specified in the related Prospectus
Supplement, the obligations of any such servicer shall be commensurate with
those of the Master Servicer described herein. References in this Prospectus to
Master Servicer and its rights and obligations, unless otherwise specified in
the related Prospectus Supplement, shall be deemed to also be references to any
servicer servicing Whole Loans directly. A manager or administrator may be
appointed pursuant to the Trust Agreement for any Trust Fund to administer such
Trust Fund. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. Forms of a Pooling and Servicing Agreement, a Sale and Servicing Agreement
and a Trust Agreement have been filed as exhibits to the Registration Statement
of which this Prospectus is a part.
The following summaries describe certain provisions that may appear
in each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that materially
differs from the description thereof contained in this Prospectus. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement for each Trust
Fund and the description of such provisions in the related Prospectus
Supplement. As used herein with respect to any series, the term "Security"
refers to all of the Securities of that series, whether or not offered hereby
and by the related Prospectus Supplement, unless the context otherwise requires.
The Depositor will provide a copy of the Agreement (without exhibits) relating
to any series of Securities without charge upon written request of a holder of a
Security of such series addressed to Merrill Lynch Mortgage Investors, Inc., 250
Vesey Street, World Financial Center, North Tower, 10th Floor, New York, New
York 10281-1310. Attention: Jack Ross.
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Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Unless otherwise
provided in the related Prospectus Supplement, such schedule will include
detailed information (i) in respect of each Whole Loan included in the related
Trust Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and Loan-to-Value Ratio as of the
date indicated and payment and prepayment provisions, if applicable; and (ii) in
respect of each MBS included in the related Trust Fund, including without
limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the pass-through or
bond rate or formula for determining such rate, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Whole Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that an
Asset Seller will fulfill this repurchase or substitution obligation, and
neither the Master Servicer nor the Depositor will be obligated to repurchase or
substitute for such Mortgage Loan if the Asset Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
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
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Seller. In addition, assignments of the related Mortgages to the Trustee will
not be recorded, unless otherwise provided in the related Prospectus Supplement.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name of
the Trustee for the benefit of the Securityholders. Unless otherwise provided in
the related Prospectus Supplement, the related Agreement will require that
either the Depositor or the Trustee promptly cause any MBS and Government
Securities in certificated form not registered in the name of the Trustee to be
re-registered, with the applicable persons, in the name of the Trustee.
Representations and Warranties; Repurchases
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters:
(i) the accuracy of the information set forth for such Whole
Loan on the schedule of Assets appearing as an exhibit to
the related Agreement;
(ii) the existence of title insurance insuring the lien priority
of the Whole Loan;
(iii) the authority of the Warranting Party to sell the Whole
Loan;
(iv) the payment status of the Whole Loan;
(v) in the case of a Whole Loan, the existence of customary
provisions in the related Mortgage Note and Mortgage to
permit realization against the Mortgaged Property of the
benefit of the security of the Mortgage; and
(vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate thereof
or such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may
have been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. Unless otherwise specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that materially
and adversely affects the value of such Whole Loan or the interests therein of
the Securityholders. If such Warranting Party cannot cure such breach
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within a specified period following the date on which such party was notified of
such breach, then such Warranting Party will be obligated to repurchase such
Whole Loan from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor. As
to any Whole Loan, unless otherwise specified in the related Prospectus
Supplement, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Rate from
the date as to which interest was last paid to the due date in the Due Period in
which the relevant purchase is to occur, plus certain servicing expenses that
are reimbursable to the Master Servicer. If so provided in the Prospectus
Supplement for a series, a Warranting Party, rather than repurchase a Whole Loan
as to which a breach has occurred, will have the option, within a specified
period after initial issuance of such series of Certificates, to cause the
removal of such Whole Loan from the Trust Fund and substitute in its place one
or more other Whole Loans in accordance with the standards described in the
related Prospectus Supplement. If so provided in the Prospectus Supplement for a
series, a Warranting Party, rather than repurchase or substitute a Whole Loan as
to which a breach has occurred, will have the option to reimburse the Trust Fund
or the Securityholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Securities or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
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.
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The collateral eligible to secure amounts in the Collection Account is limited
to United States government securities and other investment grade obligations
specified in the Agreement ("Permitted Investments"). A Collection Account may
be maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Collection Account will be paid to a Master Servicer or its designee as
additional servicing compensation. The Collection Account may be maintained with
an institution that is an affiliate of the Master Servicer, if applicable,
provided that such institution meets the standards imposed by the Rating Agency
or Agencies. If permitted by the Rating Agency or Agencies and so specified in
the related Prospectus Supplement, a Collection Account may contain funds
relating to more than one series of mortgage pass-through certificates and may
contain other funds respecting payments on mortgage loans belonging to the
Master Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be
deposited in the Collection Account for one or more Trust Funds on a daily
basis, unless otherwise provided in the related Agreement, the following
payments and collections received, or advances made, by the Master Servicer or
the Trustee or on its behalf subsequent to the Cut-off Date (other than payments
due on or before the Cut-off Date, and exclusive of any amounts representing a
Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(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");
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(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 Interesst; Servicing Compensation and Payment of
Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on
account of modification or assumption fees, late payment
charges or prepayment premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for
the benefit of the Master Servicer or the Trustee, as the case
may be, of funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in
the related Prospectus Supplement.
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;
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(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities
incurred thereby, as and to the extent described under "Certain
Matters Regarding a Master Servicer and the Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for
purposes of escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses,
costs and liabilities incurred thereby, as and to the extent
described under "Certain Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus Supplement,
to pay a Master Servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts
held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the
Master Servicer as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property
acquired for the benefit of Securityholders by foreclosure or
by deed in lieu of foreclosure or otherwise, such payments to
be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Material
Federal Income Tax Consequences--REMICS--Prohibited
Transactions Tax and Other Taxes";
(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
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"--Deposits" above for one or more series of Securities. Any amounts on deposit
in any such collection account will be withdrawn therefrom and deposited into
the appropriate Collection Account by a time specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, any
amounts which could be withdrawn from the Collection Account as described under
"--Withdrawals" above, may also be withdrawn from any such collection account.
The Prospectus Supplement will set forth any restrictions with respect to any
such collection account, including investment restrictions and any restrictions
with respect to financial institutions with which any such collection account
may be maintained.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Sub-Servicers, is required
to make reasonable efforts to collect all scheduled payments under the Whole
Loans and will follow or cause to be followed such collection procedures as it
would follow with respect to mortgage loans that are comparable to the Whole
Loans and held for its own account, provided such procedures are consistent
with:
(i) the terms of the related Agreement and any related
hazard insurance policy or instrument of Credit Support, if
any, included in the related Trust Fund described herein or
under "Description of Credit Support,"
(ii) applicable law and
(iii) the general servicing standard specified in the related
Prospectus Supplement or, if no such standard is so specified,
its normal servicing practices (in either case, the "Servicing
Standard").
In connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Whole Loans. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be responsible for filing and
settling claims in respect of particular Whole Loans under any applicable
instrument of Credit Support. See "Description of Credit Support."
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
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for the related series of Securities is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's rights
and obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See "Retained Interest; Servicing Compensation
and Payment of Expenses."
Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if cure
is likely, inspect the Mortgaged Property and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Master Servicer is able to assess the success of such corrective
action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes of
Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified number
of scheduled payments thereunder are delinquent. Any such right granted to the
holder of an Offered Security will be described in the related Prospectus
Supplement. The related Prospectus Supplement will also describe any such right
granted to any person if the predetermined purchase price is less than the
Purchase Price described under "Representations and Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Securityholder) that constitutes a fair price for such defaulted Whole Loan. In
the absence of any bid determined in accordance with the related Agreement to be
fair, the Master Servicer shall proceed with respect to such defaulted Mortgage
Loan as described below. Any bid in an amount at least equal to the Purchase
Price described under "Representations and Warranties; Repurchases" will in all
cases be deemed fair.
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.
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The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate, as applicable, plus the
aggregate amount of expenses incurred by the Master Servicer in connection with
such proceedings and which are reimbursable under the Agreement, the Trust Fund
will realize a loss in the amount of such difference. The Master Servicer will
be entitled to withdraw or cause to be withdrawn from the Collection Account out
of the Liquidation Proceeds recovered on any defaulted Whole Loan, prior to the
distribution of such Liquidation Proceeds to Securityholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Whole Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the obligor
under each instrument of Credit Support, and will take such reasonable steps as
are necessary to receive payment or to permit recovery thereunder with respect
to defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if 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.
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In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property as
is consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan where
the terms of the Mortgage Loan so permit; provided, however, that the addition
of such cost will not be taken into account for purposes of calculating the
distribution to be made to Certificateholders. Such costs may be recovered by
the Master Servicer or Sub-Servicer, as the case may be, from the Collection
Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability of
the Master Servicer to present or cause to be presented such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer by mortgagors.
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
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of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation.
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A "Retained Interest" in an Asset represents a specified portion of the interest
payable thereon. The Retained Interest will be deducted from mortgagor payments
as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it of a
portion of the interest payment on each Asset. Since any Retained Interest and a
Master Servicer's primary compensation are percentages of the principal balance
of each Asset, such amounts will decrease in accordance with the amortization of
the Assets. The Prospectus Supplement with respect to a series of Securities
evidencing interests in a Trust Fund that includes Whole Loans may provide that,
as additional compensation, the Master Servicer or the Sub-Servicers may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any account
established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets, including,
without limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other expenses
described in the related Prospectus Supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Whole
Loans and, to the extent so provided in the related Prospectus Supplement,
interest thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement,
the Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole Loans
in the related Trust Fund during such period prior to their respective due dates
therein.
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
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fulfilled its obligations under the Agreement throughout the preceding calendar
year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement,
copies of such annual accountants' statement and such statements of officers
will be obtainable by Securityholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
Certain Matters Regarding a Master Servicer and the Depositor
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the Master
Servicer shall be deemed to be to the servicer of substantially all of the Whole
Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that any Master Servicer, the Depositor and any
director, officer, employee or agent of a Master Servicer or the Depositor will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities; provided, however,
that such indemnification will not extend to any loss, liability or expense:
(i) specifically imposed by such Agreement or otherwise incidental
to the performance of obligations and duties thereunder,
including, in the case of a Master Servicer, the prosecution of
an enforcement action in respect of any specific Whole Loan or
Whole Loans (except as any such loss, liability or expense
shall be otherwise reimbursable pursuant to such Agreement);
(ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement;
(iii) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties
thereunder, or by reason of reckless disregard of such
obligations or duties;
(iv) incurred in connection with any violation of any state or
federal securities law; or
(v) imposed by any taxing authority if such loss, liability or
expense is not specifically reimbursable pursuant to the terms
of the related Agreement.
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In addition, each Agreement will provide that neither any Master Servicer nor
the Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any expense or
liability. Any such Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Securityholders, and the Master Servicer
or the Depositor, as the case may be, will be entitled to be reimbursed therefor
and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the Master Servicer or the Depositor is a party, or any person
succeeding to the business of the Master Servicer or the Depositor, will be the
successor of the Master Servicer or the Depositor, as the case may be, under the
related Agreement.
Events of Default Under the Agreement
Unless otherwise provided in the related Prospectus Supplement,
Events of Default under the related Agreement will include:
(i) any failure by the Master Servicer to distribute or cause to be
distributed to Securityholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to
Securityholders, any required payment that continues after a
grace period, if any;
(ii) any failure by the Master Servicer duly to observe or perform
in any material respect any of its other covenants or
obligations under the Agreement which continues unremedied for
thirty days (or such other period specified in the related
Prospectus Supplement) after written notice of such failure has
been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights;
(iii) any breach of a representation or warranty made by the Master
Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in
the related Prospectus Supplement) after written notice of such
breach has been given to the Master Servicer by the Trustee or
the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than
25% of the Voting Rights; and
(iv) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its
insolvency or inability to pay its obligations.
Material variations to the foregoing Events of Default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class
or classes of Securities will be specified in the related Prospectus Supplement.
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Rights Upon Event of Default Under the Agreement
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans, or if the related
Prospectus Supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
Unless otherwise specified in the related Prospectus Supplement, in the event
that the Trustee is unwilling or unable so to act, it may or, at the written
request of the holders of Securities entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the Rating Agency
with a net worth at the time of such appointment of at least $15,000,000 (or
such other amount specified in the related Prospectus Supplement) to act as
successor to the 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
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rating of the related Security) adversely affect in any
material respect the interests of any holder of Securities
covered by the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each Agreement
may also be amended by the Depositor, the Master Servicer, if any, and the
Trustee, with the consent of the holders of Securities affected thereby
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, for any purpose; provided, however,
that unless otherwise specified in the related Prospectus Supplement, no such
amendment may:
(i) reduce in any manner the amount of or delay the timing of,
payments received or advanced on Mortgage Loans which are
required to be distributed on any Security without the consent
of the holder of such Security or
(ii) reduce the consent percentages described in this paragraph
without the consent of the holders of all Securities covered by
such Agreement then outstanding.
However, with respect to any series of Securities as to which a REMIC election
is to be made, the Trustee will not consent to any amendment of the Agreement
unless it shall first have received an opinion of counsel to the effect that
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause the related Trust Fund to fail to qualify as a REMIC at any time
that the related Securities are outstanding.
The Trustee
The Trustee under each Agreement or Trust Agreement will be named in
the related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving 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,
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(iii) being the mortgagee of record with respect to the Mortgage
Loans in a Trust Fund and the owner of record with respect to
any Mortgaged Property acquired in respect thereof for the
benefit of Securityholders, or
(iv) acting or refraining from acting in good faith at the direction
of the holders of the related series of Securities entitled to
not less than 25% (or such other percentage as is specified in
the related Agreement with respect to any particular matter) of
the Voting Rights for such series; provided, however, that such
indemnification will not extend to any loss, liability or
expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or
negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless
disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the
Trustee made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Holders of the Securities of any series entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series may at any time remove the Trustee without cause
and appoint a successor trustee.
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;
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(iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or
(v) any other Event of Default provided with respect to Notes of
that series.
If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a majority in aggregate outstanding amount of the Notes of such
series.
If, following an Event of Default with respect to any series of
Notes, the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such series
and to continue to apply distributions on such collateral as if there had been
no declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such series as they would have become due if there had not been such a
declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on any
Note of such series for thirty (30) days or more, unless:
(a) the holders of 100% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate
outstanding amount of the Notes of such series consent to such
sale,
(b) the proceeds of such sale or liquidation are sufficient to pay
in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such series at the date of such
sale or
(c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such
Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee
obtains the consent of the holders of 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
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against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing rights
specified in the Indenture) upon the delivery to the Indenture Trustee for
cancellation of all the Notes of such series or, with certain limitations, upon
deposit with the Indenture Trustee of funds sufficient for the payment in full
of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders a
brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it under
the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes
will be specified in the related Prospectus Supplement. The Indenture Trustee
for any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may also
remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the Indenture Trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the Master
Servicer or any of its affiliates.
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
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in the related Prospectus Supplement, any form of Credit Support may be
structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against all
risks of loss and will not guarantee repayment of the entire Security Balance of
the Securities and interest thereon. If losses or shortfalls occur that exceed
the amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of:
(a) the nature and amount of coverage under such Credit
Support,
(b) any conditions to payment thereunder not otherwise
described herein,
(c) the conditions (if any) under which the amount of coverage
under such Credit Support may be reduced and under which
such Credit Support may be terminated or replaced and
(d) the material provisions relating to such Credit Support.
Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor
under any instrument of Credit Support, including
(i) a brief description of its principal business activities,
(ii) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
(iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business
and
(iv) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
Prospectus Supplement.
See "Risk Factors--Credit Support Limitations--Risk That Credit Support Will Not
Cover All Losses."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Securities in a series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected.
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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 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,
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any reinvestment income or other gain from such investments will be credited to
the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund may
be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
Credit Support With Respect to MBS
If so provided in the Prospectus Supplement for a series of
Securities, the MBS in the related Trust Fund and/or the Mortgage Loans
underlying such MBS may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify as to each such
form of Credit Support the information indicated above with respect thereto, to
the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain state law legal aspects of loans secured by single-family or
multi-family residential properties. Because such legal aspects are governed
primarily by the applicable laws of the state in which the related Mortgaged
Property is located (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
General
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor 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
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legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the mortgagor. At origination of a mortgage loan
involving a land trust, the mortgagor executes a separate undertaking to make
payments on the mortgage note. The mortgagee's authority under a mortgage, the
trustee's authority under a deed of trust and the grantee's authority under a
deed to secure debt are governed by the express provisions of the mortgage, the
law of the state in which the real property is located, certain federal laws
(including, without limitation, the Soldiers' and Sailors' Civil Relief Act of
1940) and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Interest In Real Property
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a 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.
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The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
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
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have upheld the reasonableness of the notice provisions or have found that a
public sale under a mortgage providing for a power of sale does not involve
sufficient state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. 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
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mortgages may occur in the foreclosure action of the senior mortgage or a
subsequent ancillary proceeding or may require the institution of separate legal
proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the 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
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the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the Cooperative as required by the proprietary lease before
transferring the Cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building was so converted.
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
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require the lender to exhaust the security afforded under a mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the mortgagor. In certain other states, the lender has the option
of bringing a personal action against the mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
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
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acquires a mortgaged property at a foreclosure sale or becomes involved in the
operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Fund) secured by
residential real property. In the event that title to a Mortgaged Property
securing a Mortgage Loan in a Trust Fund was acquired by the Trust Fund and
cleanup costs were incurred in respect of the Mortgaged Property, the holders of
the related series of Securities might realize a loss if such costs were
required to be paid by the Trust Fund.
Due-On-Sale Clauses
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally provide
that the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain limited
exceptions. Due-on-sale clauses contained in mortgage loans originated by
federal savings and loan associations of federal savings banks are fully
enforceable pursuant to regulations of the United States Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of such clauses. Similarly, "due-on-sale"
clauses in mortgage loans made by national banks and federal credit unions are
now fully enforceable pursuant to preemptive regulations of the Comptroller of
the Currency and the National Credit Union Administration, respectively.
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
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state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision that expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not taken
the requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting 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
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mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of any servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related series of Certificates,
and would not be covered by advances or, unless otherwise specified in the
related Prospectus Supplement, any form of Credit Support provided in connection
with such Certificates. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected Mortgage
Loan during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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.
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Grantor Trust Funds
If the related Prospectus Supplement indicates that the Trust Fund
will be treated as a grantor trust, then Brown & Wood LLP will deliver its
opinion that the Trust Fund will not be classified as an association taxable as
a corporation and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case, owners
of Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. Single Class of Grantor Trust Certificates
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on
its federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two 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;
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(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be
considered to represent "real estate assets" within the meaning
of Code Section 856(c)(4)(A), and interest income on the
Mortgage Assets will be considered "interest on obligations
secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a
type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] . . . which [are] principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal
of the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under these
rules, such Government Securities are treated as having OID based on the
purchase price and the stated redemption price at maturity of each Security. As
such, Grantor Trust Certificateholders would be required to include in income
their pro rata share of the OID on each Government Security recognized in any
given year on an economic accrual basis even if the Grantor Trust
Certificateholder is a cash method taxpayer. Accordingly, the sum of the income
includible to the Grantor Trust Certificateholder in any taxable year may exceed
amounts actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may
include Buydown Loans. The characterization of any investment in Buydown Loans
will depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such holder's
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.
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On December 30, 1997 the IRS issued final regulations (the
"Amortizable Bond Premium Regulations") dealing with amortizable bond premium.
These regulations specifically do not apply to prepayable debt instruments
subject to Code Section 1272(a)(6) such as the Certificates. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective Certificateholders should
consult their tax advisors regarding the possible application of the amortizable
Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the special rules of
the Code relating to original issue discount ("OID") (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
as amended on June 11, 1996, under such Sections (the "OID Regulations"), will
be applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
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:
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(i) the total remaining market discount and
(ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the Grantor Trust Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market
discount also may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Grantor Trust Certificate purchased with market discount.
For these purposes, the de minimis rule referred above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
A. 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
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points of interest stripped off. See "--Non-REMIC Certificates" and "Multiple
Classes of Grantor Trust Certificates --Stripped Bonds and Stripped Coupons"
herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either:
(i) the amount of OID with respect to the Mortgage Assets is
treated as zero under the OID de minimis rule when the
Certificate was stripped or
(ii) no more than 100 basis points (including any amount of
servicing fees in excess of reasonable servicing fees) is
stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. However, based
on the recent IRS guidance, it appears that all payments from a Mortgage Asset
underlying a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case, all
payments from such Mortgage Asset would be included in the Mortgage Asset's
stated redemption price at maturity for purposes of calculating income on such
certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However, if
such Certificate is treated as an interest in discrete Mortgage Assets, or if no
prepayment assumption is used, then when a Mortgage Asset is prepaid, the holder
of such Certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon
Certificates are urged to consult with their own tax advisors regarding the
proper treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
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
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[are] principally secured, directly or indirectly, by an interest in real
property" within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in
Loans Other Than ARM Loans
The OID rules of Code Sections 1271 through 1275 will be applicable
to a Certificateholder's interest in those Mortgage Assets as to which the
conditions for the application of those sections are met. Rules regarding
periodic inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount greater
than the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage Assets.
OID on each Grantor Trust Certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest, in
advance of receipt of the cash attributable to such income. The amount of OID
required to be included in an owner's income in any taxable year with respect to
a Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to 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
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determined as set forth under the OID Regulations. A calculation will be made by
the Master Servicer or such other entity specified in the related Prospectus
Supplement of the portion of OID that accrues during each successive monthly
accrual period (or shorter period from the date of original issue) that ends on
the day in the calendar year corresponding to each of the Distribution Dates on
the Grantor Trust Certificates (or the day prior to each such date). This will
be done, in the case of each full month accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the respective component under the
Prepayment Assumption) of all remaining payments to be
received under the Prepayment Assumption on the
respective component and
(b) any payments included in the state redemption price at
maturity received during such accrual period, and
(ii) subtracting from that total the "adjusted issue price" of the
respective component at the beginning of such accrual period.
The adjusted issue price of a Grantor Trust Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a Grantor
Trust Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full monthly accrual period, the daily portions of
OID must be determined according to an appropriate allocation under any
reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Asset, no OID attributable to the difference between the
issue price and the original principal amount of such Mortgage Asset (i.e.
points) will be includible by such holder. Other OID on the Mortgage Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
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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.
B. 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.
C. Non-U.S. Persons
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust Certificateholder holding on behalf of an owner that is not a U.S. Person
will be subject to federal income tax, collected by withholding, at a rate of
30% or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust Certificate evidences ownership in Mortgage Assets issued
after July 18, 1984, by natural persons if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder). Additional restrictions apply to Mortgage Assets of where
the mortgagor is not a natural person in order to qualify for the exemption from
withholding.
D. 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.
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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 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.
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Tiered REMIC Structures. For certain Series of Certificates, two
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any such Series of
Certificates, Brown & Wood LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Agreement, the Master REMIC as well as any Subsidiary REMIC will
each qualify as a REMIC, and the REMIC Certificates issued by the Master REMIC
and the Subsidiary REMIC, respectively, will be considered to evidence ownership
of REMIC Regular Certificates or REMIC Residual Certificates in the related
REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii) "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code; and (iii) whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code.
A. Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates
may be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular Certificate
and its "issue price." Holders of any class of Certificates issued with OID will
be required to include such OID in gross income for federal income tax purposes
as it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a
single installment obligation issued with an amount of OID equal to the excess
of its "stated redemption price at maturity" over its "issue price." The issue
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
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distributions constitute "qualified stated interest." Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any original issue discount
(disregarding the rate in the first period) and any interest foregone during the
first period is treated as the amount by which the stated redemption price at
maturity of the Certificate exceeds its issue price for purposes of the de
minimis rule described below. The OID Regulations suggest that all interest on a
long first period REMIC Regular Certificate that is issued with non-de minimis
OID, as determined under the foregoing rule, will be treated as OID. Where the
interval between the issue date and the first Distribution Date on a REMIC
Regular Certificate is shorter than the interval between subsequent Distribution
Dates, interest due on the first Distribution Date in excess of the amount that
accrued during the first period would be added to the Certificates stated
redemption price at maturity. REMIC Regular Certificateholders should consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide
for certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not 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.
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Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates --Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on the
first day or first business day of the immediately preceding month, interest may
be treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by:
(i) adding
(a) the present value at the end of the accrual period
(determined by using as a discount factor the original
yield to maturity of the REMIC Regular Certificates as
calculated under the Prepayment Assumption) of all
remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and
(b) any payments included in the stated redemption price at
maturity received during such accrual period, and
(ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual
period.
The adjusted issue price of a REMIC Regular Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a REMIC
Regular Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest made
at the end of or during that accrual period. The OID accrued during an accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the accrual period. The calculation of OID
under the method described above will cause the accrual of OID to either
increase or decrease (but never below zero) in a given accrual period to reflect
the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue price
but less than the stated redemption price at maturity), however, the daily
portion is reduced by the amount that would be the daily portion for such day
(computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
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(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.
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
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(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
(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:
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(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.
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
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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 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
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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.
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
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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.
A. 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 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.
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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 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
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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 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.
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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.
A. 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
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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.
B. 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.
C. Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the
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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.
D. 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.
E. 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 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
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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 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
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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 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.
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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.
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
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the holder is not subject to backup withholding. Should a nonexempt Noteholder
fail to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If so treated,
the Trust Fund would likely be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. Tax Consequences to Holder of the Certificates
Treatment of the Trust Fund as a Partnership. The Depositor will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Trust Fund as a partnership for purposes of federal and state
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust
Fund, the partners of the partnership being the Certificateholders, and the
Notes being debt of the partnership. However, the proper characterization of the
arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Master Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be required
to separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the
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economic arrangement of the parties, this approach for allocating Trust Fund
income should be permissible under applicable treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to Certificateholders. Moreover, even under the foregoing method
of allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust Fund income even if they have not received cash from
the Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund
(including fees to the Master Servicer but not interest expense) would be
miscellaneous itemized deductions. Such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to
income and allocations to Certificateholders on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Mortgage Loans may be greater or
less than the remaining principal balance of the Loans at the time of purchase.
If so, the Loan will have been acquired at a premium or discount, as the case
may be. (As indicated above, the Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage Loan by
Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust
Fund will be deemed to terminate for federal income tax purposes if 50% or more
of the capital and profits interests in the Trust Fund are sold or exchanged
within a 12-month period. Pursuant to formal Treasury regulations issued May 8,
1997 under section 708 of the Code, if such a termination occurs, the Trust Fund
(the "old partnership") would be deemed to contribute its assets to a new
partnership (the "new partnership") in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
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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 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
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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.
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
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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 (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.
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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.
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.
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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.
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
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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 it s holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its
stated principal amount,
(v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and
(vi) if it pays interest, such interest is payable at either
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to such principal
amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax
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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 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
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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.
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
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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 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.
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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.;
(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
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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 investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or
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guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation before
the October 4, 1991 cutoff established by SMMEA for such enactments, limiting to
varying extents the ability of certain entities (in particular, insurance
companies) to invest in mortgage related securities, in most cases by requiring
the affected investors to rely solely upon existing state law, and not SMMEA.
Investors affected by such legislation will be authorized to invest in SMMEA
Certificates only to the extent provided in such legislation. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in "mortgage
related securities," or require the sale or other disposition of such
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which includes guidelines to assist federal credit unions
in making investment decisions for mortgage related securities, and the NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which sets
forth certain restrictions on investment by federal credit unions in mortgage
related securities.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing any Offered Security. The Federal Financial Institutions
Examination Council, for example, has issued a Supervisory Policy Statement on
Securities Activities effective February 10, 1992 (the "Policy Statement")
setting forth guidelines for and significant restrictions on investments in
"high-risk mortgage securities." The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement generally indicates that a
mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Securities will not be treated
as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject
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to insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch
or any other Underwriter in connection with offers and sales related to market
making transactions.
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The Depositor will indemnify Merrill Lynch and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, or will contribute to payments Merrill Lynch and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's or Asset
Seller's Assets pending the sale of such Assets or interests therein, including
the Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an
electronic Prospectus Supplement and Prospectus from the Underwriter or a
request by such investor's representative within the period during which there
is an obligation to deliver a Prospectus Supplement and Prospectus, the
Depositor or the Underwriter will promptly deliver, or cause to be delivered,
without charge, a paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the Depositor
by Brown & Wood LLP, New York, New York. Certain matters with respect to
Delaware law will be passed upon for the Depositor by Richards, Layton & Finger,
P.A., Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports
filed on behalf of the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
prior to the termination of the offering the related Securities. Upon request by
any person to whom this prospectus is delivered in connection with the offering
of one or more Classes of Offered Securities, the Depositor will provide or
cause to be provided without charge a copy of any of the documents and/or
reports incorporated herein by reference, in each case to the extent the
documents or reports relate to such Classes of Offered Securities, other than
the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center-North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, telephone number (212) 449-0357. The Depositor
has determined that its financial statements are not material to the offering of
any Offered Securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
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Ratings on asset backed securities address the likelihood of receipt
by securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, securityholders might suffer a lower than anticipated yield, and,
in addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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INDEX OF DEFINED TERMS
1986 Act................................................................65, 69
Accrual Securities..........................................................19
Accrued Security Interest...................................................21
adjusted issue price........................................................80
Agreement...................................................................29
Amortizable Bond Premium Regulations....................................62, 74
an accrual period...........................................................71
Applicable Amount...........................................................79
ARM Loans...............................................................11, 65
Asset Seller.................................................................9
Assets.......................................................................9
balloon loans................................................................7
Book-Entry Securities.......................................................20
Buydown Mortgage Loans......................................................17
Buydown Period..............................................................17
Cash Flow Agreement.........................................................14
Cede........................................................................26
CEDEL.......................................................................27
CEDEL Participants..........................................................27
Closing Date................................................................69
Code....................................................................59, 96
Collection Account..........................................................32
Cooperative.............................................................27, 51
Cooperative Loans...........................................................51
Cooperatives................................................................10
covered trust................................................................6
Covered Trust...............................................................48
CPR.........................................................................17
Credit Support..............................................................14
Crime Control Act...........................................................59
Deferred Interest...........................................................66
Definitive Securities...................................................20, 28
Depositaries................................................................28
Depositor....................................................................9
Determination Date..........................................................20
disqualified organization...................................................82
DTC.........................................................................26
Due Period..................................................................20
Eligible Corporations.......................................................94
ERISA.......................................................................96
Euroclear...................................................................27
Euroclear Operator..........................................................27
Euroclear Participants......................................................27
excess servicing............................................................63
Exemption...................................................................97
FDIC....................................................................32, 99
FHLMC.......................................................................40
foreign person..............................................................85
Home Equity Loans...........................................................11
Home Improvement Contracts..................................................11
Indenture...............................................................19, 29
Indenture Trustee...........................................................29
Indirect Participants.......................................................26
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
----- -----------------
Insurance Proceeds..........................................................33
IO..........................................................................93
L/C Bank....................................................................49
Labor.......................................................................96
Legislative History.........................................................65
Loan-to-Value Ratio.........................................................10
Master REMIC................................................................69
MBS Agreement...............................................................12
MBS Issuer..................................................................12
MBS Servicer................................................................12
MBS Trustee.................................................................12
Merrill Lynch..............................................................100
Model Law...................................................................99
Mortgage Assets..............................................................9
Mortgage Loan Group.........................................................19
Mortgage Loans...............................................................9
Mortgage Notes..............................................................10
Mortgage Rate...............................................................12
Mortgages...................................................................10
NCUA........................................................................99
new partnership.............................................................87
New Regulations.................................................68, 77, 89, 92
Nonrecoverable Advance......................................................23
OID.........................................................................62
OID Regulations.............................................................62
old partnership.............................................................87
Originator..................................................................10
OTS.........................................................................99
Participants............................................................26, 28
parties in interest.........................................................96
pass-through entity.........................................................83
Pass-Through Rate...........................................................21
Payment Lag Certificates....................................................75
Permitted Investments.......................................................33
phantom income..............................................................77
Plans.......................................................................96
Policy Statement............................................................99
Pooling and Servicing Agreement.............................................29
Pre-Funded Amount...........................................................14
pre-issuance accrued interest...............................................75
Prepayment Assumption.......................................................65
Prohibited Transactions Tax.................................................80
PTCE 83-1...................................................................98
Record Date.................................................................20
Refinance Loans.............................................................10
Related Proceeds............................................................23
Relief Act..................................................................58
REMIC Certificates..........................................................68
REMIC Regular Certificateholders............................................69
REMIC Regulations...........................................................59
REMIC Residual Certificateholder............................................76
REMIC Residual Certificates.................................................68
Restricted Group............................................................98
Retained Interest...........................................................40
RICO........................................................................59
Security Balance............................................................22
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
----- -----------------
Security Owners.............................................................26
Senior Securities...........................................................19
Servicing Agreement.........................................................29
Servicing Standard..........................................................36
Short-Term Note.............................................................85
Single Family Mortgage Loan..................................................9
Single Family Property.......................................................9
SMMEA.......................................................................98
SMMEA Securities............................................................98
SPA.........................................................................17
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...........................................................14
Sub-Servicer................................................................36
Sub-Servicing Agreement.....................................................36
Subsidiary REMIC............................................................69
Super-Premium Certificates..................................................70
Tax Counsel.................................................................90
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
105
